Dropshipping in the EU: Taxes and VAT on Every Order

1What is dropshipping, exactly?

Dropshipping is a fairly young form of online retail in which the seller doesn't stock the products but arranges for delivery from another country (usually China). These drop shipments are especially easy to run, above all because you don't need inventory, so you can get started without capital.

Here's how a sale works:

 

The seller passes the customer's order straight to a company overseas, which packs it and ships it to the customer's address. So the seller never physically touches the product. There are no storage costs, and all the work can be done comfortably from home. The profit comes from advertising the mostly inexpensive overseas products on the website at a much higher price. The seller receives the money from the customer, pays the overseas company and keeps the difference. This works because the products are usually simple. A phone case, for example, costs only about 0.50 € to produce. The seller markets it through the right channels and finds customers who are happy to pay 10 € for one featuring the hero of their favorite show. Since it's a simple product, the seller can be confident the customer won't complain and nothing will be sent back.

For sellers focused on a specific niche in particular, dropshipping can be a great way to sell products within the EU without worrying about stock or shipping. Dropshipping in Europe can also appeal to smaller sellers because it lowers the barrier to online retail. All you need to launch a successful dropshipping business is an email address and an online store.

What many dropshippers don't realize is that this margin is, of course, taxable too. So where and how does VAT arise? Who has to charge it? And from what point do you pay tax on imported products? You'll find all this and more in this article.

2Dropshipping tax basics

Broadly speaking, a dropshipping sale breaks down into 2 separate invoices:

1. A customer in the EU buys something from you. It could be any product, say a phone case.
2. You, the seller, buy the goods overseas. The manufacturer is usually based in China or the surrounding region.

These 2 invoices involve 3 parties: the buyer, the seller and the overseas supplier. For tax purposes, the two invoices are treated differently:

3Static supply and moving supply

As the previous figure shows, the sale happens in three steps, which is why the whole process is known as a chain transaction. Of the three parties involved, only two ever touch the actual product: the overseas supplier and the customer in the EU. The intermediary, the seller the customer knows, never actually sees the product. So a chain transaction has one moving and one non-moving supply. The purchase from the seller is non-moving here, because the seller only takes the money and arranges the shipment. No physical product moves. As a result, only the sale itself is taxed. In Germany that is usually 19%, in Austria 20%, for example.

Shipping the product from China to the customer is the moving supply. Because the product ships from China, this step is tax-free for the business, at least as far as the EU is concerned. Any taxes in the supplier's own country are not relevant to the dropshipper.

You do, however, need to factor in import VAT and customs duty. These apply when products are imported into the EU from non-EU countries. Until July 2021, the import VAT threshold was 22 €. It was based on the purchase price in China, not the actual sale price. If import VAT was ultimately due, the seller had to pay it, but could reclaim it as input VAT.

For customs, the European threshold is 150 €. Anything above it had to be declared to customs before and still does today. The value is the actual purchase price, including any shipping or postage costs. Above 150 €, a set rate of customs duty is charged.

4The Distance Selling Regulations

As a dropshipper you usually sell not just in your own country but across Europe, so you should be at least broadly familiar with the legal framework of the EU single market. Until June 2014, the key piece was the EU Distance Selling Directive 97/7/EC (the "Distance Selling Regulations"). For a long time it governed the general aspects of selling online, including:

• Sufficient, detailed information about the product and the purchase in the form of a contract
• Any additional fees must be understood and accepted by the customer
• The customer has the right to withdraw from the purchase within 7 working days without giving a reason
• The contract must be printable

In addition, products in Europe must be delivered within 30 days of the order. That sounds generous at first, but orders from China can often take 60 days or more unless you're willing to pay for faster delivery. Dropshippers operating in the EU should take these rules seriously. Since June 2014, the EU Consumer Rights Directive 2011/83/EU applies: the customer can withdraw for 14 days without giving a reason, and if the withdrawal notice is missing, the period is extended by up to 12 months.

5VAT on sales to other EU countries until July 2021

Until July 2021, as an EU seller you initially paid VAT only in your home country. But once your sales into another EU country passed a certain threshold, that country naturally required the VAT to be paid there. Because the thresholds differed, the rules were unfortunately rather confusing. France, for example, charged VAT from 35,000 € in sales, while Germany and Italy only did so from 100,000 €. Successful dropshippers therefore had to keep constant track of their sales in each country, so they could pay VAT to the right country and not evade tax unknowingly. On top of that, you had to register for a tax number in every country concerned. Even back then, that meant a lot of extra work.

That's why the EU passed a new law some time ago, designed to simplify paying VAT on sales to other EU countries since July 2021:

The law builds on a system introduced back in 2015, the "Mini One Stop Shop". Sellers of digital products online register with this system, and the VAT on sales of software, e-books and other digital goods is automatically allocated to the customers' countries and paid there. There's no need to register for a tax number in other EU countries. Instead, the software calculates the VAT due automatically and you pay it to your tax office at home. The EU's aim is to reduce tax evasion.

This same system was extended to dropshipping websites from July 2021 under the name "One Stop Shop". At first glance, the upside is that dropshippers save a lot of time tracking totals and registering multiple tax numbers. Every sale in each EU country is then taxed at the local VAT rate.

The new rules have a downside too: the old country-specific delivery thresholds (whether 35,000 € or 100,000 €) are gone entirely, replaced by a single EU-wide threshold of 10,000 €. Sales are now tracked EU-wide from the very first euro. For dropshipping from within the EU, this means: once your EU-wide sales to consumers in other EU countries exceed 10,000 €, VAT is due at the rate of the customer's country and can be reported in one place through the One Stop Shop. That means more government oversight and taxes falling due sooner. There are various other changes as well.

6The end of the import VAT threshold

So what else changed in July 2021? Under the banner of the "new e-commerce VAT package", the EU introduced several more changes. Besides scrapping the distance-selling thresholds, the European Union removed another limit: goods imported into the EU with a value of up to €22 used to be exempt from import VAT. That rule was abolished because many dropshippers exploited the exemption and falsely declared their products below the €22 mark to pay as little VAT as possible.

The new rules are the EU's answer. Import VAT is now due on every imported product with a value of up to €150. Above that, as mentioned, customs duty applies. Here too, alongside the OSS for EU sellers, a new system was introduced: the IOSS, or "Import One-Stop Shop", for non-EU sellers. Dropshippers from outside the European Union apply for an IOSS identification number in one EU country and file a quarterly return covering all their sales. The system then automatically declares the import VAT for each country.

The new e-commerce VAT package is a very broad topic that touches many areas of e-commerce. That is why we have gone through all the changes for you on this page.

7Dropshipping into the EU from outside

Many successful dropshipping businesses are based outside the EU and naturally want to serve it as the world's second-largest market. Even when someone in America, for example, sells a product to a customer in Europe, VAT is due on it.

Until the changes took effect in July 2021, it was the buyer, not the seller, who was charged, and only once the product arrived. Unsurprisingly, that made for a very unpleasant customer experience. After all, who wants to pay around 20% on top when accepting a product they have already paid for? Complaints and returns were common, and for a seller with no real warehouse they often caused major complications.

Alternatively, the seller could register for a tax number in the relevant EU countries and pay the VAT directly. Depending on where the seller was resident, it could then also be reclaimed as input tax. Otherwise, the option was to pass the higher price on to the customer. Not ideal, but better than hitting them with extra costs after delivery. What mattered most was the buying experience and the shop's reputation that goes with it.

Today, alongside the OSS for EU sellers, non-EU sellers can register for the IOSS. They register in any EU member state of their choice and apply for a tax identification number there. As a dropshipper, this keeps import VAT from being billed to your customer after the fact. What sounds like a big advantage at first is put into perspective by the fact that the IOSS also increases government oversight: the EU now records every sale made through the system. Sellers who do not register for the IOSS have to pay the tax separately to the tax authority of each EU country. Their goods may also be treated less favorably at customs, which can lead to delivery delays.

8Alternatives to dropshipping into the EU

As this article has shown, dropshipping into the EU is no easy undertaking, whether you sell from inside the Union or from outside it. You have to deal not only with the many different languages of the member states but also with a range of EU requirements. Since July 2021, the tax rules may look harmonized, but look behind the scenes and the changes turn out to be a tool for tighter government oversight. Sellers now have to file reports from the very first sale. All the thresholds below which no tax was previously paid in individual countries, as well as the €22 import VAT exemption, have been abolished entirely, making dropshipping structures far less attractive.

Even though the EU is the second-largest economic area, there is a much better alternative: the USA. Here is why:

1. The USA is the world's largest economy and, despite differences between the states, has relatively uniform laws. There is a single currency, one main language and, above all, a legal and tax framework that varies only slightly from state to state.
2. In the USA, the pre-tax price is what counts. Shelves in the supermarket show only the net price, and the same goes for online shops. Customers are used to adding their state's sales tax in their heads automatically. Because of this mindset, Americans see a higher total at checkout as normal. Unlike in the EU, it does not make them reconsider the purchase.

If you are in dropshipping yourself and are considering the USA as a target market or thinking about forming a company, this article is highly relevant to you.

9What this means for dropshipping in the EU

Dropshipping is a simple idea at heart, but its VAT treatment is not. Especially within the EU, there are many rules and systems to consider, such as import VAT and customs. With the introduction of the new Import One-Stop Shop, the tax situation has, at first glance, become somewhat simpler. But getting used to the new system costs time and nerves, expands government oversight and ends every exemption threshold for VAT and import VAT.

If you do not depend on a customer base in the EU, do not wait long: consider moving to simpler markets such as the USA or, for example, Australia.

Mount Bonnell Advisors gives you professional support with every step, from forming your US company to ongoing tax support for your US business.

You will find an overview of all articles on the topic on our E-Commerce & Dropshipping page. Dig into the tax questions in our article on taxation of e-commerce and dropshipping profits, and weigh your next step with the pros and cons of forming a US company. If you want to run your shop through a US LLC without a US permanent establishment, our sister site zerotax.llc is the place to go.

In short

• In dropshipping, the seller holds no stock: the order goes to an overseas supplier who ships directly to the customer.
• For tax purposes, this is a chain transaction with two invoices, one moving supply and one static supply.
• Since July 2021, the EU has no distance-selling thresholds: VAT is due from the first sale. The One-Stop Shop bundles the reporting.
• The €22 import VAT exemption has been abolished; sellers from outside the EU can register for the IOSS.
• The article names the USA as the simpler alternative, with one language, one currency and sales tax only above a threshold.

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