VAT in the EU: What you need to know

The creation of the VAT system was a response to the need for a neutral and transparent turnover tax system to facilitate an effective single market in Europe.

The Value Added Tax (VAT) is a consumption tax in the European Union that is levied on the value added to goods and services. It applies to the majority of goods and services bought or sold for use or consumption within the EU.

Exported goods are usually not subject to VAT. The same applies for services offered and sold to customers outside EU territory. However, imports are taxed in order to have a fair system which allows EU producers to compete on the European market on equal terms with external suppliers.

Main aspects

The Value Added Tax is a general tax, applicable to all commercial activities that involve the provision of services or the production and distribution of goods. If the annual turnover of a person is less than a specific limit (the threshold), they do not have to charge VAT on their sales. The threshold is different in each EU member state.

The VAT is ultimately borne by the final consumer, not by the businesses.

The VAT is levied based on a percentage of the price and is visible throughout the production and distribution chain, indicating the actual tax burden. To collect the VAT, a system of partial payments is implemented, where taxable individuals or businesses that are registered for VAT deduction deduct the tax amount they have paid to other taxable individuals or businesses for purchases related to their business activities. In that way, the tax remains neutral regardless of the number of transactions.

The VAT is categorized as an indirect tax due to the fact that although the seller is the one who is accountable to the revenue authorities for paying it, the buyer ultimately pays it to the seller as an inclusive part of the overall price.

VAT rates

The EU issues a specific list of goods and services for which:

1. The standard VAT rate must be minimum 15%.
2. The reduced tax rate must be minimum 5%.

Each country determines what goods, products, and services are considered a taxable supply, meaning a subject to tax. For instance, there is a different rule for (international) transport of passengers in each of the Member States. 

Each EU country also determines its own general tax rates and the rates for specific types of products. 

VAT in Bulgaria

In Bulgaria, the standard VAT rate is 20% but as a result of the COVID crisis some products and services like books, baby food and products, hotels and restaurants, touristic services and excursions that include transport services, natural gas and central heating are taxed at a reduced rate (9%).

Note that VAT registration is compulsory for all Bulgarian companies and tax liable persons who, within one financial year, produce VAT taxable sales in Bulgaria of 50,000 BGN or more (~ 26,000 EUR). Those who record taxable sales below this limit can choose to register voluntarily.

If you need help with registration at the local government, contact us. Our experts will assist you with any related matters and check whether you are entitled to any reduced rates or exemptions.

How is VAT charged?

When a sale is made, the VAT is calculated as a percentage of the sale price. The taxable person then subtracts any amount that has already been paid in the previous stage to avoid imposing taxes twice on the same product or service (double taxation).

VAT is applied solely on the value added during the various stages of production and distribution. This means that the final price of the product is the sum of the values added at each preceding stage, and as a result, the total amount of VAT paid is the sum of the tax paid at each phase.

Registered VAT traders have to show the VAT charged to customers on invoices. That way, if the customer is also a registered trader, they will know how much they paid and how much they can deduct respectively. Moreover, the consumer is aware of how much tax they have paid on the final product.

This system is somewhat self-policing, ensuring that the correct VAT is paid in stages.

An important detail to note is that citizens of the US and other non-EU countries can take advantage of the so-called VAT refund when they travel to Europe. EU legislation allows a VAT refund to be applied for purchases of goods made by EU visitors. You can read about the process of claiming such a refund on the website of the European Commission.

VAT identification number

Each taxable person/business or a non-taxable legal entity which registers for VAT purposes receives a VAT identification (registration) number. The unique number serves for identification in the tax and legal system of each country. 

The VAT identification number is issued by tax administration and has different names in the EU countries, for example no TVA in France, USt-IdNr in Germany, P.IVA in Italy, and NIF (CIF) in Spain. The Bulgarian name is “ДДС номер” /DDS nomer/, which literally means VAT number.

The format of this number depends on the country, but each must begin with the country’s code, followed by a block of digits or characters. Businesses supplying goods or services in several countries might have to get a number in each of them.

These identification numbers are important because they identify the tax status of the customer, the place of taxation, and are mentioned on invoices (except simplified invoices in certain countries).

Most businesses and natural persons carrying out economic activity need such a number.

They are obligated to register when they:

• carry out the supply of goods or services taxed with VAT;
• make an intra-EU acquisition of goods;
• receive services for which they are liable to pay VAT;
• supply services for which the customer is liable to pay VAT.

If you need to check whether a certain number is valid, you can do so on the website of the European Commission.

To summarise, the application of VAT is regulated by national tax authorities but there are some standard EU rules that need to be respected. This tax system and the VAT law are different from the ones in the United States.

If you need a consultation with a good tax lawyer in Bulgaria, contact us. Our legal experts speak English, German, Russian, and French, and can help you with all kinds of legal matters concerning the Bulgarian tax system.