First published in November 2000

E-commerce now enables numerous companies in most economic sectors to distribute their goods throughout the world by means of their Internet site. Each web user, whether a company or an individual may order and pay for goods by the Internet and sometimes make considerable savings. Numerous Internet sites managed by non European enterprises conclude import transactions within the meaning of the intra-community VAT rules without including VAT on such imports in the price and without invoicing VAT to the customer or paying VAT to the tax authorities.

Thus at the moment when VAT becomes payable (upon entry in territory for goods and upon payment for services) the transaction is not declared and VAT is therefore not levied. There are now too many non dematerialised goods for a systematic customs control to be carried out on postal and private dispatches and dematerialised goods such as data bases, sound, photographs, cinema films, information technology programs are delivered by simple uploading the transaction thus totally avoiding attention. However tax law at present provides that e-commerce is subject to normal VAT rules (see below the solutions set forth by De Chazeaux Ministerial Replies). There is no doubt that the normal tax and customs sanctions would be also applicable in the absence of any declaration of import and non-payment of VAT. Thus in most cases the customer in such a transaction finds himself liable to VAT.

It is not therefore the foreign enterprises largely sheltered from any action by the French tax authority but their French and European customers, enterprises and individuals, which bear most of the risk incurred by participating in such a transaction.

1 - E-Commerce: Applicability Of VAT Under Normal Regime

The VAT rules applicable to e-commerce were explained by different Ministerial Replies given by De Chazeaux1. These replies show clearly that the ordinary VAT rules apply mutatis mutandis to e-commerce2. These rules are set forth and explained below.

Thus, it was stated that3 that transactions relating to dematerialised goods "could" be considered as supply of immaterial services governed by Article 259 B of the Code Général des Impôts (General Tax Code). VAT would then be payable in the country of use by the beneficiary of the service whether such beneficiary be subject to VAT (and can immediately deduct it) or not so subject (VAT payable by individuals "according to conditions to be defined").

However this change of regime is not to come into effect until after the adoption of the draft European directive on VAT regime applied to electronic commerce which is at present under discussion.

In the meantime dematerialisation of certain goods does not change their nature from a tax point of view with the notable exception of software programs4. Deliveries of all other dematerialised goods can therefore not be considered as supply of service5, and the VAT remains due under the normal regime for a great majority of e-commerce transactions.

2 - VAT Is Payable On Goods Ordered Online And Imported Into France

Thus, in the case of an import of goods by a French customer whether subject or not to VAT from a seller established outside Europe, VAT is payable upon entry of the goods into the French territory6.

When the import is declared, the Customs services levy VAT on the person designated as consignee in the Customs import declaration, the person declaring to the customs being jointly liable for payment of VAT (Article 293 A 1 of the General Tax Code).

In the absence of any declaration and/or payment of VAT it is therefore the French customer, recipient of the goods who must pay the VAT due upon import.

In the absence of import declaration Customs sanctions can be added to any tax sanctions applied for failure to pay VAT. Finally, VAT on imports is governed by the Customs law and not by tax law and Customs procedures are even more coercitive than tax procedures.

3 - VAT Is Applicable To Most Online Supplies Of Services

The normal rule is that VAT is payable in the country where the supplier of the services is established. An Internet site accessible in France does not in itself constitute such an establishment7, a foreign enterprise supplying services in France through its Internet site would not therefore be liable to French VAT.

However, there are two important exceptions to this principle of territoriality, among which are included most online services.

Thus, VAT is payable in the country where "materially localisable" services (governed by Article 259 A of the General Tax Code) are in fact supplied, i.e., in France.

The services concerned by this provision include the supply of cultural, education, artistic or scientific services and the leasing of means of transport. Such supplies of services online are at present offered by non European sites most of which seem to be unaware of the existence of VAT.

Moreover, when "immaterial" services (governed by Article 259 B of the General Tax Code) are provided to a French customer by a service provider not established in France, French VAT is due in the following conditions : if the customer is subject to VAT it must itself pay VAT (which it can immediately deduct), the foreign enterprise being jointly liable for payment and ; if the customer is not subject to VAT and the service is used in France, the French customer is also liable to VAT.

The provision is aimed especially at advertising services, consultants, engineers and consulting agencies, data processing and supply of information, banking, financial and insurance services and telecommunication services. These services which at present represent most of the online services on the Internet are often offered by non EU sites exclusive of VAT.

4 - Compulsory Tax Representation Of Non EU Enterprises Which Are Not Established In France

Any foreign enterprise not established in France but which carries out transactions there liable to VAT is obliged to designate a tax representative authorised by the tax authorities (Article 289 A-I of the General Tax Code).

This representative undertakes to fulfil the declaration obligations incumbent on the foreign enterprise and to pay the VAT payable by this enterprise.

Failing appointment of a representative, the recipient of the taxable transaction, i.e., the customer, is liable for the VAT and any applicable penalties (Article 289 A-I of the General Tax Code).

5 - Sanctions Applicable In Event Of Non-Payment Of VAT

Where VAT is not paid, the payment of the unpaid tax and any penalties concerns not only the foreign enterprise but also, and in most cases above all, its European customer which means that the authorities (tax or Customs) may apply directly to the customer to obtain payment of all amounts due.

The sanctions applicable for non-payment of VAT are as follows: payment of the evaded VAT at the normal rate (without possibility of subsequent deduction of this tax) late interest at a rate of 9% per annum, and a penalty of 5% on the amount of evaded VAT.

Should the bad faith of the taxpayer be established, an additional penalty of 40% of the amount of evaded tax is applicable, a penalty which is increased to 80% where fraud has been established. Although it is difficult to believe that individuals are fully aware of VAT rules, obviously this is not the case for enterprises.

The savings thus made, especially by operators who cannot recover VAT either totally or partly, can finally turn into a dissuasive cost. But although the tax authorities do not dispose of sufficient means of control over transactions concluded by the Internet they are at present developing special information technology tools to monitor this potential source of massive fraud.

Moreover, the draft European Directive on the VAT regime applicable to e-commerce provides that dematerialised goods be considered as services but also that any service supplied by electronic means and used in the European Union shall be subject to VAT in the Union whatever its origin.

According to the draft, the relevant foreign suppliers will also be obliged to register for the purposes of VAT in each member state where their annual turnover exceeds € 5,000.

This directive is being examined and modified by the Ecofin Council. Until it is adopted, the normal regime of VAT remains applicable. If the tax authorities consider that fraud is becoming widespread, there is no doubt that the necessary means to combat it will be rapidly implemented. VAT represents 20% of the tax revenue of member states and almost half the community's budget is based on the tax revenue of member states.


1 Rep. Min. No. 1506, J.O. A.N. Q. of 3 November 1997, page 5850; Rep. Min. No. 15728 and 15729, J.O. A.N. Q. of 26 October 1998, page 5850; Rep. Min. No. 39393 and 39394, J.O. A.N. Q. of 29 May 2000, page 3263. These Ministerial Replies are a formal interpretation of the law and can therefore be relied on by taxpayers in any dispute with the tax authorities, or by the tax authorities themselves where necessary subject to their legality.

2 Extract from the Ministerial Reply No. 15729: "Under applicable rules, VAT applies to all deliveries of goods and services carried out within the European Union regardless of the means of communication or the trade conditions used to carry out such transactions."

3 Rep. Min. No. 39393, J.O. A.N. Q. of 29 May 2000, page 3263.

4 According to the instruction dated 26 February 1996 (B.O.I. 3 A-1-96), the transfer of standard software is subject to VAT under the rules applicable to the supply of services when the software is delivered without material support. **

5 Extract from the Ministerial Reply De Chazeaux No 15729 : "The unilateral application by France of the rules of Articles 259 B and 259 C of the General Tax Code [provisions defining the VAT regime for so called "immaterial" services] to all transactions relating to virtual goods can not be considered since it would lead according to the construction adopted by the member states to double taxation and/or on the contrary to the absence of taxation."

6 Only goods with an overall value not exceeds FF 150 may be imported into France VAT free (except where they are sold by correspondence but this last regime concerns only inter community connections)

7 The Ministerial Response De Chazeaux No. 39394 states that "a commercial site does not constitute a permanent establishment for the purposes of VAT".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.