Understanding ViDA Proposed Changes to Reverse Charge Rules

The European Commission, as part of its VAT in the Digital Age project (ViDA), is proposing to modify reverse charge rules for non-established suppliers. These rules are currently optional for Member States, which has resulted in patchwork application across the EU. The modifications are intended to harmonize these rules across member states. Although the intent is to simplify the administration of VAT, the proposal may result in new obligations for certain taxpayers.

Let’s review the current reverse charge rules and assess what the proposed changes could mean for businesses conducting trade in the EU.

The current landscape

Article 194 of Council Directive 2006/112/EC (the EU VAT Directive) states that a Member State may apply a reverse charge to sales of goods, services or both, when the sale is made by a non-established supplier to a taxable person, and when the VAT is due within said Member State. Article 194 also gives broad leeway for Member States to institute this reverse charge.

Importantly, Article 194 does not apply to all transactions involving non-established suppliers. For transactions involving goods, Article 194 applies only when the goods are shipped domestically, such as with a shipment from the local warehouse of a non-established supplier. For transactions involving services, Article 194 applies only when the services are of a type that can be sourced to a specific location. Examples include services to immovable property, passenger transport services and catering services (“General” services from non-established suppliers are instead governed by Articles 44 and 196 of the VAT Directive).

Member States do not apply Article 194 in a uniform manner today. National implementing legislation can vary in the scope of the goods and services covered. Some countries, such as Belgium, Italy, the Netherlands, and Spain, will apply Article 194 to all applicable services, while others, such as Austria, will exclude certain services.

The registration requirements for imposing a reverse charge also vary by country. Belgium is a good example of the complexities in this area. In Belgium, the reverse charge can be imposed if there is a sale from a non-established supplier to a customer established in Belgium. It can also be imposed if the customer is not established but has a VAT representative in Belgium. If the customer, however, is not established but is merely identified for VAT purposes in Belgium, the reverse charge does not apply. While most countries are not so granular in their registration requirements, Belgium is not the only country to restrict the application of the reverse charge based on whether a customer is established in the country.

The Commission’s proposal and its implications

The Commission has proposed that from January 1, 2025, Member States must allow the reverse charge envisioned in Article 194 – it will no longer be an optional provision. In addition, the reverse charge is defined to apply in all cases where the customer is established or identified for VAT purposes in the Member State where VAT is due.

The immediate impact of this proposal, should it become law, will be that customers in all EU Member States, when buying goods and services from non-established suppliers, will incur VAT liability by default. In practice, non-established suppliers under the new regime might be able to voluntarily register and collect VAT in jurisdictions where it is due, rather than follow the reverse charge process; this point will require clarification from the Commission.

Suppliers doing business in countries with a limited domestic reverse charge, meanwhile, will have to consider the consequences of an expanded regime. The new Article 194 reverse charge will no longer be subject to country-specific exemptions or exclusions, which should simplify the regulatory landscape for companies conducting trade in multiple member states.

Taxpayers active in the EU should be sure to follow future developments in this area, as the January 1, 2025 deadline for this proposal to become law is not too far away.