What is VIES and what is it for?
To make it clearer, there is nothing better than an example. Imagine that your company in Luxembourg is going to sell products to a company located in France. According to European tax legislation, sales of goods or services to business customers in other European countries must be invoiced without VAT provided that the customer is registered for VAT in their country and is listed as authorized for intra-Community transactions in the VIES system.
Therefore, in order to invoice the sale without VAT, you need to know whether the French company meets these characteristics and has a VAT number authorized for intra-Community transactions.
What should you do then? Simple, go to the VIES website, enter your French customer's VAT number and the system will instantly tell you if the number is valid and active. If the number appears as valid in VIES, Luxembourg authorizes you to invoice the sale without VAT, and you must keep the confirmation as proof for your accounting records.
The VIES is therefore a key component of the European tax system, as it prevents companies that are not authorized to carry out exempt intra-Community transactions from being invoiced without VAT. However, it does not only have this function, it also facilitates cross-border tax audits and the exchange of information between the tax administrations of the Member States. In addition, this platform also helps to detect suspicious transactions and sophisticated fraud such as carousel fraud, in which companies take advantage of the VAT exemption on genuine intra-Community transactions and then sell these goods in their own country with VAT and disappear without paying that VAT to the national tax authorities.
Difference between domestic and intra-Community transactions
As seen in the previous example, VIES makes it possible to validate VAT numbers in Europe and thus verify whether a company can carry out intra-Community transactions exempt from VAT. However, there are still some questions to be answered, such as how this differs from domestic transactions, or when it is actually mandatory to use VIES. Let's clarify these points by examining the VAT procedure for domestic transactions and intra-Community transactions.
- Domestic transactions: These occur when both the selling and purchasing companies are established in the same country. In this case, the selling company always invoices with Luxembourg VAT and the buyer can deduct this VAT on their own tax return, if applicable. Here, the use of VIES is not necessary as the validation of VAT numbers is only relevant for trade between countries.
- Intra-community B2B (business-to-business) transactions: In this case transactions are carried out between companies located in different Member States of the European Union. This is the same case reviewed in the previous section when a company in Luxembourg sells, for example, machinery to a company in France. In this case the Luxembourg company must check whether the French customer's VAT number is valid before issuing the invoice without VAT. To do this, it must go to the VIES portal and check the EU VAT number. If the number is valid, the Luxembourg company can invoice without VAT.
- Intra-community B2C (business-to-consumer) transactions: This last case occurs when, for example, a Luxembourg company sells products or services directly to individuals in another European country. In this case it is not necessary to use VIES. Instead, the Luxembourg company must apply the VAT of the consumer's country and use the OSS (One Stop Shop) system to declare and pay VAT on sales made to private customers in other European countries.
What must a company do before operating in the EU?
Before a company can begin operating with other companies in the European Union, it must ensure that its VAT number is correctly enabled for intra-Community transactions.
It is important to note that it is not enough to have a national VAT number; it is essential that this number is registered and active for trade at European level.
In some cases, it is already active from the outset, as the VAT number application form usually includes a box asking whether intra-Community transactions will be carried out, and if this box is ticked from the outset, the VAT number assigned will be activated in the VIES. If this box has not been checked from the outset, the company must request the activation of the VAT number for transactions in the EU from its tax administration. To verify whether the VAT number is active, simply check the VAT number in the VIES by entering the number in the portal's search engine.
This check is extremely important, whether you are a buyer or a seller. If you are a buyer and your number does not appear in VIES, your suppliers will not be able to recognize it as valid and will not be able to invoice you without VAT. Conversely, if you are a seller, you must verify that your European customers' VAT numbers are enabled for intra-Community transactions in order to invoice them without VAT, otherwise, you will have to charge VAT.
Failure to comply with this step can have significant consequences. The company could be forced to charge or pay national VAT on transactions that should be exempt, lose business opportunities, face delays in international payments, and even receive penalties or surcharges in the event of a tax inspection.
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VIES is an essential tool for any European company that wants to operate safely and transparently in the intra-Community market. Validating the VAT number of business partners is not only a legal requirement, but also an effective way to protect yourself against administrative errors and help detect potential fraud. As seen, the system is fairly simple, although there are important concepts that must be understood in order to use it, so this article has attempted to explain them clearly. We have discussed the usefulness of the portal, when it should be used, and how to make sure the VAT number is valid for intra-European transactions.
However, you may still have unresolved questions or doubts about specific situations. If this is the case and you want to go into more detail, don't forget that EasyBiz is here to help. Contact us and we clear up your doubts.
