EU Dropshipping VAT Compliance 2025: A Complete Guide

Dropshipping as a business model has seen tremendous growth, even before the COVID-19 pandemic, which has since reached its peak. Dropshipping offers numerous advantages to all parties involved in the supply chain. In a nutshell, it represents selling products online without the necessity for the intermediary supplier to own a physical inventory. 

In a dropshipping supply chain, there are typically three principal parties: a supplier (online retailer), a customer, and the dropshipping supplier (producer or distributor). The online retailer lists the products for sale, and the drop shipper processes the purchase order, controls inventory and packaging, and ships the product directly to the customer. 

Being an online retailer in the dropshipping supply chain offers numerous advantages. The retailer doesn’t need to buy and store stock or employ staff to process orders, package, and ship. However, it remains responsible for processing returns or complaints, VAT and Customs compliance, and the extended responsibility concerning the hazardous products that are being shipped. 

EU VAT Compliance 

As previously mentioned, retailers who are part of the dropshipping supply chain enjoy many tangible benefits. The dropshipping business model has given birth to hundreds of thousands of very profitable small online businesses worldwide. However, it should be clearly emphasized that the VAT and Customs compliance duty remains, in most cases, the responsibility of the online retailer. 

Unfortunately, the data shows that many online retailers “forget” that the tax compliance responsibilities for supplies of goods to end customers are within their scope of duties and aren’t “reserved by default” to “actual” dropshipping suppliers. 

EU VAT Rules for Online Retailers 

Dropshipping Model

For non-EU online retailers, the first fact to be aware of is that each EU country determines its VAT rates on products and VAT compliance duties. The EU VAT Directive is the principal piece of legislation that shapes the VAT regime of Member States; however, it shouldn’t be confused with the fact that each Member State has its freedom in determining VAT rates for products and other VAT compliance requirements. (thresholds, registration, reporting, invoicing rules)

For both EU and non-EU online retailers making distant supplies of products to customers based in the EU, the first question to be answered is – what Member State is defined as the place of supply? Some of the questions to be answered to determine his VAT responsibility are: 

• Are goods shipped from outside the EU, or are the goods in free circulation within the EU 
• From which Member State are the products exported 
• Into which Member State the products are imported
• Who is the importer of record
• Is the supply B2C or B2B 
• Where is the online retailer established, and in what Member States does it have VAT registration 

Non-EU-based or established retailers should be aware that there is no available threshold for distance sales of products to end customers residing in the EU. If they choose to sell products to EU consumers, they should register for VAT in one or more Member States. EU-established retailers could benefit from the EUR 10,000 threshold for all intra-EU distance supplies of goods and services. 

Online retailers should familiarize themselves with the alternatives available to them to ensure VAT compliance for their EU supplies.  

One-Stop-Shop 

Simplified registration

Established EU and non-EU businesses could adhere to one or more of the simplified reporting schemes included in the One-Stop-Shop compliance package. The OSS scheme drastically reduces the compliance challenges, costs, and bureaucracy for retailers that have adhered to it. 

Depending on the type of activity, place of business, and the nature of the customers, the online retailer can choose one or more EU OSS schemes to reduce its compliance costs. 

• Union Scheme – can be used both by online retailers whose place of business is within the EU or outside the EU, for making intra-EU distance supplies of goods
• IOSS Scheme – can be used by both EU and non-EU established retailers that are making distance supplies of products imported from non-EU countries, where the value of the consignment doesn’t surpass the EUR 150 threshold(alongside other conditions) 

This scheme provides significant benefits to retailers that sell products (imported into the EU) of low value to EU consumers. 

The use of one or more of the OSS schemes permits retailers (when the conditions are met) to register in only one Member State. For OSS purposes, the Member State for non-EU established retailers will be the Member State of Identification(MSI). For EU-established retailers, the MSI will be the Member State of establishment by default. 

Multiple VAT registrations 

However, established EU and non-EU online retailers can opt for multiple VAT registrations for various reasons. They can even combine simplified OSS reporting with domestic VAT returns(where possible). We have many clients who have chosen that path. One reason is to be able to claim input tax credits, given the high volume of B2B transactions.