Breadcrumbs DSV MCF > Make or Buy > Europe and VAT > How does the European VAT system work?

Destination principle

The European Union’s VAT system is based on the destination principle. This means that VAT (only) must be paid to the government of the country in which the consumer who buys the goods lives.

So if company A in the Netherlands sells something to company B in Germany, the VAT should be transferred from the Netherlands to Germany. To realize this, the transaction between the Netherlands and Germany is exempt from VAT.

Similarly, when a German company buys goods in another member state, the VAT is payable in Germany. Please watch the video about how the European VAT system works:

The video shows the way in which the tax authorities track the transactions that take place between companies in different member states of the EU. It also shows how companies have to apply the VAT.

Citizens

Citizens cannot apply the system, as they are not entrepreneurs. However, they too can buy goods in another member state.  The European Union has therefore formulated maximum sums of goods that citizens can legally buy in another member state without tax interference.

Since there are no longer any internal border controls in the EU, These rules are hard to control, and exemptions only apply when citizens transport the goods themselves. If the goods are being brought to them by the selling company from another member state, the regulation concerning distance selling applies.