Medical Device and Life Science VAT Processing & Deferment
The essential characteristics of VAT:
- VAT is an end user tax that is supposed to be paid by the end user of your product. You as the manufacturer are a mere unpaid government official who passes on VAT to the government.
- There are three types of VAT:
- VAT on your sales that you charge to your customers when they buy your products.
- VAT you incur on expenses you make 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. Hence you obtain a financing advantage.
This number is an identification number used to declare and pay VAT to the tax office. Each European country issues its own VAT numbers. Dutch VAT numbers begin with NL followed by nine digits and the extension B01. A VAT number is required to do VAT filings in a specific country. Filing for a Dutch VAT number is included in your fiscal representation contract.
This type of transaction involves sending products from one EU country to another. In order to prevent extensive money transfers the EU has decided that the buyer of the products is required to declare an intra community purchase and is required to pay the VAT in his own country. The seller has to report the sale as an intra community sale on his 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 he would not be able to file for the VAT.
A domestic delivery is a delivery within one country, for instance a delivery from our warehouse to a Dutch hospital. A delivery from a trunk stock to a customer in the same country is also considered a domestic delivery. One should beware that a domestic delivery must be invoiced with local VAT although there may be exceptions. In order to invoice VAT of a certain country, the seller must have a valid VAT number of that particular country.
An export delivery is a delivery where the product is transported to a destination outside of the EU’s VAT territory. One should beware that there are some areas that are part of the EU but are not part of the VAT area. The Channel islands are an example of such an exception.
Distant selling involves selling products to VAT exempt entrepreneurs or consumers in other EU countries, e.g. from the Netherlands to Germany. Since the buyer does not have a valid VAT number, the intra community VAT does not apply here.
If the seller does not have a VAT number in the country he is selling to, he should invoice the buyer with VAT of his own country. E.g. issue an invoice with 21% Dutch VAT to a buyer in Germany. One should bear in mind that such a procedure is only allowed up to a certain threshold per year. The amount varies from country to country, Germany and France for example have a threshold of 100.000 € per annum. This means that one can sell 100.000 € worth of net revenue (revenue excluding VAT) to these countries. VAT is added to the amount on the invoice. If the threshold is exceeded, registering for a local VAT number is required. All future invoices to buyers without a VAT number will then be invoiced with local VAT.
Import means import into the European Union’s common market. VAT is due on importing products into the EU. However a deferment mechanism is in place in the Netherlands allowing you to import your products without paying any VAT. We will explain this in more detail below.
EORI stands for Economic Operator Registration and Identification number. It’s a customs number required for customs activities. A company can only have one EORI number in the entire EU. The number is valid anywhere in the 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.
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. In VAT a fixed establishment is an entity that can do sales on its own like a shop, sales office or even a factory. This rule is favorable to you since any VAT on sales has to be paid to the Dutch government 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.
General Fiscal Representative: The general fiscal representative can act on behalf of the entity they represent for all products or services where VAT is involved. The foreign enterprise which appoints the general representative shall have its own VAT number. Only one general fiscal representative can be appointed by a foreign enterprise. This involves the same financing advantage mentioned above. The general fiscal representative has limited liability for the VAT declared on behalf of the clients, the maximum exposure is the amount of the deposit. The tax office demands that a general fiscal representative makes a deposit for his activities. All declarations done by the fiscal representative are done on the client’s own VAT number. Therefore all clients have their own individual VAT filings.
Article 23 VAT deferment: VAT has to be paid upon importing products into the Netherlands. Even though this VAT is eligible for a refund the importer still suffers a financing loss because the refund takes place several month later. Furthermore tax authorities often demand additional filings and explanations.
In order to smoothen 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). This arrangement allows a company to declare and deduct the import VAT (import being import from outside the EU) in one VAT filing. Hence neither a payment nor a request for refund is required.
This arrangement only exists in the Netherlands and in Belgium.
Consignment stock: Consignment stock is the process in which you send products to a hospital which will only be billed once the hospital has used one or more of these products. Consignment stock is distinguished from trunk stock by the fact that the buyer is already known at the moment the products enter a specific country.
Some countries like France have simplification rules where other countries like Germany have not. A simplification rule often implies that the transaction can be treated as a single intra community sale instead of an intra community sale followed by a domestic delivery.
Please inform us upfront if you would like to do a consignment process. We will then look into the applicable legislation. If required Healthlink can help you set up a local VAT registration. There are however additional charges involved being a set up fee and a fixed monthly fee for the VAT filings.
Trunk stock: Trunk stock is the process in which you send products to your sales reps who will sell the products to a customer later on. In the meanwhile your sales rep will have the products at his or her disposal. At the time the stock is received by your sales rep the buyer is not yet known.
From a VAT perspective you should be aware that trunk stock mostly leads to a local VAT registration if products are sold at a commercial value to a customer. Most countries in Europe see the move of your own goods to the trunk stock location of your sales representative as an intra community transaction and the subsequent sale to a customer as a domestic sale subject to local VAT.
Healthlink can help you set up a local VAT registration. There are however additional charges involved being a set up fee and a fixed monthly fee for the VAT filings.
Please inform us upfront if you would like to do a trunk stock process. We will then look into the applicable legislation.
Switzerland: Even though Switzerland is not a member state of the European Union this country has VAT regulations in place. If you would like to sell directly to hospitals VAT registration is recommended if not required. The alternative is to send products under incoterm DAT or DAP. The hospital would then have to take care of customs and VAT filings. Hospitals are often reluctant to do this. Please inform us separately if you plan to do any business in Switzerland or from Switzerland.
Establishing your own entity in Europe: In most European countries you can set up a business with local sales representative without forming a legal entity. Setting up your own legal entity will make it easier to have VAT incurred on operating expenses reimbursed. Next to that 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.
Establishing your own bank account in Europe: Often you can collect money from your customers on your US bank account without having to establish a local bank account. We recommend to contact your own bank to check if this is possible. In our experience establishing a European bank account is often not required.
Requesting a refund for VAT 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 appellant’s country of origin does not have VAT itself. The USA has sales tax but no VAT. This is also called the reciprocity principle. The following countries apply this principle: Bulgaria, Cyprus, Czech Republic, Estonia, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Poland, Slovakia, Spain and the UK. Henceforth a VAT refund request in these countries is very unlikely to be successful. As an alternative you could consider setting up your own legal entity in these countries. The costs for setting up and maintaining such an entity are often considerable. Therefore this is only worthwhile if you have very high costs in one or more EU countries.
Threshold scheme for selling abroad to customers without valid VAT number: Some of your customers outside of the Netherlands might not have a valid VAT number. The reason for that can be that they are an exempt entrepreneur or individual consumer.
These customers would normally have to pay domestic VAT 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.
Let’s assume the seller sells from the Netherlands and that the buyer is located in France. The threshold for France is 100,000.00 euro per year. The seller sells 10,000 euro worth of products to a French exempt entrepreneur without a VAT number. He issues an invoice with 21% Dutch VAT despite the fact that the buyer is located in France.
In June of the same year the seller has sold 100,000 euro worth of products to French customers without VAT number and he exceeds the 100,000 euro for that year. Please beware that the threshold only applies to buyers without VAT number. If he sells to buyers with a valid VAT number at the same time these sales don’t count for the threshold.
At this stage the seller has to obtain a French VAT number by registering with the French tax office. From the moment he obtains a valid French VAT number he is required to invoice with 19.6% French VAT, being the applicable rate in France.