Dropshipping is a delivery or fulfilment method that allows retailers to set up and run a business without large investments, since products are only purchased from the supplier after they have been sold to the end customer. But dropshipping brings with it some complications – especially when it comes to VAT. In the following article you will find out what you have to consider in terms of VAT when dropshipping.

Definition of dropshipping in VAT law

Dropshipping is also known as direct selling or drop shipping. From a VAT point of view, however, dropshipping is a “chain transaction”. Chain transactions are defined as all transactions with a product that are subject to VAT in which at least three people are involved and the shipment is made from the first entrepreneur to the last customer.

This is exactly the case with dropshipping, as the dropshipper acts as an intermediary and second link between the supplier or manufacturer and the end customer, although according to the VAT definition of chain transactions, several intermediaries can also be involved.

The alternative to chain transactions is traditional retail, whether online or stationary. In this case, the online retailer buys the products in advance, stores them, and sells and ships them directly to the end customer. In both cases, however, the transactions are usually subject to VAT.

VAT liability for dropshipping 2022

VAT is always due when a company generates sales. At first glance, this sounds quite simple, but there are a few exceptions and special regulations that complicate VAT liability. Whether or not and how much VAT has to be paid can depend on several factors:

• Type of products
• Customers
• Location of customers
• Annual turnover of the company

The type of products, customers, and annual turnover of the company always play a role. Some products are subject to reduced VAT rates in many countries, a distinction is usually made between sales to companies and private individuals, and in many countries there are special regulations for entrepreneurs with low sales. With dropshipping, however, the locations of the customer and the supplier are additionally important.

According to the classic location rule for deliveries, the place of delivery is where the transport to the customer begins. In contrast, according to the mail order delivery rules, the place of delivery is where the transport to the customer ends, i.e. in the customer’s home country. The place of delivery determines the applicable VAT rates and VAT regulations to be followed. However, dropshipping or chain transactions formally consist of several deliveries and therefore contain some exceptions. These are best illustrated with a few examples.

VAT changes in 2021

But first some VAT changes have to be discussed. Because in July 2021 the EU-wide VAT law was updated. The following changes affect all cross-border transactions with private customers within Europe and thus not only normal mail order companies, but also dropshippers.

• Country-specific delivery thresholds for the B2C mail order business, which, if exceeded, resulted in a VAT registration obligation in the respective country, were replaced by an EU-wide delivery threshold, after which sellers must register for VAT in all countries in which their end customers are based.
• Alternatively, sellers can register for the One-Stop-Shop (OSS). All EU foreign VAT registrations are thus obsolete and transactions are settled via a uniform OSS report in the home country. However, registrations are still necessary if goods are stored in other EU countries.
• Import VAT limits, such as the German limit, which was set at a maximum value of goods of €22, were removed without replacement. From now on, all goods, regardless of their value, are subject to import VAT when imported into the European Union. The Import-One-Stop-Shop (IOSS) offers a way of simplifying the reporting of import VAT across the EU.

Example 1: VAT on dropshipping in a single country

The VAT situation is easiest when all parties involved are based in one country, for example when the supplier, dropshipper and end customer live or are registered in Germany. In this case, all invoices contain the German VAT rates. However, the dropshipper can deduct the VAT calculated by the supplier as input tax in his German VAT return.

Example 2: VAT for dropshipping with self-delivery

In this example, a German dropshipper sells products subject to normal VAT rates to a French end customer. He obtains his products from a supplier in Germany.

In classic retail, the retailer would purchase their products from the manufacturer and only then sell and ship them. In this case, the purchase from the manufacturer in Germany would be taxed at 19%, which the retailer could then report as input tax.

The retailer would then ship the products to France. In terms of VAT, there would be three options to process this transaction:

• If the entrepreneur’s EU-wide cross-border turnover is below the EU-wide delivery threshold, the transaction is taxed at the German VAT rate of 19% and listed in a German VAT return.
• If the entrepreneur’s EU-wide cross-border turnover is above the EU-wide delivery threshold, the transaction will be taxed at the French VAT rate of 20% and listed in a French VAT return. To do this, the seller must register for VAT in France.
• If the seller uses the One-Stop-SHop, the French VAT rate of 20% is used regardless of the total turnover. However, the transaction is listed in the OSS report and no additional VAT registration is required.

The process of classic distance selling could also be replicated in the context of dropshipping. In this case, the dropshipper would have to commission the shipping himself and identify himself to the supplier or manufacturer as the supplier, for example by giving him his German VAT identification number (VAT ID). This option is the simplest, but it does not correspond to the classic dropshipping process.

If the dropshipper’s revenue in France exceeds €10,000 they would either need a French VAT registration or an OSS registration in Germany. Both can be provided by hellotax. We also take care of French VAT returns or OSS reports in Germany. The dropshipper would, of course, also need to file regular VAT returns in their home country Germany.

Example 3: VAT for dropshipping with delivery from the home country

In classic dropshipping, the German manufacturer or supplier sends the goods directly to the end customer in France and is therefore the first link in the chain transaction. Since the end customer is based in Europe and the shipment crosses national borders, this delivery is considered an intra-community shipment and therefore tax-free. The invoice from the supplier to the dropshipper, therefore, also does not contain any VAT and the dropshipper cannot deduct input tax.

Now the second link, the dropshipper, comes into play as a middleman. He is also formally considered a supplier in chain transactions – as the supplier of the invoice. Since this is a chain transaction, the delivery threshold regulation does not apply here. The invoice to the end customer should therefore immediately include the French VAT rate of 20%.

However, the nature of the end customer has an impact on the reporting of the transaction. If the end customer is a French private individual, the German dropshipper can use the One-Stop-Shop (OSS) since it is a cross-border B2C transaction. In this case he would not need a French VAT number.

In this example hellotax would also provide the dropshipper either the necessary French VAT registration or an OSS registration in Germany and would take over the filing of French VAT returns or OSS reports in Germany. However, this would be necessary from the start, as the €10,000 threshold is not applicable when handling chain transactions.

Example 4: VAT for dropshipping with delivery from a third EU country

Dropshipping also often involves three parties from three different countries. For example, a German dropshipper could source a product from a Polish supplier and sell it to a French customer. In this case, too, the invoice from the supplier and the dropshipper does not include VAT. Because both entrepreneurs are based in different EU countries and it is a B2B transaction, the VAT is processed using the reverse charge procedure. In the course of this system, the dropshipper still has to pay the VAT, but directly to the tax authorities.

As previously, hellotax would take care of the French VAT registration and VAT returns or OSS registration and OSS reports in Germany. Additionally, the dropshipper would have to pay Polish VAT directly to the Polish authorities.

Example 5: VAT for dropshipping with delivery from abroad

If the manufacturer or supplier of the products is not based in Europe, it is suddenly no longer just about VAT. In many cases, the European entrepreneur does not pay any VAT at all to the foreign, for example Chinese, suppliers, since this state follows a different VAT system. However, the goods are imported into the European Union. As a result, customers may have to pay customs fees.

In addtion to VAT duties in Europe, a dropshipper in this example would also have to deal with import procedures. These can be handled in the European Union with the help of the Import-One-Stop-Shop (IOSS). hellotax not only helps you with the French or German OSS procedure but also all things IOSS. Contact us today to find out more.

VAT rates in Europe

When it comes to VAT in European countries, a distinction is first made between physical and digital goods. The former are products that are packaged and shipped, such as clothing and electronics. Examples of the latter would be e-books, music downloads, stock photos, and webinars.

For dropshipping, however, only the VAT rates for physical products are relevant. Furthermore, the VAT rates differ between certain product categories. In Germany, reduced tax rates apply to books and food, for example. However, each EU country has its own reduced tax rates applied to decorations, study materials and more.

Until recently, dropshippers were able to add domestic VAT rates to transactions with end consumers located in other EU countries. Country-specific, mostly very high delivery thresholds for the B2C mail order business applied. Only after crossing the country-specific thresholds, e.g the Dutch one of 100,000€, though sales to customers in that one country only country-specific VAT rates had to be applied. That changed on July 1, 2021.

On this day, country-specific delivery thresholds were replaced by an EU-wide, low threshold of just €10,000. This limit is reached through all cross-border B2C transactions combined and, therefore, crossed much earlier. For classic mail order companies and also dropshippers, this means that they now have to deal more frequently with EU VAT rates. Your sales system must be able to map the VAT regulations and country-specific tax rates, both the normal and all reduced ones.Sellers and dropshippers also have to adjust their prices. German customers are only charged 19% VAT, while Hungarian customers pay 27%, for example. If the seller does not use OSS, he must also register for VAT in third EU countries.

VAT IDs for Dropshippers vs. OSS

A lot has changed here since the delivery threshold for mail order was changed and the One-Stop-Shop was introduced. Dropshippers with a turnover of more than €10,000 per year through cross-border transactions with European private customers must now register for VAT and obtain VAT identification numbers (VAT ID) in all EU countries, in which their customers are based.

As an alternative, you can use the One-Stop-Shop. All cross-border B2C transactions in Europe are processed via this system. Separate VAT registrations are then no longer necessary for dropshippers.

However, the OSS is only valid throughout Europe. When selling to customers who are based in non-EU countries, their delivery thresholds must still be observed. These are usually shown in the local currency. So be careful! An unexpected exceeding of the delivery threshold is not only possible due to a sudden increase in demand, but also due to volatile exchange rates.

Import VAT when dropshipping with IOSS

The regular VAT that must be added to the price when selling goods to end consumers is not the only VAT that dropshippers have to worry about. The dropshipping business model is often associated with foreign, but especially Chinese suppliers – and with good reason. The vast majority of dropshippers source their products from abroad and thus benefit from low production prices. However, there is an import VAT due when importing the products into Europe.

Here, too, a lot has changed on July 1, 2021. So far, for example, deliveries with a maximum goods value of €22, or effectively €26.30 thanks to a calculatory flexibility, were exempt from import VAT in Germany. This exemption limit was abolished with the introduction of the new VAT system and the new delivery threshold. From July 2021 on, all products are subject to import VAT. The normal VAT rates of the importing countries apply.

But the European Union has also introduced a system for imports: the Import-One-Stop-Shop (IOSS). The IOSS is not the same as the OSS, but the procedures are similar since the latter was developed on the basis of the IOSS. If you use the IOSS, you simplify the reporting of your imports with the collected EU-wide IOSS report.

In addition to VAT for imports into the European Union, there are also country-specific customs duties that depend on the country of import. Customs duties were and are still only due from a goods value of 150€ – in Germany. Customs borders and customs fees differ from country to country and between individual product categories, but generally only apply to higher-priced deliveries.

The registered importer or importer of record (IOR) is responsible for customs duties and import VAT. With dropshipping, this is generally the customer, as he is the direct recipient of the goods from non-EU countries. The end customer must therefore pay these fees by post or directly to customs. This should be pointed out during the payment process in the dropshipping shop in order to avoid negative customer reviews.

Alternatively, the dropshipper can apply for himself to be considered a registered importer and include the fees in the purchase price. However, this is only possible without any problems if he receives the goods himself – which in turn does not correspond to the classic dropshipping model.

Income Tax for Dropshippers

Of course, VAT, import VAT, and customs duties are not the only taxes dropshippers have to pay. As the owner of a dropshipping business, like most entrepreneurs based in Europe, you are subject to income tax. However, the laws, tax rates and special regulations differ from country to country. In Germany, for example, you are subject to unlimited VAT liability if you not only have your registered office but also your permanent place of residence in Germany. Furthermore, the world income principle applies, according to which all income generated worldwide, i.e. sales to customers worldwide, are taxable. Similar regulations also apply in other EU countries. If you have questions about income tax, you should consult a regular tax advisor.

VAT complications and accounting in dropshipping

Income tax regulations are considered complicated by both employees and entrepreneurs. VAT, however, is a lot more complex. First of all, all business processes must be documented precisely. In addition, accounting should be handled with good software programs that can map the different source and destination countries and the complex business processes. If you have any questions about the processes in the dropshipping business from a VAT perspective, hellotax can help you.

We specialize in the VAT compliance of Amazon sellers, dropshippers and e-commerce retailers and take care of all the necessary registrations and submissions. We are able to do this thanks to our self-developed VAT software, with which you always have an overview of your transactions, and a team of specialized, local tax advisors. The latter will also be happy to clarify any individual questions you may have about VAT when it comes to dropshipping. Contact us today and learn more about our services.