Increased focus on e-commerce and payment of VAT

17 June 2015

Malene Kristensen

VAT is a constant issue to be considered for all internet-based businesses and e-commerce. Taxation of digital business and e-commerce is currently in the focus of the Danish tax authority.

Digital e-commerce is a rapidly growing business market within the EU. The general consensus in Europe is that the destination principle, in other words taxation at the place of consumption, is the way forward for VAT in Europe. The destination principle also applies in relation to sales of digital e-commerce products to end-consumers in the EU so that these are subject to VAT in the consumer's country.

When applying the destination principle, it provides a basis for a sustainable solution to the challenges raised by the digital economy, on the basis that it should ensure a level playing field for operators providing goods and services from a remote location.

In Denmark, the destination principle applies when an internet-based business is selling for more than DKK 280,000 a year to Danish private consumers. The VAT taxation rate in Denmark is 25 %.

Despite the destination principle, many EU internet-based businesses above the DKK 280,000 a year limit do not pay Danish VAT or settle the VAT correctly. This creates competition on unequal terms which is harmful for Danish internet-based businesses and the Danish economy. In the light of these events, the Danish tax authority has applied for further control means regarding correct settlement of Danish VAT.

Further control means will provide the Danish tax authority with tools known from the tax assessment control. The Danish tax authority will then be able to request information regarding the use of Danish credit cards on foreign e-commerce homepages and conduct investigations where the expected annual VAT income is compared to the actual VAT income for a given year.

The effort will have no impact on the Danish consumers as it is the companies who will receive the additional charge. As a foreign internet-based company, it is therefore important to register your company in Denmark. At the registration, you will automatically receive a VAT number by ticking the VAT registration box.

In order to register for VAT, the e-commerce business should use the form 40.112 (in English). The registration form can be found here. The form 40.112 must be completed with information about the applicant, the type of business, the name and address of the company, the owner and contact person and information for VAT registration in Denmark. A VAT representative is only required if there is a postal address in Denmark but no fixed place of business in Denmark.

The lack of correct VAT settlement can result in a fine and in severe cases of gross negligence or intent, the punishment can be imprisonment.

Bird & Bird has published a guide about the new VAT taxation rules in EU with examples from different countries. You can read the guide here.