The international expansion of Portuguese businesses has created new commercial opportunities, but it has also brought new tax challenges. Today, it is increasingly common for a company established in Portugal to provide services to a client in Spain, purchase goods from Germany, or sell products to the United States.
Against this backdrop, one of the most frequently asked questions regarding VAT in international transactions is: should an invoice be issued with VAT or without VAT?
Tax law specialists have a reputation for always answering: “it depends.” And, admittedly, when it comes to international VAT, that reputation is well deserved. The good news is that this “it depends” is not a sign of uncertainty, but rather reflects the complexity of a system that requires several questions to be answered before reaching the correct conclusion.
An Example of VAT in International Transactions
Imagine a Portuguese company providing services to a German company in relation to a project located in Morocco. Portugal, Germany, Morocco. Three countries, one invoice, and one question: where does VAT belong?
If there were a tax GPS, all you would need to do would be enter the destination and wait for the fastest route. Unfortunately, VAT does not rely on geographical coordinates—it relies on place of supply rules.
In this example, there are three relevant connecting factors:
- Portugal, where the service provider is established;
- Germany, where the customer is established;
- Morocco, where the project will be carried out.
The VAT treatment does not result from choosing one of these three countries, but from applying the place of supply rules laid down in the applicable VAT legislation.
In many cases, where services are supplied between taxable persons, the supply is deemed to take place in the country where the customer is established, meaning that Portuguese VAT is not chargeable. In other cases, however, the outcome may be entirely different, depending on the specific nature of the services provided.
How Is the Place of Supply Determined for VAT Purposes?
It is often assumed that whenever the customer is established abroad, the transaction is not subject to Portuguese VAT. However, this assumption is not always correct.
For VAT purposes, the first question is not “Where is the customer established?” but rather “Where is this transaction deemed to take place for VAT purposes?”
The Portuguese VAT Code lays down a set of rules designed to determine the place where a transaction is taxable. These rules differ depending on whether the transaction involves a supply of goods or a supply of services and, in the case of services, whether the recipient is a business or a final consumer.
B2B VAT and B2C VAT: What Is the Difference?
As a general rule, where services are supplied to a VAT taxable person (B2B), the place of supply is deemed to be the country where the customer is established. This means that a Portuguese company supplying services to a French company, for example, will generally not charge Portuguese VAT, with the reverse charge mechanism commonly applying.
Conversely, where services are supplied to a final consumer (B2C), the general rule is reversed: the place of supply is, in principle, the country where the supplier is established. As a result, a Portuguese company providing services to a foreign individual may be required to charge Portuguese VAT.
Are There Exceptions to the VAT Place of Supply Rules?
Every rule has an exception. In VAT law, however, it sometimes seems to work the other way around: every exception appears to have its own rule. As a result, two seemingly identical transactions may receive completely different VAT treatments.
This is the case, among others, for services relating to immovable property, transport services, cultural, sporting or educational services, restaurant and accommodation services, and electronically supplied services.
Each of these categories is subject to specific place of supply rules, meaning that the applicable VAT treatment must always be assessed on a case-by-case basis.
VAT on the Supply of Goods: When Is It Due?
The VAT treatment of supplies of goods also depends on the specific circumstances of each transaction.
As a general rule, VAT becomes chargeable where goods are made available in Portugal. However, it is equally important to determine whether the goods remain in Portugal, are dispatched to another EU Member State, or are exported to a non-EU country.
Likewise, it is essential to distinguish whether the purchaser is a business or a final consumer, as this may significantly affect the applicable VAT treatment.
The Risks of Charging VAT Incorrectly
In practice, many VAT errors result from applying automatic assumptions. Statements such as “the customer is foreign, therefore no VAT applies” or “the company is Portuguese, therefore VAT must be charged” have no basis in VAT legislation.
Charging VAT incorrectly may lead to the subsequent assessment of unpaid tax, together with interest and penalties. It may also create difficulties for customers, compromise the recovery of input VAT, trigger tax audits, require the production of additional documentation and explanations, consume valuable internal resources, and place unnecessary strain on the relationship with the tax authorities.
In many cases, the true cost of an error extends well beyond the unpaid tax itself. It also includes legal uncertainty, administrative burden, and the time required to regularise the tax position.
How Can VAT Errors in International Transactions Be Avoided?
Although VAT is largely harmonised across the European Union, it remains a highly technical tax whose correct application requires a careful assessment of each individual transaction.
Before issuing an international invoice, businesses should consider, among others, the following questions:
- Is the transaction a supply of goods or a supply of services?
- What is the exact nature of the transaction?
- Is the customer a business or a final consumer?
- Where is the customer established?
- Does any specific place of supply rule apply?
- Is the reverse charge mechanism applicable?
- Does any VAT exemption apply?
Only after these questions have been answered can the correct VAT treatment be determined.
Before Issuing an International Invoice
The correct VAT treatment depends on the interaction of various practical, legal and tax considerations, making it essential to assess each transaction individually.
A prior review of the applicable tax treatment helps prevent errors, minimise risks, and ensure compliance with tax obligations, both in Portugal and abroad.
In many situations, relatively minor changes to the structure of a transaction may result in a different VAT treatment. For this reason, before entering into an agreement or issuing an international invoice, it may be advisable to carry out a VAT assessment of the proposed transaction in order to anticipate its tax consequences and reduce the risk of non-compliance.
If your business operates internationally or plans to expand into new markets, obtaining specialist advice on the applicable VAT treatment may help avoid significant costs and ensure that every transaction complies with the relevant legislation.
For more information or specialized assistance, click here to schedule a meeting with one of our professionals.
The content of this information does not constitute any specific legal advice; the latter can only be given when faced with a specific case. Please contact us for any further clarification or information deemed necessary in what concerns the application of the law.