ViDA – Impact on business processes – Part 3: Member States ”Shall Allow” ”Domestic Reverse Charge” as of Jan 1, 2025 (Art. 194)

On 8 December the European Commission (“EC”) launched its long-awaited proposals to modernize the VAT rules within the EU collectively known as “VAT in the Digital Age package” (“ViDA”). Note that is still a PROPOSAL subject to change.

ViDA has 3 pillars:

Digital Reporting Requirements (DRR)
Platform Economy
Single EU VAT Registration

As part of the pillar ”Single EU VAT Registration”. article 194 will become optional to apply for taxpayers instead of being an option imposed by a Member State. This article allows Members States in case of B2B supplies made by non-established entities in the country where the VAT is due, to shift the VAT laibility to the customer by application of the reverse charge mechanism.

In order to further minimise the need to register in a Member State where the taxation of a domestic B2B supply occurs, the modification in Article 194 renders mandatory for the Member States to accept the application of the reverse charge mechanism where a supplier, who is not established for VAT purposes in the Member State in which VAT is due, makes supplies of goods to a person who is identified for VAT in that Member State. This reform will ensure that, in such circumstances, the supplier who is not identified there, does not have to register in that Member State. Further, the modification excludes supplies of margin scheme goods from the mandatory application of the reverse charge mechanism. To ensure adequate follow-up of the goods, this type of supplies is now to be mentioned in the recapitulative statement as referred to in Article 262.

Per Jan 1, 2025

Article 194 – OLD VERSION

1. Where the taxable supply of goods or services is carried out by a taxable person who is not established in the Member State in which the VAT is due, Member States may provide that the person liable for payment of VAT is the person to whom the goods or services are supplied.

2. Member States shall lay down the conditions for implementation of paragraph 1.

Article 194 – NEW VERSION

Article 194

Without prejudice to Articles 195 and 196, where the taxable supply of goods or services is carried out by a taxable person who is not established in the Member State in which the VAT is due, Member States shall allow that the taxable person liable for payment of VAT is the person to whom the goods or services are supplied if that person is already identified in that Member State.
Paragraph 1 shall not apply to a supply of goods carried out by a taxable dealer as defined in Article 311(1), point (5), where the goods are subject to VAT in accordance with the special arrangements provided for in Section 2 of Chapter 4 of Title XII of this Directive.

Additional invoicing/reporting requirements as of Jan 1, 2025

Deadline for the issuance of invoices on intra-Community supplies of goods and supplies of services where the reverse charge applies: Article 222

An invoice needs to be issued by the fifteenth day of the month following that in which the chargeable event occurs for transactions subject to art. 194

Article 222 the first paragraph is replaced by the following:

‘For supplies of goods carried out in accordance with the conditions specified in Article 138 or for supplies of goods or services for which VAT is payable by the customer pursuant to Articles 194 and 196, an invoice shall be issued no later than on the fifteenth day of the month following that in which the chargeable event occurs.

Supplies for which art. 194 is applied should be included in the recapitulative statement of Jan 1, 2025

Article 262, paragraph 1, point (c) is replaced by the following:

‘(c)the taxable persons, and the non-taxable legal persons identified for VAT purposes, to whom that taxable person identified for VAT purposes has supplied goods or services, other than goods or services that are exempted from VAT in the Member State where the transaction is taxable, for which the recipient is liable to pay the tax pursuant to Articles 194 and 196.

Remarks

Article 194 is amended from a ”May” article into a ”Shall allow” article.
The amendment of article 194 may avoid the registration of the non-established in a country where the tranaction takes place. The VAT liability in that case is shifted to the customer via application of the reverse charge method.
Supplies subject to art. 194 will need to be reported in the recapitulative statements as of Jan 1, 2025.
The application of this article is optional for the taxable persons to apply. This may lead to discussions between supplier and customer whether or not the article to apply.
The application of this article or not may have a significant impact on VAT receivable balances.
Some Member States as e.g. France do not allow non-established entities to register for VAT in their country if they only make supplies via application of art. 194. If applied, the non established entity has to recover VAT via the 8th or 13th EU VAT Directive, which may be a lengthy process.
Quid countries who already today implemented art. 194? Will it beccome optional for taxpayers to apply art. 194?

In this serie ….

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