EU & UK VAT Collection for Software Businesses - Freemius (original) (raw)

Example: You became self-employed at the start of the year and made €15,000 in gross investments. Here’s how your invoice would differ with and without the Kleinunternehmerregelung:

Similar to SaaS, small business exemptions may apply for selling downloadable software if your turnover is below a country-specific threshold in the EU. Additionally, some member states may provide reduced VAT rates or exemptions for certain software categories, such as educational or accessibility-related software. Be sure to check the VAT exemptions in each country where you do business, as they can vary significantly.

Selling software subscriptions in the EU introduces unique challenges related to VAT compliance, especially due to the recurring nature of payments. Here are the main complexities:

In a subscription-based model, VAT must be applied not just to the initial purchase but to every recurring payment. This requires continuous tracking of VAT rates over time, which can be complicated if the rates change during the subscription period. Accurate calculations are essential to avoid non-compliance or undercharging VAT.

Businesses selling to VAT-registered customers may need to manage VAT exemptions, especially when selling B2B. Under the ‘reverse charge mechanism’, VAT is not charged on sales to EU businesses with a valid VAT ID, but this exemption needs to be consistently applied throughout the subscription’s duration. If the customer’s VAT status changes, adjustments to the VAT treatment may be required.

During long-term subscriptions, VAT rates may change within a country. Businesses must ensure that the most current VAT rate is applied at the time of each payment, even if the subscription started at a different rate. Failure to update rates correctly could lead to penalties or customer dissatisfaction.

Freemius automatically handles VAT collection and reporting for your sales to EU and UK customers, allowing you to focus on developing your software products.

We detect the customer’s location using their IP address (geolocation) in the checkout screen.

Consumers located in any EU country will have VAT automatically added to their order amount, based on their country of origin.

Consumers can provide their business VAT number, which we will use to assess eligibility for a potential VAT exemption. While there is no equivalent reverse-charge mechanism for UK VAT, businesses making sales to UK VAT-registered companies may be eligible for certain exemptions, depending on the nature of the transaction.

All necessary information — location, VAT amount, business VAT number — is recorded by Freemius.

As the authorized reseller of your software products, Freemius acts as the merchant of record for all sales. We manage the collection of all applicable taxes from your customers, ensuring a smooth transaction process.

There is almost no way around having a merchant of record to collect and manage taxes worldwide as a company from within the EU. You would most likely need a full-time contractor to handle that, and paying the revenue share to Freemius is nowhere near the typical salaries here.

We handle reporting and remittance to the relevant European taxation authorities and the UK’s HMRC. This includes detailed records for both EU VAT and UK VAT obligations.