New VAT rules explained for dropshipping in 2024

Currently, dropshipping plays a significant role in the economy. Despite not having to manage inventory or logistics, every serious dropshipper must now fulfill all VAT obligations. Compared to other business activities, VAT for dropshipping follows a unique method. The new rules regarding tax provisions for dropshipping require careful consideration before settling supplier invoices and pricing your products. Understanding the application and management of these taxes, as well as the method for calculating the VAT due, is essential. Follow this guide closely for more information.

Essential considerations

In dropshipping, VAT applies when services are provided by suppliers located outside the European Union. The VAT regime related to the business varies based on two fundamental criteria: your business model and your turnover. If you operate in online commerce, it is highly likely that goods will pass through French customs.

However, it is the final customers who are responsible for paying all customs fees, which are often related to packages from non-EU countries. Moreover, if the value does not exceed €150, this context is not systematic. Some dropshippers choose to determine the amount to be paid using the VAT rate applicable to dropshipping products. This requires consulting the tariff grid within French customs services.

As VAT is a consumption tax, the final consumer indirectly pays it. Each country can define its policy, but in France, the rate is 20% of the product price. For dropshipping in Belgium, the standard VAT rate is 21%.

VAT liability for dropshippers

Inevitably, tax declarations, such as VAT for dropshipping, are imperative. This process allows you to determine the applicable rate based on your status. Depending on the situation, you may declare taxes in the country of your supplier. The dilemma lies in choosing the country, especially in dropshipping, as there are many countries of origin. Thus, you might find yourself managing multiple regulations simultaneously. This is not a major issue if you are an expert.

issue if you are an expert.Regarding dropshipping and VAT, a major change was introduced in the 2020 Finance Law. Most of the newly implemented measures have been in place since January 2021. This mainly affects all platforms serving e-commerce, including marketplaces and dropshippers. They are primarily expected to have purchased and shipped dropshipping products

Applying VAT in dropshipping

Before delving into the details of VAT in dropshipping, it's crucial to understand the particularities of the sales method in e-commerce. In this model, the online store owner is not supposed to hold any stock. Instead, the suppliers manage the inventory and are responsible for the direct delivery of orders to the buyer.

This is the result of the services provided by marketplaces like Bigbuy, which have adopted this highly cost-effective sales method. It helps avoid managing inventory and potential devaluation if stock is not sold. The same applies to logistics, which handles stock and shipping. Specifically, it is the marketplaces that manage dropshipping as a whole. This concept is opaque to the buyer during the sale. On the dropshipper's online store, it is impossible to know that the items sold do not belong to the seller.

Regarding VAT recovery, it also has its peculiarities. For products purchased outside the EU, the importer is not responsible for delivery. In France, no VAT is imposed. Therefore, if you source from a supplier outside the EU, no VAT recovery on purchases is performed.

How to avoid paying VAT in dropshipping

In reality, this is not a straightforward context. One must consider whether the transactions are classified by tax authorities as triangular operations involving a third country within the EU. When purchasing or delivering a product to a supplier or client outside the EU, no VAT is applied.

For a dropshipping sole trader, VAT is not entirely exempt. To avoid paying this tax completely, you must opt for VAT exemption. However, this regime is a particular subject. In contrast, dropshipping operations on Aliexpress are not regularly affected by VAT.

Additionally, you might have several suppliers, both within and outside the EU. Consequently, you may need to manage numerous VAT obligations.

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Taxes on dropshipping: what the law says 

Dropshipping is indeed a legal activity. As such, it is subject to specific regulations and cannot be exempt from VAT or, when applicable, customs duties. The tax administration has confirmed this with clearer imposition since January 1, 2021. Therefore, any professional or business engaged in dropshipping is liable for VAT. To ensure compliance, dropshippers must maintain a transaction log, which must be kept for 10 years. Minea provides more details on this legal obligation.

• Regarding online sales of imported goods

The concept of distance sales of imported goods is regulated by the General Tax Code (CGI), Article 256 II bis. This article stipulates that all goods dispatched or transported by the supplier or on their behalf from non-EU countries to individuals within the European Union are not subject to VAT on the value added for dropshipping.  

• Regulation of Distance Selling (VAD)

Since January 1, 2021, distance selling or VAD is subject to dropshipping VAT. This means that the seller does not directly handle the delivery. 

• Liability of electronic platforms

All electronic interfaces, such as marketplaces and platforms, are now liable for VAT on facilitated distance sales. 

• Introduction of one-stop shop systems

Practitioners of distance selling of imported goods can use a special regime to settle their VAT. This is the IOSS (Import One Stop Shop). Dropshipping businesses are not exempt from this rule. VAT is not applicable to imports valued below €150. 

• Compliance through Information systems

To comply with these new regulations, each dropshipper or online platform must update their information systems (IS). 

• Application of VAT on all purchases without exception

All platforms or online sales companies in France, whether dropshipping or not, will be taxed. VAT on dropshipping not only affects France but also applies to all foreign businesses that sell online in France.

Different types of taxes in dropshipping

Dropshipping is attracting more and more self-employed individuals. Although dropshipping can be highly profitable, it can also present tax risks. To manage a dropshipping business effectively, it is crucial to understand VAT in dropshipping. The taxation of dropshipping generally falls into three categories and depends on the legal status of each e-commerce company. Depending on the applicable tax regime for your business, you will be liable for income tax, customs duties, and dropshipping VAT, as well as other fiscal and social charges.

• Taxation for Self-Employed Entrepreneurs

Being a self-employed entrepreneur or applying the self-employed system in dropshipping must meet certain criteria. A dropshipper is considered a self-employed entrepreneur if they are: 

1. under the micro-BIC scheme or with annual sales excluding tax of less than €176,200
2. Under the micro-social regime.

Many dropshippers register as self-employed entrepreneurs because the VAT imposed on a self-employed dropshipper is reduced. The negotiation is done with the URSSAF for income tax and all social contributions. Payments are made based on a percentage of turnover through regular release payments.

• Taxation for Individual Self-Employed Entrepreneurs (EI)

An individual self-employed entrepreneur does not operate as a business and their turnover exceeds a certain threshold. The VAT for a self-employed entrepreneur in dropshipping applicable to an individual business is the micro-BIC regime (Industrial and Commercial Profits). However, your annual turnover excluding tax from the previous year must not exceed €176,200. This represents 29% of the taxable turnover and a 71% flat-rate deduction.

• Taxation for Limited Liability Sole Proprietorships (EIRL)

It is important to note that the EIRL and the individual business (EI) are by default subject to the same tax regime. The EIRL has the option to separate its professional assets from personal assets to protect them through a declaration of asset allocation for professional activity. The EIRL may also be subject to corporate tax (IS), with a rate of 15% up to €38,120 in profits and 28% beyond €38,120 in profits.

• Taxation for Single-Member Limited Liability Companies (EURL)

This status pertains to a company with no partners. For this status, VAT is imposed on income. It is also possible to subject it to corporate tax (IS). 

How to pay VAT in dropshipping

How do you pay VAT in dropshipping? And who is responsible for VAT in dropshipping? These are the questions that arise. The method of payment generally depends on three conditions: status, turnover, and geographical location.

• VAT payment based on your status

Every dropshipper has a choice of several statuses. Each status differs based on the VAT payment method. Note that VAT payment is made to the state. Being registered under the self-employed status generally offers certain advantages for VAT payment. According to the 2020 law, a self-employed business is not required to pay VAT in dropshipping if their annual sales do not exceed €85,800, or €6,900 per month. This is a limit set by the state. Beyond this limit, you are obliged to remit VAT in dropshipping to the state.

• VAT payment based on turnover

When operating in dropshipping, declaring taxes is mandatory. In addition to status, turnover impacts the VAT rate to be paid. The VAT modality in dropshipping generally varies based on the country where the dropshipper is declared. However, the condition is that your business must reside in the country.

• VAT payment based on geographical location

The method of paying VAT in dropshipping can also vary based on geographical location. Outside the European Union, VAT in dropshipping considers customs fees. Logically, there is no customs VAT imposed on dropshipping when the customer resides in the EU, such as the transporter or the supplier. In this case, the final customer will be responsible for paying customs fees.

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Conclusion

The calculation of VAT varies based on certain criteria, including geographical zone. If you are in France and required to pay, the applied rate will be 20%. However, you must first determine if you are subject to it. Before planning to set up your dropshipping business, it is essential to address tax issues. Consulting a specialist like Minea will provide you with all the necessary answers.