General Insights into Chain Transactions in the EU VAT Framework

Chain transactions involve multiple consecutive sales of the same goods, with the goods being transported directly from the first seller to the final buyer across borders within the European Union (EU). These transactions become complex because they involve multiple parties and various EU member states.

What is a Chain Transaction?

A chain transaction occurs when multiple parties sell the same goods, but the goods are transported only once between two EU member states.

For example:

• Company A in France sells goods to Company B in Germany.
• Company B then sells the same goods to Company C in Italy.
• The goods are transported directly from France to Italy.

Even though multiple parties are involved there is only one physical movement of the goods

Chain Transaction Rules

The chain transaction rule assigns the intra-Community transport of the goods to either the supply made to the intermediary operator, or the supply made by the intermediary operator. This rule applies when:

1. There is a single movement of goods across a border.
2. There are at least two invoice flows.
3. There are at least three different businesses involved.

Changes Effective from 1 January 2020

The EU simplified the VAT position determination for transactions involving three businesses: the supplier, the intermediary, and the customer. The new rules clarify two scenarios for zero-rating the movement of goods in the chain (chain transactions):

1. Intermediary with VAT Number in Supplier’s Country:
   • If the intermediary presents a VAT number in the supplier’s country (where the goods are dispatched from), the sale is treated as a domestic transaction in the supplier’s country.
   • The supplier charges local VAT to the intermediary.
   • The intermediary then transports the goods to the customer’s country and performs a zero-rated cross-border supply to the customer.
2. Intermediary with VAT Number from Another EU State:
   • If the intermediary provides a VAT number from another EU state, the supplier zero-rates the sale as a cross-border supply to the intermediary.
   • The intermediary is responsible for transporting the goods from the supplier’s country to the customer’s country.
   • The intermediary then undertakes a domestic supply with the customer under the customer’s national VAT rules.

Allocation of Transport

In a chain transaction, the VAT treatment hinges on which supply in the chain links to the physical movement of the goods. The key is to allocate the transport to one specific supply. This supply becomes an intra-Community supply, while all other supplies in the chain are treated as domestic transactions, subject to VAT in the respective countries.

The rules for determining which supply links to the transport depend on whether the intermediary operator holds a VAT registration in the country of departure (the country from which the goods are shipped). If the intermediary is VAT-registered in the country of departure, the second supply (the intermediary’s onward sale) links to the transport. If not, the first supply links to the transport.

Conclusion

Chain transactions are common in cross-border trade within the EU, but they present complex VAT implications. Determining which supply links to the transport of goods and ensuring compliance with the EU VAT Directive is crucial to avoid costly errors and penalties. Businesses involved in chain transactions should seek expert advice and invest in robust record-keeping systems. This is important to comply with VAT regulations across multiple EU member states. Contact VAT Compliance to learn more about chain transactions.