How to apply VAT when trading goods in the EU and third countries

VAT may not be a simple matter even for experienced entrepreneurs, especially when it comes to foreign transactions. In this article, you will find basic information on the VAT rules that apply to sales of goods to EU countries and beyond.

PLACE OF SUPPLY AND VAT FOR FOREIGN TRANSACTIONS

When you trade with foreign countries, you need to correctly determine the place of supply, i.e., in simple terms, determine in which country the value added tax will be paid. From a VAT perspective, there are three types of territories:

  • the Czech Republic (i.e., the Czech Republic),
  • European Union countries (other member states),
  • countries outside the EU (called third countries).

If the transaction has a place of supply outside the Czech Republic, it is usually exempt from output VAT in the Czech Republic; however, this is not the case without exception. In addition, even if you are a non-VAT payer, you must register as an identified person for some foreign transactions. The whole issue is then regulated by the VAT Act.

VAT AND EU MEMBER STATES

When trading with entities from EU countries other than the Czech Republic, we use the terms "delivery to another Member State" and "acquisition from another Member State". One of the important conditions is that the goods must actually move from one country to another in the transaction.

DELIVERY OF GOODS

The place of fulfilment is the Member State to which the goods are delivered. For example, a sale to a customer in Austria. If the transport is provided by a customer who is registered for tax, the transaction is exempt from VAT in the Czech Republic, but the right to deduct input VAT remains.

If the buyer of goods from another EU country is not a VAT payer, you usually charge the price including tax and apply output VAT.

PROCESSING OF GOODS

When you purchase goods from an EU country, you pay VAT in the Czech Republic, which is the place of supply in this case. This type of transaction is, for example, a purchase from France.

If you purchase goods from a person registered for tax in another Member State, you will reverse-charge the tax yourself; you will therefore charge both input and output tax. The overall impact is then de facto zero, it is only a matter of correctly reporting the transaction.

If you buy from a non-taxpayer from an EU country, you are not entitled to deduct VAT. However, the supplier may be obliged to register for VAT in his home country.

TRADING WITH EU MEMBER STATES & VAT IN A NUTSHELL

Situation Business case Procedure
delivery of goods as a Czech VAT payer you sell to a VAT payer in the EU exempt from VAT, you are entitled to a deduction if the transport is provided by the customer
as a Czech VAT payer you sell to a non VAT payer in the EU you invoice the price including VAT and apply input VAT
acquisition of goods as a Czech VAT payer you purchase from an EU VAT payer perform a self-assessment of the tax
as a Czech VAT payer you buy from a non VAT payer from the EU you pay the full amount without VAT deduction

VAT AND NON EU COUNTRIES

For transactions with third countries, the terminology differs slightly. Here we use the terms 'export' and 'import'. However, a nice simplification is that for this type of country we do not distinguish whether the other party is a VAT payer.

EXPORT OF GOODS

Exports are for example when selling goods to a customer in the USA. If the exporter, the buyer or a carrier authorised by the exporter or the buyer arranges the transport of the goods, the export is exempt from VAT with a right to deduct input VAT. The place of supply is the Czech Republic. You prove the exemption by a customs declaration and declare it on the date the goods leave the EU, i.e. the date they left the Czech Republic.

GOODS DELIVERY

If you buy from China, for example, it is an import. The place of fulfilment is the Member State where the goods are located when they enter the EU from a third country, or the Member State where the goods cease to be subject to customs measures. It does not have to be the Czech Republic.

In the tax return, you will perform the aforementioned self-assessment of the tax, which you will apply both on the input and output. The customs office will collect the VAT from non-taxpayers together with the customs duty.

TRADING WITH THIRD COUNTRIES & VAT IN A NUTSHELL

Here you do not address whether the other party is a VAT payer or not.


Situation Business case Procedure
export of goods as a Czech VAT payer you sell goods to third countries you invoice the amount without VAT, exempt from VAT with the right to deduct
import of goods as a Czech VAT payer you purchase goods from a third country perform a self-assessment of the tax

NEED HELP WITH YOUR TAXES?

In complicated areas such as VAT in connection with foreign transactions, it is always better to consult experts. Tax consultancy services will save you time and relieve you of the administrative burden. We will tame VAT for you - fill in the contact form and we can get started.


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