What is the ABC-delivery within the EU, and how does it relate to chain transactions?
The Netherlands is considered a highly competitive country worldwide, when it comes to doing business. With the port of Rotterdam and the airport Schiphol just 2 hours away from each other, it is considered profitable to open a logistical or drop-ship business here. The immediate access to high-quality infrastructure ensures, that you can import and export goods at a highly rapid pace. Nonetheless, the Netherlands is also part of the European Union and, thus, European and International laws also apply to doing business in this country. With international laws and regulations that determine the way you should handle your business affairs, it’s of the highest importance to become acquainted with some of these international laws. One of these regulations concerns the so-called ABC-delivery. This type of shipping involves at least three entrepreneurs from multiple countries, and is regulated due to tax purposes as well as to avoid fraud. We will outline the ABV-delivery in this article, so you know what you are up against if you consider opening a business in the Netherlands.
Chain transactions explained
If we want to explain a chain transaction, let’s start at the basics. A regular transaction is when entrepreneur or person A sells something (either goods or services) to entrepreneur or person B. This is fairly simple and straightforward, since A only needs to deliver and B needs to pay. However, in a chain transaction, there are multiple parties involved in a single transaction. This is also why the ABC-delivery is named as such: there are more entrepreneurs involved than just A and B, for there is also a C (and sometimes even more parties). In a chain transaction within the EU, goods are delivered to two or more entrepreneurs. If there are three parties involved, the chain goes from A to B, and then from B to C. Please note, that the goods are physically transported directly from A to C, though. Nonetheless, there are still transactions taking place between all three parties.
The important part is, who can deliver via European Intra-Community transport of goods: meaning for a 0% VAT rate. In general, the intermediary is the one who can do this, i.e. the 0% VAT rate can only be attributed to one supply in the chain. This is the delivery to or by the intermediary/broker. The broker is generally never the first supplier in a chain. The way the broker can be determined, is by figuring out who is actually taking care of the transport of the goods. Does an entrepreneur in the chain, who is not the first supplier, transport or ship the goods? Then this entrepreneur is the intermediary. Does a party outside the chain transport or ship the goods? In such cases, the intermediary is seen as the person who instructs that party for the Intra-Community transport or shipment.
What is the ABC-delivery exactly?
As stated in the introduction, an ABC-delivery always involves 3 separate parties: A, B and C. In general, entrepreneur A sells goods to B, which in turn sells to entrepreneur or customer C. But: the goods will be delivered directly from entrepreneur A to entrepreneur or customer C. Due to the fact that the seller isn’t actually the one who delivers the goods, some extra rules apply when it comes to VAT and tax payments. In essence, there are two separate transactions:
- The transaction between party A and B
- The transaction between party B and C
So, the main question is: who pays VAT if there is an ABC-delivery within the European Union? Entrepreneur A, B or C? We will try to explain this process, by outlining an example of an ABC delivery below in detail.
An example of an ABC-delivery
If you want to know how VAT payment is handled when performing an ABC-delivery, it is prudent to know more about the process itself. Imagine there is a company in Germany (entrepreneur A) that sells steel. You have a company in Holland (entrepreneur B), that resells steel to a company in Belgium (entrepreneur C). You as a company have instructed entrepreneur A to deliver the steel directly from Germany to entrepreneur C in Belgium. This essentially means, that the transport to Belgium is therefore also part of the delivery from A (Germany) to B (Holland). Thus, the transport consists of two separate parts: the first and the second delivery. We will explain this below.
The 1st delivery
The first delivery is considered the delivery from entrepreneur A to B. This means, that the delivery goes to another EU country. Due to the fact that the transport is actually part of the delivery, it is considered an Intra-Community delivery. The regulations regarding Intra-Community VAT are a set of rules, that apply to certain cross-border activities within the entire European Union. This means, that company A can send an invoice to company B with 0% VAT charged. After this has happened, entrepreneur B must register in Belgium as an entrepreneur subject to VAT, and declare his Intra-Community acquisition there. There is also the option of a so-called ‘simplified ABC-delivery’, in which the Dutch entrepreneur does not have to register as an entrepreneur in Belgium.
What is a simplified ABC-delivery?
With the normal ABV-delivery, entrepreneur A sells to entrepreneur B, who then in turn sells to entrepreneur C. The goods then go directly from entrepreneur A to entrepreneur C. If the goods are transported from entrepreneur A to B, then B must register in the country of C as we mentioned above, and file a declaration there. However, this is not required when we speak about a simplified ABC-delivery. If you do not want to register in the country of entrepreneur C (in our case in Belgium), you can also opt to declare your delivery to entrepreneur C in the Netherlands.
In such a case, no registration is required in the country of C. You will have to perform some extra actions, though. As discussed above, entrepreneur B will receive an invoice from entrepreneur A with 0% VAT. As entrepreneur B, you don’t include this purchase in your VAT return, since you don’t have to pay VAT. When you deliver the goods to C in Belgium, this is also considered an Intra-Community supply. This means, that you also send a 0% VAT invoice to entrepreneur C. Please note, that this invoice needs to meet some additional requirements. In essence, you hereby declare this delivery to C in your own VAT return, and you also have to include it in your ICP declaration. Entrepreneur C then calculates the VAT owed himself and declares it in his own country, being Belgium in our example. We will outline the extra conditions and requirements for the simplified ABC-delivery later in this article.
The 2nd delivery
After the first delivery has taken place, it’s time for the second delivery. In our example, there are two separate possibilities:
- With a normal ABC-delivery, entrepreneur B has registered as an entrepreneur in Belgium. Therefore, the delivery from B to C is considered a domestic delivery, since the steel remains in Belgium. In this case, B charges Belgian VAT to entrepreneur C.
- With the simplified ABC-delivery as we mentioned above, B does not have to register in the country of C. Instead, entrepreneur B sends a 0% VAT invoice from Holland to Belgium, after which entrepreneur C declares the VAT owed in Belgium. In both cases, the transport takes places directly from A to C.
So: In a regular ABC-delivery, B buys from A and arranges the transport. This means B is the broker. Only the VAT rate for the goods that A supplies to B is 0%. The other deliveries, for example from B to C and possibly from C to D etc., are so-called domestic deliveries that are taxed in the EU country where the goods arrive. Does the broker provide his supplier with a VAT ID of the EU country from which the goods are shipped? Then the VAT rate of 0% applies for the 2nd delivery. We will discuss the terms and conditions for a simplified ABC-delivery below.
Conditions and requirements for a simplified ABC-delivery
It is understandable, that business owners don’t want to register as an entrepreneur in many different countries. For example; if you do business in 7 countries, this would mean you would have to register in every single one. Due to the fact that this is considered unpractical, you can also apply the simplified ABC-delivery scheme if you meet certain conditions. In general, you have fewer obligations when you apply the simplified scheme, such as not needing to register in an entrepreneur's country anymore. The conditions you have to meet are as follows:
- You are able to demonstrate that you bought something from entrepreneur A with the goal of selling these goods to entrepreneur C. This is fairly easily done, for example, by providing a quote or contract.
- All 3 entrepreneurs need to have a VAT identification number in each respective country.
- You need to make a clear agreement with entrepreneur A regarding the transport of the goods to C.
- The goods are then shipped directly from entrepreneur A to entrepreneur C.
- You then have to include your Intra-Community supply to entrepreneur C in your VAT return and also ICP statement.
Additional requirements for your invoice
Next to meeting the specific conditions to be able to use the simplified ABC-delivery, you also need to take into account some additional requirements regarding the invoice you send. This is particularly important for entrepreneur B. When you create an invoice whilst applying the simplified ABC-delivery method, you need to add the following extra information:
- The VAT identification number of your company
- The national VAT identification number of entrepreneur C
- You also need to specifically mention either of the following:
- ‘Shift of the simplified ABC-delivery scheme’, or;
- ‘Intra-Community supply’.
This information informs entrepreneur C about the fact, that they need to declare the VAT in their own country, due to the fact that you used the simplified ABC-delivery scheme. So, entrepreneur B send a 0% VAT invoice, and entrepreneur C declares this invoice so the country entrepreneur C is based in can cash in the VAT, if said entrepreneur C has less VAT to pay than they received. This also informs customer C that he must declare the VAT, because you use the simplified scheme.
Which delivery is the Intra-Community supply in ABC-transactions?
As of January 1, 2020 and 2021, the VAT rules for international trade have changed on a number of important points. In order to find out how an entrepreneur should determine which delivery is the Intra-Community delivery in ABC-transactions, we need to look at the current legislation. From 1 January 2020, the main rule is that the Intra-Community supply is the supply from A to B. In our example above, that would be the German entrepreneur A. But: if entrepreneur B provides entrepreneur A with a VAT identification number of the Member State of departure, the supply from B to C will also be regarded as the Intra-Community supply. The new arrangement only applies if B arranges the transport.
The simplification that will apply from 1 January 2020 can also be applied in the case of longer chains. Suppose, for example, that there is an ABCDE delivery and D arranges the transport. In that case, if D provides C with a VAT number from a country other than the country of departure of the goods, the supply from C to D qualifies as an Intra-Community supply. If said entrepreneur provides a VAT number for the country of departure, then the supply from D to E is the Intra-Community supply, and so on. The simplification has no consequences for the already existing simplified SPC scheme; this will continue to exist. The regulation itself can be easily applied in practice and provides more legal certainty. After all, A can rely on the VAT identification number provided to him. In our opinion, however, there can still be a discussion in certain cases about who has transported the goods, for example when B agrees with A to collect the goods, but an employee of C sends them. Who transports the goods essentially influences whether the regulation applies, and in which link the Intra-Community supply takes place.
Do you need more information about chain transactions within the European Union?
If you want to start a Dutch company and trade goods within the EU, you will have to become acquainted with the many different laws and regulations covering this subject. Otherwise, you risk hefty fines or even incarceration, due to the fact that malpractice can be seen as tax evasion and/or fraud. When you are involved in ABC-transactions, it is important to look at the consequences of the arrangement on the basis of your current conduct. If you have VAT numbers from different countries, you can see whether it is more favorable to use one or the other VAT number for ABC-transactions. This way, you can set up your own supply chain in the best profitable way for your company. Do you need help with some of the regulations? Or do you seek advice about the way you should set up your companies? Of course, we are happy to help you with this. Please contact one of our VAT advisers for more information regarding the subject, or a clear quote.