We explain the general rule for determining the location of VAT in the provision of services
We often have doubts about how to account for services provided by foreign clients or suppliers. We usually wonder where a particular service is located, whether it is subject to VAT, who should declare the VAT accrued on the transaction, how to declare the transaction if it is not subject to VAT in Spain, or whether or not VAT should be charged on the invoice.
According to the general rule for VAT location, the location of a service will depend on whether the recipient of the service is a businessperson or a private individual.
What happens when the recipient of the service is a business owner or professional?
Regardless of where the service provider is established, when the recipient is a businessperson or professional, the services are provided at the recipient's headquarters.
As we already know, if both the service provider and the recipient are based in Spain, the transaction will be subject to VAT, and the provider must charge Spanish VAT on the invoice. But what happens when we have foreign clients or suppliers?
If both the service provider and the recipient are based in different countries within the European Union, the reverse charge mechanism applies. VAT will be exempt in the provider's country and taxed in the destination country, with the EU business or professional receiving the service responsible for self-assessing the VAT. Consequently, the service provider must issue an invoice without VAT and reference Directive 2006/112/EC or Article 25 of Law 37/1992 on VAT, indicating that the supply is exempt.
Furthermore, those EU companies that regularly provide or receive intra-community services are advised to have a VAT number assigned by a member state.
On the other hand, when the service provider or recipient is located in a country outside the European Union, the transaction will not be subject to VAT. The reverse charge mechanism will apply, and VAT will be levied at the destination, with the business or professional receiving the service responsible for self-assessing the VAT. In this case, the service provider must issue an invoice without VAT, and it will not be necessary to require a VAT identification number.
And what when the recipient of the service is a private individual?
As a general rule, when the recipient is a private individual within the European Union and the service provider is a business or professional based in an EU member state, the services are considered to be supplied at the provider's registered office. VAT will be levied at origin, meaning the transaction will be subject to VAT in the service provider's country. Therefore, invoices issued by EU businesses or professionals to private individuals within the EU must include VAT in the member state where the service provider is located.
However, there are several exceptions to the general rules above. For example, for certain services, when an individual resides outside the EU, the transaction will be considered to take place at the recipient's registered office, and therefore not subject to VAT, meaning no VAT will be charged on the invoice. We will analyze these special rules in a future post on our blog.
VAT regulations are highly complex and encompass a wide variety of situations. Here, we have attempted to provide a brief introduction to the general rule for determining the place of supply of services, but for specific situations, we recommend contacting us so we can help resolve your questions.
At Àmbit Assessor we are experts in national and international taxation and we would be happy to help you.
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A graduate in Business Administration from the University of Barcelona, she continued her education with a Postgraduate Diploma in Accounting and Management Control from Pompeu Fabra University, and completed various courses in tax and fiscal matters offered by the Terrassa Chamber of Commerce, the Barcelona Bar Association, and the Center for Financial Studies. Before joining Àmbit Assessor in 2001 as a tax and accounting consultant, she worked as an administrative assistant at Caixa Manresa and Banc Sabadell and as a tax information call center operator at the Spanish Tax Agency. For three years, she served as treasurer of the L'Alzinar Recreational and Cultural Society, a position she held concurrently with her work at Àmbit Assessor.
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