Business has gone global. That’s hardly news anymore. But for the first time in history, the world marketplace is open all day, every day, unrestricted by distance, technological barriers or country of origin. But as with any business venture, entering the arena of global trade and investment presents both opportunities and challenges. The solution? … do your homework … be prepared.
Doing business in the EU– four basic questions
This of course applies to many areas of international trade and investment, one of which is becoming familiar with a region’s taxation regulations. A somewhat simple solution that relates to the European Union (EU) can be summarized in four basic questions:
- Do you need to set up a branch office or a separate legal entity in Europe when importing/selling there?
Answer: No, this is not required but at the same time it also could be beneficial. - Does importing and distributing in Europe result in a corporate income tax liability in a European country?
Answer: Again, this is not necessarily the case and we’ll look at this further later on. - Can a Canadian company import/customs-clear products into Europe?
Answer: The simple answer is yes. - And finally, will Value Added Tax (VAT) be due/payable when importing into the EU?
Answer: Not always, but it can in certain situations.
The European Union and trade legislation
The European Union (EU) has 27 independent Member States. An important part of the EU legislation is in the form of “Directives”, which means that the Member States have to create their own national legislation, for example relating to VAT. Customs and trade legislation (including duty rates and quota regimes) are managed through EU Regulations, which are directly applicable and binding in the Member States. Corporate income tax is mainly regulated by the countries themselves.
Main customs principles in the EU
From a customs duty perspective, it makes no difference whether goods are imported via the Netherlands, Belgium or any other EU country. However, interpreting customs legislation can differ between countries. But after clearing customs in one EU country, you can distribute your goods to other EU locations without any customs interference, which is known as “free circulation within the EU”. So, in general, it is recommended to centralize import and customs compliance, and to seek out expert advice to ensure compliance.
Business Services Value Chains (BSVCs)
Certain countries, such as Belgium and the Netherlands have sophisticated “Business Services Value Chains”. BSVCs aren’t about doing business, but rather about setting up and operating a business. They are aimed at simplifying and facilitating goods imports and taxation. Key components of BSVCs are air, land and seaports, logistics hubs, legal, accounting and employment advisory services, government services and available labour pools.
Approach of the Member States’ customs authorities
Apart from the legislation, the attitude and focus of local customs and other authorities are also key for companies.
As well, all EU Member States apply the same classification legislation and duty rates. However, the interpretation of these rates can sometimes differ. For example, there are high customs duty-rates in the food and fish industry.
A further issue deals with supply chain security and Authorized Economic Operator (AEO) status. Without AEO certification, customs simplifications are not possible.
Basically there are three types of AEOs:
- customs simplifications;
- security and safety;
- and a combination of the two, customs simplifications/security and safety.
EU VAT – VAT at import
In most countries, the VAT at import becomes due when goods are declared for importation at customs. You can reclaim this VAT-at-import payment, but the actual refund can take several months. However, various EU Member States have implemented regimes to avoid the VAT import payment. Avoiding these payments is a very important selling tool to attract international business.
VAT onward distribution and export
After customs clearance, no VAT is due when goods are sold and shipped to another EU Member State or a non-EU destination (the VAT zero rate applies). When a foreign company sells goods to a company within the country of customs clearance, in some countries, no VAT should be charged. There are also no VAT charges when selling to non-EU destinations.
In sum, the onward sale/distribution of goods from the country of customs clearance does not normally have to result in VAT payments.
Conclusions and ideas
When doing business in Europe, tax, trade, customs and VAT are key topics both from a planning and potential risk point of view. It is important to ensure compliance, as non-compliance could result in assessments, fines and criminal sanctions. Finally, to lower the tax, customs duty and VAT burden, careful planning and some (limited) investments are recommended.
Do you think that you will seek out expert advice when it comes to taxation, customs, VAT regulations and practices in the EU? Do you have anything to add to the above?
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