IN098 - Trading with EU Companies - VAT Solutions

A non-EU resident company or International Business Corporation (IBC) has many issues to consider when evaluating the effects of VAT rules on its proposed trading activities in the EU. Legislation and rules change on a regular basis, both EU wide and in individual states. Therefore such companies trading in the EU should take local specialist advice.

Situations when Registration for VAT (TVA) would be Appropriate

There may be circumstances where an IBC would not need to register within the EU, for example, if they are providing services to a VAT registered business within the EU.

On the other hand, there are circumstances where an IBC should register for VAT. Such a situation is highlighted in the Dixcart Information Note number 97 relating to the “Ticking Tax Time Bomb”.

In another set of circumstances it may well be advantageous to have an EU VAT registration in order to reclaim input taxes or facilitate trading operations.

Take, for example, a non-VAT registered IBC that wishes to purchase goods in Belgium and sell them in The Netherlands. In this instance the IBC would need to export the goods physically out of the EU and then re-import them into the EU in order to avoid breaching the VAT rules. On the other hand, an IBC that is registered for VAT within Europe could arrange for goods to be sent directly from Belgium to The Netherlands. Under the simplification procedure detailed later in this note VAT would not need to be added to the supply cost.

The problem is how does a non-EU resident IBC register for VAT, without raising the question of a corporate tax liability in the location of registration? There are a number of alternative VAT structures available, each of which offer a solution to overcome this challenge:

1. The use of an Isle of Man company
2. Registering an existing IBC in the Isle of Man
3. The use of a Madeira company
4. The use of a United Kingdom agency company

Use of an Isle of Man Company

An Isle of Man company is worthy of consideration because the Isle of Man is treated as part of the EU common customs area – the “VAT zone”.

An Isle of Man company is resident in the Isle of Man and is therefore eligible to register for VAT in the Isle of Man. Where the company is owned by non-residents of the Isle of Man, it is possible to pay a fixed annual amount of £450 tax, irrespective of the profit of the company. Such companies should have at least one director and a secretary resident in the Isle of Man. Dixcart is able to provide directors and the company secretary, and organise the registration of the company for VAT.

Registering an Existing IBC for VAT in the Isle of Man

It is possible for an IBC, not incorporated in the Isle of Man, to appoint a local VAT agent in the Isle of Man. The agent will be responsible for the registration process and will provide the ongoing contact point between the VAT authorities and the IBC. The agent will be required to have copies of the IBC’s accounting records, as well as original purchase invoices and copy sales invoices at their offices. They will liaise with Customs officials at the necessary VAT inspection visits and report back to the directors of the IBC as required.

It should be noted that in order to qualify for VAT registration within the UK, it is necessary that the company seeking registration undertakes an economic activity within the UK or has an establishment in the UK. Dixcart can offer advice on the measures that should be taken to best meet these obligations. The Dixcart Information
Note number 92 covers this topic in further detail.

One of the attractions of registering for VAT in the Isle of Man is the speed of registration with registrations often taking no more than seven days.

Use of a Madeira Company

Companies registered in Madeira’s Free Trade Zone are Portuguese companies. They offer additional advantages as they benefit from numerous tax incentives only applying to companies licensed to operate in the Free Trade Zone of Madeira.

As Portugal is a member of the EU, Madeira companies are automatically provided with a VAT number on incorporation.

Where a business provides digitally delivered services to non-VAT registered customers within Europe, it should seriously consider using a Portuguese company resident in Madeira. This will enable it to charge 15% VAT on sales, rather than the rate applicable where the customer resides in the EU. The Madeira rate of 15% is one of the lowest VAT rates within Europe. You can obtain further information on this by requesting our Information Note number 85 on Internet Delivered Services in Europe.

Use of a United Kingdom Agency Company

A UK incorporated tax paying company can transact business on behalf of an undisclosed principal. The UK company would be subject to corporation tax on its profits, being the agency fee less any expenses of the company. It is important that the management and trading activities take place outside the UK. In order to ensure this, Dixcart normally appoints directors resident in the Isle of Man.

Where the principal in this arrangement is based outside the EU, Customs & Excise ignores the principal for VAT purposes and substitutes the agent, thus removing any obligation from the principal for registering for VAT.

Simplification Procedure

Under the simplification procedure, a VAT registered company can supply its VAT number to a supplier in another EU country. This will enable the supplier to zero rate the transaction.

Where a customer is VAT registered and a member of another EU country, the VAT registered company will be able to issue an invoice to the customer endorsed “VAT: EC Article 28 Simplification Invoice.” The customer will then pay VAT in his own country under the reverse charge procedure.

Clearly there is therefore an advantage in satisfying the simplification procedure conditions in that the VAT registered company will not have to account for VAT on transactions with companies in other EU countries.

The above simplification procedure only takes place if the following conditions are met:

1. The supplier is VAT registered in an EU country
2. The customer is VAT registered in a different EU country
3. Neither is registered for VAT in the same country as the company.

What if both Supplier and Customer are Located in the same EU Country?

In these circumstances, zero rating would not be possible as this only operates for goods moved between member states. The company would therefore be required to register for VAT in the country where the supplier and customer are situated.

What if the Customer is not Registered for VAT?

In this case, zero rating would also not apply and therefore the agent would have to register in either the country of residence of the supplier or the customer.

What if the Supply is other than a Supply of Goods?

In the majority of the examples used above we have dealt with a supply of goods. The supply of services is a more complex area of VAT and depends on the type of service being provided. Professional advice should therefore always be taken in situations involving the supply of services.

A list of the most common types of service provision is detailed below and we would be happy to provide additional advice on this specific aspect of VAT:

• Consultancy services
• Services relating to land
• Services taxed where they are performed (educational services, performances by artists/sportsmen and conference administration)
• Transport services

Summary

This Information Note details the alternative structures available, for a non-resident EU IBC to register for VAT in the EU. The note also considers the advantages that such an EU registration can offer.

For further information on this topic please do not hesitate to contact Laurence Binge in our UK office or your usual Dixcart contact.