Guide overview
We’ll start with a 60-second snapshot of how VAT works for SaaS companies, then walk through a six-step compliance framework - from identifying which transactions are taxable to filing quarterly returns under the One Stop Shop (OSS). You’ll see fresh data points, pitfalls to avoid, and quick wins that keep auditors happy and cash flow smooth. Today, you will learn how to handle subscription-based VAT compliance, apply the digital goods tax EU rules correctly, and avoid the steep penalties that can wipe out months of recurring revenue.
1. Confirm your service is “electronically supplied” under EU law
Most cloud products qualify as “electronically supplied services” (ESS). The service is delivered over the internet with minimal human intervention.
Examples: SaaS subscriptions, pay-per-use APIs, downloadable software updates, etc.
Non-ESS edge cases: Custom consulting delivered via Zoom, manual data-entry services, etc.
Why it matters
ESS is taxed where the customer is, not where your servers are.
Quick test
If the service stops functioning without automated technology, it’s ESS. If it needs significant manual effort from your staff each time, it may be treated as a general B2B service.
2. Pinpoint the customer’s location, place of supply
ESS rules provide that VAT is due in the customer’s EU member state.
- Collect at least two non-contradictory pieces of evidence (billing address, IP address, bank location).
- Keep records for 10 years - auditors can ask anytime.
- For B2B sales, validate the client’s VAT number with the VIES system and store the timestamp.
Troubleshooting geo-location conflicts: what would you do if the IP is in France, but the card is issued in Germany?
1. Ask the customer for proof (utility bill, statement).
2. Default to the country best supported by evidence.
3. Document the decision trail - penalties are lighter when you show reasonable care.
3. Check thresholds and decide on OSS registration
Applicable rates depend on your EU sales volume:
- €10,000 cross-border sales per year: below this, you may apply your home country’s VAT rate.
- Above €10,000: you charge VAT at the customer’s rate in every destination country.
- One Stop Shop (OSS) lets you file a single quarterly return instead of 27 separate ones.
The EU VAT system works well - Member States have collected over €88 billion in VAT under the OSS and IOSS schemes.
Here are the variants for informed decision-making:
- Under threshold and B2B only - local VAT rules may suffice.
- Over threshold or B2C across borders - register for OSS as soon as possible. Over 130,000 companies are on board already.
4. Apply the correct VAT rate and issue compliant invoices
- Build a tax-rate table keyed to country codes.
- Automate updates; legislation shifts several times a year.
- Invoice must show: VAT rate, amount, buyer’s VAT ID (if B2B), OSS registration number, and “EU OSS scheme” note.
Handling promotions and credit notes:
- Discounts reduce the taxable amount; show them on the same invoice.
- For refunds, issue a credit note referencing the original invoice number and adjust it in your next OSS return.
5. Collect, file, and remit under OSS
Filing is arranged quarterly and is due by the end of the month following each period (Q1 return due 30 April).
- Export transactional data: date, country, VAT base, VAT amount.
- Group totals by member state.
- Pay the total to your OSS home country; they distribute funds.
Account for the EU’s VAT compliance gap - €89.3 billion was lost in 2022, roughly 7 % of expected revenue.
Pro Tip:
Tighter audits red-flag late filings quicker.
6. Monitor Nexus outside the EU
Over 170 countries levy VAT worldwide. If you sell to the UK, Norway, Australia, or Canada, similar “digital tax” regimes apply:
- Track revenue by country weekly.
- Use tax-tech or a spreadsheet with alert thresholds.
- Wherever local registration is mandatory, imitate the OSS playbook: register, charge local VAT, file returns.
How does VAT work for SaaS in the EU?
VAT for SaaS applies per customer’s residence, not where the software company is established. Once annual cross-border B2C sales exceed €10 000, suppliers must charge each customer the VAT rate of their EU member state and report all sales through the One Stop Shop (OSS) by filing a unified quarterly return covering each country involved.
Conclusion:
Subscription-based VAT compliance is not an optional paperwork - it’s a constant cash-flow and reputational risk. Transform VAT from your nightmare into a routine back-office function by:
- Verifying that your service is electronically supplied.
- Pinpointing customer location.
- Registering for OSS once you cross the €10 000 margin.
- Automating rate updates.
Keep records tight and file on time to avoid tax penalties.
About the Author
Rūta Švobienė
Ruta Svobiene is the Head of Indirect Taxes at 1stopVAT, with 5 years of experience in VAT compliance and tax strategy. She leads a team that provides tailored solutions to businesses, ensuring compliance with complex global tax regulations.
