Dropshipping and VAT

Since the rise of e-commerce, dropshipping has emerged as an innovative model for selling and launching an online business without the burden of maintaining physical inventory. Since 2021, a major VAT reform has come into effect, marking the most significant change in this area in 25 years.

However, many questions remain: what are the obligations regarding Value Added Tax (VAT) in dropshipping? Do I need to pay VAT in dropshipping? With Fiscalead, optimize your VAT management in dropshipping to ensure the sustainability of your business.

What is Dropshipping ?

Dropshipping, or “direct delivery” in French, is a business practice that has become widespread with the emergence of new technologies. Dropshipping relies on distance selling of imported goods (VAD BI) and is based on a tripartite organization in which the seller is only responsible for marketing and sales.

This means that the intermediary buyer-seller (the “dropshipper”) purchases goods from a supplier outside the EU without ever physically handling them and then resells them online to a customer located within the EU.

The intermediary seller enjoys several advantages:

• No management of logistics or merchandise inventory.
• Low overhead costs, limited to creating an online store, conducting marketing activities, or paying the supplier.

However, the dropshipper is not exempt from adhering to consumer protection regulations. They must ensure compliance with several obligations:

• Ensuring the proper delivery of the product to the end customer.
• Managing returns.
• Ensuring the quality of the products sold.
• Paying the supplier.
• Verifying the reliability of the supplier.

How VAT Works in Dropshipping

Since the 2020 Finance Act, dropshipping products are subject to VAT. Therefore, any professional or business engaged in dropshipping activities is liable for VAT.

To simplify the process, you can register with the IOSS (Import One Stop Shop), which spares you the need to register in each EU member state.

Here are the possible scenarios:

• Business located outside the EU : You must use an intermediary, such as Fiscalead, to register on the IOSS. This intermediary will handle VAT declarations and payments on your behalf in the respective EU member state.
• Business established within the EU : You can register for the IOSS and file your VAT declarations yourself.

Key Points on VAT in Dropshipping

• Distance Selling of Imported Goods : According to Article 256 II bis of the French General Tax Code (CGI), goods shipped or transported from a non-EU country to the EU are not subject to dropshipping VAT on the added value.
• Distance Sales of Imported Products Under €150 : VAT must be charged at the rate applicable in the country of delivery. Therefore, you should refer to the VAT rate of the destination country.

For instance, if the delivery is to France, a 20% VAT rate applies in addition to the final price. For dropshipping in Belgium, the VAT rate is 21%.

You are then required to remit the VAT to the relevant EU tax authorities.

Note that this VAT is not deductible.

• Annual Revenue ≤ €10,000 : Sales will be declared as occurring in France, and a 20% VAT rate will apply.
• Annual Revenue > €10,000 : The sale will be considered as taking place in the consumer’s country. The applicable VAT rate will thus be the one governing commerce in the recipient’s country.

• Transaction Records : Dropshippers must keep transaction records for 10 years for tax audits.

Paying VAT in Dropshipping

Dropshipping is subject to specific VAT regulations. The payment of VAT generally depends on three factors : status, revenue, and geographical location.

VAT Payment in Dropshipping by Status

Dropshippers can choose between various business statuses, each with a different VAT payment method. However, all payments are made to the State:

• Self-employed in Dropshipping : According to the 2020 law, self-employed businesses are not required to pay import VAT in dropshipping as long as their annual revenue does not exceed €85,800. This threshold is set by the State.
• Individual Entrepreneur – EIRL : VAT in dropshipping is subject to the micro-BIC regime.
• EURL : VAT is applied to income.

Paying VAT in Dropshipping Based on Revenue

As mentioned earlier, annual revenue impacts the VAT rate to be paid in dropshipping.

Paying VAT in Dropshipping Based on Geographical Location

• Outside the European Union: VAT accounts for customs duties.
• Within the EU: The final customer is responsible for paying the customs duties.

FAQ – Dropshipping and VAT

Does the Dropshipper Have to Pay Customs Duties for VAT?

No, in general, the dropshipper does not have to pay customs duties. It is the final customer who is responsible for paying VAT-related customs duties.

• If the goods come from the EU: No customs duties apply in France.
• For goods from non-EU countries worth over €150: Customs duties are payable by the final customer upon delivery.

The customer will settle these additional costs at the time of delivery.

What is the 2024 Finance Act?

The 2024 Finance Act introduced new measures for dropshipping to reduce VAT losses, address fiscal challenges, and ensure fair competition in the e-commerce sector.

Before this law, the dropshipper’s margin was not subject to VAT in France, even though it was part of the price paid by the customer.

Since then, the law has established specific rules requiring dropshippers to reassess their product prices and incorporate import VAT into their fiscal management.