Reaching a level where products are sold, or services are supplied to international customers and consumers, is an ultimate goal for most businesses. While the financial benefits are apparent, overlooking the compliance drawbacks is often where businesses run into trouble. One of those is not understanding what creates VAT obligations even when a company has no local office, employees, or subsidiary in another country.

For non-resident businesses, the key question is not simply how much revenue is generated, but where the supply takes place, what is being supplied, who the customer is, and which business is responsible for accounting for VAT. What adds to the complexity is that VAT registration rules differ significantly between jurisdictions. Comprehending these differences is what can make expanding to new markets feel like a sustainable growth opportunity rather than an unexpected tax and compliance burden.

Non-Resident VAT Registration vs. Domestic VAT Registration

A non-resident or non-established business is generally a company that makes taxable supplies in a country without being established there. Under the EU VAT framework, for example, VAT rules apply to taxable persons regardless of whether their business is established inside or outside the EU. The distinction between domestic and non-resident businesses is important because VAT registration thresholds do not necessarily operate in the same way for both.

For example, a domestic company might not be required to register for VAT before or immediately after it makes a taxable sale. Instead, it may be able to trade up to a specified turnover threshold before mandatory VAT registration applies. On the other hand, a foreign company may be subject to different rules. In many jurisdictions, there is no VAT registration threshold for foreign companies. 

What the Absence of a Threshold Means for Foreign Companies

Where a jurisdiction does not provide a threshold for foreign businesses, or specifically excludes non-residents from its domestic threshold, even a relatively small taxable transaction can trigger registration. The absence of a threshold does not, however, mean that every foreign company selling to customers in a country must register. Where the transaction is outside the country's VAT scope, is exempt, or falls under a reverse-charge mechanism, registration may not be required.

What Triggers VAT Registration for Foreign Companies?

Several key triggers require foreign companies to register for VAT in countries where they have customers but no physical presence. It is important to note that VAT registration is not triggered only by reaching a turnover threshold. 

The first issue is whether the foreign company is making a taxable supply in the jurisdiction. Most countries apply similar standards for what constitutes a taxable supply of goods or services, though some differences between jurisdictions remain.

Another common registration trigger is selling goods locally. A foreign business may be required to register when it imports goods and subsequently sells them in the destination country, particularly where it is responsible for the local VAT rather than the customer.

In some cases, holding inventory locally can also create VAT obligations. For example, an e-commerce business storing its products in a foreign warehouse or fulfillment center may have local VAT obligations on subsequent sales. The precise consequences depend on the jurisdiction and the nature of the transactions.

VAT registration for foreign companies may be triggered by the place-of-supply rules. The place-of-supply rules determine whether VAT is due in the customer's country, the supplier's country, or another jurisdiction. The rules are different for goods and services, and the result depends heavily on whether the customer is a business or an individual consumer.

The type of customer also determines where VAT is due and who is responsible for accounting for it. For B2C transactions, the seller is typically liable for VAT. In contrast, for B2B supplies, the reverse-charge mechanism applies, making the buyer liable for VAT.

Additionally, construction and real estate supplies, installation and assembly work services, events and admissions, and transfers of a company's own goods often have special place-of-supply rules. Consequently, a company should assess each transaction type separately rather than applying one general registration rule.

Exceptions and Special VAT Schemes

Where there are rules, there are also exemptions. One of the exemptions is the application of the previously mentioned reverse-charge mechanism. Even though the foreign company is making a taxable supply, the domestic recipient is responsible for VAT. 

The EU's OSS schemes are another important example of simplification. Since July 2021, the EU's e-commerce VAT rules have allowed eligible businesses to use OSS to declare and pay VAT on certain cross-border B2C supplies without registering separately in every EU country where the customers are located. Importantly, the OSS system will further expand, making VAT compliance in the EU more practical and straightforward.

Other special schemes may apply to businesses, particular industries, or specific categories of goods and services. These schemes can apply to sectors such as travel agents, second-hand goods, and investment gold.

Key Takeaways

Overall, VAT registration for foreign companies should be viewed as an activity-based and transaction-based issue, not simply a turnover issue. A company can have relatively modest sales and still be required to register for VAT from the first taxable supply due to the absence of a registration threshold. 

Therefore, the critical questions that each company should ask are: What are we doing in each country, where are the goods or customers, and where does the VAT-relevant supply take place? These questions are particularly important for e-commerce companies and digital service providers who operate in multiple countries.