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Update on June 27, 2024
While Europe offers interesting business opportunities, businesses should remember that they may have to pay VAT.
A growing number of Québec businesses are looking to diversify their markets by exporting products or providing services to Europe. The European Union (EU) is considered the world’s second largest economy, providing access to a vast market of over 500 million consumers.
The Comprehensive Economic and Trade Agreement (CETA), signed by 27 EU member states and Canada, exempts most exported products from tariffs. However, businesses still have to pay value added tax (VAT) and fulfil their tax return obligations.
VAT: Somewhat like GST and QST
VAT is applied and invoiced similarly to the Goods and Services Tax (GST) and the Québec Sales Tax (QST) collected by Québec businesses for most goods and services sold in Québec. It is also a consumption tax that is applied differently based on the type of goods and services bought and sold in the EU.
VAT weighs lightly on a business’s finances since, like GST and QST, the end consumer pays it. However, businesses must make sure to calculate the tax amount (in euros), enter it on invoices along with their VAT identification number and then pay it to the country’s tax authorities on time.
Rates: High and variable
Each EU country sets its own rates, based on three categories: standard rate, reduced rate and special rates. The standard rate cannot be lower than 15% and, in practice, hovers around the 20% rate in effect in France.
In Scandinavian and most Eastern European countries, the standard rate is even higher, ranging from 23% to 27%. In Germany, it is slightly lower, at 19%. Reduced rates or additional taxes may also be applied to the provision of specific goods and services (alcohol, energy, costume jewellery, etc.).
An expert’s preliminary analysis can help you determine the impact of EU taxes on your business.
Beware of nasty customs surprises
Québec and Canadian businesses should not overlook the importance of VAT: they risk having their products detained at customs or at the post office if the exporting business has not collected and paid VAT. Consumers may even get the unpleasant surprise of having to pay VAT when they receive their package. Such a situation could very easily break the trust—and even the commercial relationship—between a business and its customers.
What’s more, in France, VAT is the most evaded tax and involves the most common form of tax fraud. It is therefore subject to very strict controls by the French tax authorities. Other EU countries have also raised penalties.
Annual updates required
Some goods and services are exempt from VAT. However, domestic businesses should not assume that since they are not paying GST and QST, they will also be exempt from VAT in EU countries.
Therefore, when companies decide to do business in Europe, it is in their interest to understand the specific rules that apply to VAT. Furthermore, VAT laws are reviewed and amended every year.
As well, businesses selling goods or services liable for VAT in France may be required to appoint a tax representative to carry out their red tape and obligations. They should therefore expect to incur high annual costs.
Given the complexity and diversity of tax obligations, choosing a competent international tax expert could save you a lot of trouble and costly penalties.
This article was written in collaboration with Alexandre Lecomte, tax consultant at Raymond Chabot Grant Thornton.