VAT is unavoidable, so it’s important to understand what’s relevant to US and EU manufacturing and logistics.
One of the most misunderstood topics about selling hardware systems in the EU is VAT (Value Added Tax), the European equivalent of sales tax. It’s a common belief that building systems in the EU can save a lot of money by avoiding the VAT tax, but that’s false: no matter where your systems are built, somewhere along the line the VAT tax is collected for goods sold in the EU.
The gray area (or “grey” area, depending on your locale), is the point at which the VAT must be collected in the journey to the end user. It mainly depends on whether or not companies have registered for VAT numbers. Generally, VAT will be collected either at the point of entry into the EU, during the manufacturing of the product in the EU, or deferred until product ships to the EU end user.
Since we field this question frequently and there are financial benefits to VAT deferment, we’ll explore the three most common scenarios that apply to hardware deployments, identify when VAT is charged, and share our recommendation in each case. For these examples, the EU manufacturing and stocking location we refer to is our MBX Netherlands facility.
#1 Systems built in the US, direct shipped to an EU end user
Let’s start with the easiest scenario. When systems are shipped directly from the US to an EU end user, VAT is charged at the time of entry to the EU and paid by either the shipper or end user. We recommend this course of action for our customers who are still building up their EU presence because it’s the most straightforward approach and doesn’t necessitate obtaining VAT registration.
#2 Systems built in the US, stocked in the EU, then shipped to an EU end user
This is where recommendations become conditional on whether you and your hardware partner have registered for Dutch VAT or EU non-Dutch VAT numbers. MBX is registered for Dutch VAT and we require our customers who stock in the Netherlands to be registered, too. In this case, MBX maintains ownership of stocked products, which is a financial benefit for our customers. The Dutch VAT payment is deferred until a product is sold and shipped to the end user. This is the taxation method that EU companies are most accustomed to.
The bottom line: the financial benefits of stocking products in the Netherlands prior to shipping to end users is dependent upon both parties being registered.
#3 Systems built in the EU, direct shipped to an EU end user
This scenario usually only applies to companies with a very high volume of product sales in the EU. We can run the numbers based on your forecast to determine what the break-even point is that makes sense to build in the EU. Generally, even with a reasonable sales volume, it’s more economical to build in the US and stock in the EU.
If your volume does justify EU manufacturing and you are registered for both Dutch VAT and EU non-Dutch VAT numbers, the traditional EU taxation method of charging the end user VAT when your product is sold and invoiced applies.
Obtaining VAT registration
The VAT tax is complicated and requires the expertise of a tax advisor to complete the requirements as well as to apply for a VAT deferment license. MBX can recommend a tax advisor in the EU country for which you wish to obtain a VAT number to help guide you through the requirements based on your company’s needs.
The first step to applying for Dutch VAT registration is to find a tax agent to act as your fiscal representation to obtain it. Once these materials are submitted, the timeline for processing, approval, and license issuance is approximately four weeks. Then the agent can provide a list of materials needed to apply for an Article 23 Licence for Dutch VAT deferment.
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