VAT TREATMENT OF “CHAIN TRANSACTIONS”
Definition of “Chain transactions”
“Chain transactions” is the common name given to consecutive supplies of goods between three or more legal entities as parties, in which goods are delivered directly from the first party located in one EU Member State to the final purchaser in the chain, located in another EU Member State.
It can happen that in some circumstances, the goods sold are sourced from a third country not belonging to European Union, and giving rise to the payment of VAT and customs duties at the time of importation into EU.
Such transactions might raise a number of doubts related to the correct VAT rule to apply. By determining the fiscal rule suitable for each stage of the transaction, companies engaged in “chain transactions” can eliminate the tax and financial risk generally related to such supplies.
An example of “Chain transactions” involving France
A French company (Company “FR”) orders goods from a US company registered for VAT in Germany (Company “US”). The latter orders the goods from a sister company in Germany (Company “DE”).
The German company (Company “DE”) is out of stock and orders in turn the goods from a Dutch company (Company “NL”) with instructions that the goods should be delivered directly to Company “FR” in France.
In this chain transaction, there are four parties located in different countries and three supplies of goods with a single movement of the cargo from the initial supplier to the end purchaser.
As France is the place where the transport of the goods ends, the German company (Company “DE”) is deemed to be making an intra-community acquisition of goods in France. The German company is therefore liable to be registered for VAT in France. By obtaining the French VAT number of the German company, the Dutch company would be able to apply no sale tax on its supply.
If the German company fails to account VAT for the intra community acquisition in France, the German tax office will be entitled to qualify the transaction as an intra-community acquisition in Germany under the “Safety Net” procedure.
Since the supply from the German company to the US company takes place where the goods are physically located (i.e. France), the transaction is subject to French VAT. The German company is therefore liable to register for VAT in France and add French VAT on its sale invoice, except if the US company is also registered for VAT in France.
The supply from the US company to the French company also takes place in France, but under the French reverse charge mechanism, the US Company is not liable to be registered for VAT in France. Even if the US Company is already registered for VAT in France, as a general rule, it is not allowed to a foreign company to raise an invoice including French VAT when its customer has a VAT number in France.