VAT Processing & Deferment
What is Value-Added Tax (VAT)?
VAT is an end user tax that should be paid by the end user of your product. There are three types of VAT:
- VAT on sales you charge to your customers when they buy your products.
- VAT you incur on expenses in Europe such as marketing and sales activities.
- VAT you pay upon importing products into the European Union. Even though you are eligible for a refund of this VAT, Healthlink can help you obtain an article 23 permit that will enable you to immediately deduct the VAT providing you with a financial advantage.
What is a VAT number?
This number is an identification number used to declare and pay VAT to the tax office. Each European country issues its own VAT numbers. If you need to file a VAT return in a specific country, a VAT number is required. Filing for a Dutch VAT number is included with HealthLink’s fiscal representation service agreement.
Basically, there are four types of transactions with different fiscal implications:
1. Intra community sale
This type of transaction involves sending products from one EU country to another. In order to prevent extensive money transfers, the buyer of the products is required to declare an intra community purchase and is required to pay the VAT in its own country. The seller has to report the sale as an intra community sale on its VAT filing. You as a seller would not have to pay any VAT on such a transaction. This applies only when the buyer has a valid VAT number; otherwise it would not be able to file for the VAT.
2. Domestic sale
A domestic sale is a sale within one country, for instance a delivery from HealthLink’s warehouse to a Dutch hospital. A delivery from a trunk stock to a customer in the same country is also considered a domestic sale. Domestic sales are subject to local VAT, although there may be exceptions. In order to invoice local VAT, the seller must have a valid local VAT number in the country in question.
3. Export sale
When the product is sold and transported to a destination outside EU, it is considered as an export sale. Please note that some areas are part of the EU, but are not part of the EU VAT area. An example of such an exception are the Canary Islands.
4. Distance sale
Sometimes your customers outside of the Netherlands may not have a valid VAT number, for example if they are a VAT exempt entrepreneur or individual consumer. Since the buyer does not have a valid VAT number, the intra community VAT does not apply here.
VAT would normally have to be paid in their own country. That would mean that the seller has to register for VAT in the country where the buyer is located. For low sales volumes that would be quite inefficient.
Therefore the European Union has decided to facilitate sellers by implementing a threshold scheme. In practice this means that a seller can invoice with VAT of his own country up to a certain amount per year.
What is an import?
When goods leave one customs region and enter another, this an Import. VAT is due on imported products, however, it is possible to have the import VAT deferred. This is explained in more detail below.
What is an EORI Number?
EORI stands for Economic Operator Registration and Identification number. It’s a customs number required for customs activities, which is valid throughout the EU. In fact, you can only have one EORI number in the entire EU. Without a valid EORI number products will be delayed at the customs office. Healthlink will file for an EORI number on your behalf as soon as we have received your Dutch VAT number. Please make sure you have no other EORI numbers in the EU.
What is Article 12 section 3?
This term refers to the Dutch VAT legislation and prohibits companies without a fixed establishment in the Netherlands to invoice Dutch VAT to Dutch entrepreneurs or other entities with a valid Dutch VAT number. A fixed establishment means an entity has a physical location from which it can make a sale, such as a shop, sales office or even a factory. This rule is favorable since any VAT on sales has to be paid at month end, even when it takes much longer to collect VAT from your customer. The VAT has to be declared and paid by the end user. You as a seller can conclude the sale without any VAT obligations.
What is a Fiscal Representative?
A company that is not established in the Netherlands, the fiscal representative is authorized to act on behalf of the entity they represent for all VAT related matters. The company must have its own VAT number, which the fiscal representative can apply on the company’s behalf. Only one fiscal representative can be appointed and the fiscal representative is liable for the VAT declared on behalf of the client; however the exposure is limited to the amount of the deposit. This deposit is based on the expected volume of sales of the client and must be paid before the fiscal representation and article 23 licenses are granted.
What is Article 23 VAT deferment?
When goods enter the Netherlands from outside the EU, import VAT has to be paid. The import VAT can be reclaimed when the VAT return is filed, but this may be several months later. Obviously, this can cause cashflow problems.
To simplify this process the article 23 VAT deferment has been put in place. Article 23 refers to article 23 of the Dutch VAT act (Wet OB 1968). What this means is import VAT does not have to be paid upon import, instead it is deferred to the VAT return where it is also deducted, so the client does not actually pay it.
What are consignment stock and trunk stock?
Consignment stock means that you send products to a customer (i.e. a hospital) and only the products that are used are invoiced. Trunk stock means that products are sent to sales reps who sell the products to a customer at a later stage. The difference between consignment stock and trunk stock is in the case of consignment stock the buyer is already known at the moment the products enter a specific country.
Having either consignment or trunk stock (or both) means that you will likely need a local VAT registration. Most countries in Europe see the move of your own goods to a consignment or trunk stock location as an intra community transaction and the subsequent sale to a customer as a domestic sale subject to local VAT. In such cases, HealthLink can help you set up a local VAT registration and file a local VAT return. For additional VAT registrations there is a setup fee and a fixed monthly fee for the VAT filings.
Export to non-EU countries (i.e. Switzerland, UK)
Exporting products to countries outside the EU means you are liable to pay import VAT without being able to reclaim it. Depending on the volume of exports sales, it may be beneficial for you to register for a local VAT number. In these cases HealthLink can assist with the VAT registration as well as the VAT returns.
Establishing your own entity in Europe
In most European countries you can set up a business with local sales representatives without setting up a legal entity. Setting up your own legal entity will make it easier to receive reimbursement of VAT incurred on operating expenses. Also, employees might prefer to work for a local legal entity instead of an offshore Inc. or LLC. On the other hand a local entity will have to submit a statutory annual report and you will have to hire someone to do the accounting for the entity. Furthermore establishing a local entity might have income tax consequences as well. Often local tax authorities use a cost plus system in which a certain percentage of the costs incurred is treated as a taxable profit.
VAT refund on sales expenses
While acquiring customers for your product in European Union countries where you do not have a local VAT number, you may incur VAT on sales and marketing expenses such as traveling or exhibits or fairs. Based on article 2, section 2 of the 13th EU directive, EU countries are entitled to refuse a refund if the country of origin of the requestor does not have VAT itself. For example, the USA has sales tax but no VAT. This is also called the reciprocity principle and the following countries apply this principle: Bulgaria, Cyprus, Czech Republic, Estonia, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Poland, Slovakia, Spain and the UK. A VAT refund request in these countries is very unlikely to be accepted. As an alternative you could consider setting up your own legal entity in these countries.