The most popular trading scenario with EU registered companies is the VAT triangulation system. Triangulation rules are specifically designed to make cross-border trade easier, so EU businesses don't have to register for a VAT number in every EU member state they ship goods to.
Although triangulation is easy to understand, this trading model seems to be a significant source of misunderstanding for many business owners.
The first rule to keep in mind is that the model must include three companies registered in three different EU member states, each with their own VAT number.
A company sells goods to another company, which then resells the same goods to the third company. However, the goods are transported directly from the first company to the last (third) company.
Basic rules of VAT triangulation
Anyone who makes use of the sales tax triangular simplification procedure must act in accordance with 2006/112/EG, Article 141 of the EU VAT Directive, which provides for the following conditions:
The trading system must involve three different companies located in three different EU countries.
Every company in the trade system must have a valid sales tax identification number.
The goods must be transported directly from company number 1 to company number 3.
Trading scenarios without triangulation simplification
The benefits of triangulation simplification depend on the transport scheme. There are two main scenarios regarding how goods are transported between the three parties.
First scenario: assignment to sale #1
In this scenario, goods are transported from company 1 to company 3 and assigned to sale #1. The delivery of goods arranged by company 1 is classified as intra-community and is therefore subject to 0% VAT. Meanwhile, Company 2 makes a taxable intra-Community acquisition in Company 3's Member State where the goods arrive. Consequently, Company 2 must register for VAT in the country of arrival of the goods and declare the acquisition there. If Company 2 is not registered for VAT in that country, it will be charged VAT in its own member state.
While Company 1 is involved in an intra-Community supply with 0% VAT, the subsequent transfer of the goods between Company 2 and Company 3 is treated as a domestic sale. Therefore, Company 2 is registered for VAT in the Member State receiving the goods and charges the VAT applicable in that State. Ultimately, Company 3 will reclaim this VAT through its regular VAT return.
Second scenario: assignment to sale #2
In this case, goods are transported from company 1 to company 3 and allocated to sale #2. The sale of company 2 is classified as an intra-community supply of goods and is subject to VAT at 0%. Company 3 becomes VAT registered in its own Member State, while Company 2 makes an intra-Community supply in Company 1's Member State where the transport chain started, also with 0% VAT. This means that Company 2 must be VAT registered in Company 1's Member State where it declares the intra-Community supply of the goods. Therefore, the transaction between Company 1 and Company 2 is considered a domestic sale, with Company 1 charging Company 2 its local VAT rate. Later, Company 3 declares the VAT business in its own member state and reclaims this VAT on its VAT return.