Dropshipping, the latest invention of e-commerce, makes online trading extremely easy, as retailers do not have to worry about warehousing and delivery.
The advantages, however, are offset by the legal and tax consequences of dropshipping. It is not for nothing that these are the weak points of the business model.
Dropshipping is essentially a story with three actors: the buyer, the dropshipping webshop and the supplier.
Example:
A German e-retailer sells goods manufactured in Poland to private end users (consumers) in various EU countries.
Legal conclusions
Goods in the EU
Since a private person is involved in the chain, we can exclude the triangular transaction, we have to classify the structure as a chain transaction. If wholesalers or traders are also served, it is definitely worth choosing the triangular transaction for these transactions.
Concept of chain transactions
A chain transaction occurs when the same product is sold to several (at least two) buyers in succession, with the product being shipped directly from the first seller to the final buyer. In a chain transaction, the transport of the product does not follow each invoice, but comes directly from the first seller, who otherwise has no invoice relationship with the final buyer.
We are dealing here with the basic model of a chain transaction, where three actors are involved in the transaction, with the first actor selling the product to the second actor, the second actor selling the same product to the third actor, and the product being shipped directly from the first actor to the third actor.
In chain transactions, the first thing to determine is the place of delivery, as it determines which country’s VAT rules apply to a particular transaction.
We know that the goods are shipped from the Polish manufacturer to the parcel courier, who delivers them directly to the consumer.
Only one of the three transactions is a 0% joint transaction.
General rules for the place of performance of a chain transaction
As a chain transaction is a supply of goods, the rules on the place of performance for the supply of goods should be observed. For all sales of goods where the goods are dispatched or transported, the place of performance is the place where the goods are dispatched. In a chain transaction, regardless of how many deliveries are included in the chain, the rule that the place of delivery of goods that are the subject of transport (dispatch) is the place where the transport begins (or where the dispatch takes place) only applies to one transaction (Section 26 UStG, Section 6a UStG-E, Article 36a VAT Directive)
Definition of a transaction with a transport
The first step in the VAT analysis of a chain transaction is therefore to determine the delivery in the chain that represents the transaction with transport (dispatch), since the tax exemption is linked to this transaction.
The place of performance of this transaction is the place where the goods are dispatched. In all cases, the transaction involving transport is the delivery for which the seller or the buyer orders the transport. If the Polish manufacturer has commissioned the parcel service, the transport transaction is the first sale (invoicing).
Definition of other transactions
After identifying the transport transaction, the place of performance of the other sales in the chain that do not involve transport should be examined. The place of performance of non-transport-related sales depends on whether the sales in question precede or follow the transport-related sales in the chain.
Sales without transport that precede sales with transport are also considered to have been made in the country of departure of the transport. Sales without transport that follow sales with transport are considered to have been made in the country of destination, i.e. the place of delivery between D and the final consumer is the consumer’s place of residence.
VAT value of the chain transaction
The next step in the VAT analysis of a chain transaction is to determine the tax rate. If the place of sale is abroad, foreign VAT law applies. If the place of delivery is domestic, Hungarian VAT law applies.
A chain transaction is an intra-Community transaction – i.e. a tax-free transaction – in which the goods have demonstrably left the territory of the Community for another Member State. Only one of the three transactions is therefore a 0% Community supply. If the Polish manufacturer orders the delivery, the first transaction (between the Polish manufacturer and D) is a 0% Community supply, the second transaction is subject to VAT, VAT is due at the place of delivery.
The place of performance is the place of destination, i.e. the country of the consumer.
The VAT Directive only requires Member States to define the objective to be achieved, and the decision on how to implement these objectives in their national legal system is left to Member States, so it is always necessary to check what legislation exists in the consumer’s country for the type of transaction in which the final consumer is established. In this memorandum, we have examined Hungarian and German law. D, as an intermediary entrepreneur, must apply for an EU tax number in each Member State in which the consumer is established and pay VAT in the consumer’s Member State.
If the consumer orders the goods to Hungary.
For the situation described above, there is a special rule in Sections 29-30 of the Hungarian VAT Act, which differs from the general rule and applies when the goods are intended for Hungary.
Since the shipment is made by the Polish manufacturer for non-taxable Hungarian consumers, the VAT due is usually (Section 29 of the VAT Act) the VAT at the place of destination of the transport, i.e. Hungarian VAT. In this case, Dway Handel will of course have to change its Hungarian VAT number and comply with its obligations to declare and pay VAT in Hungary. However, if certain criteria are met, the obligation to pay VAT will remain in the Member State where the goods are dispatched or the transport begins, i.e. Poland.
This criterion is that the total net value of your sales in the Member State of destination reaches a certain threshold set by each Member State, e.g. EUR 35,000 in the case of Hungary, then Polish VAT up to this threshold is payable and Hungarian VAT on sales after this threshold. Of course, you can choose to pay Hungarian VAT on the entire turnover, but you cannot deviate from this decision until the end of the next calendar year.
Formalities
Article 45a of the VAT Directive Implementing Regulation (282/2011/EU) specifies which document the Polish seller must have in order for the first transaction between him and Dway Handel to constitute a VAT-exempt Community supply:
In this case, the order document issued by the Polish manufacturer or his representative to the parcel service provider must be kept and presented during a tax audit.
If Dway Handel commissions the Polish parcel service, VAT must usually be declared and paid in the Member State where the transport begins, i.e. Poland. In this case, however, you should always check the VAT rules of the destination country. If Hungary is the destination country, Dway Handel charges Polish VAT up to a total annual turnover of €35,000 and Hungarian VAT at a rate of 27% above that. In this case, the application of Polish VAT of 23% is a price-reducing factor. The first transaction (between the Polish manufacturer and Dway Handel) is subject to Polish VAT of 23%, which Dway Handel can reclaim in Poland.
The German VAT of 19% can only be applied to goods purchased from or sold to Germany.