Reverse Charge: A Complete Guide

The reverse charge mechanism is a VAT simplification rule defined in Article 196 of the EU VAT Directive 2006/112/EC. Under normal circumstances, the supplier charges VAT and remits it to their tax authority. With reverse charge, this responsibility shifts to the buyer.

The supplier issues an invoice without VAT (at 0%) and includes a reference to the reverse charge provision. The buyer then accounts for the VAT in their own country at their local rate, typically claiming it back as input VAT on the same return.

This mechanism exists to avoid the complexity of suppliers having to register for VAT in every EU country where they have clients.

Three conditions must all be met for the reverse charge to apply:

1. The transaction is B2B (business-to-business). Both the supplier and the client must be taxable persons (businesses). Reverse charge does not apply to sales to private individuals.

2. The supplier and client are in different EU member states. Cross-border within the EU is required. Domestic transactions and transactions with non-EU countries follow different rules.

3. The client has a valid EU VAT identification number. The client must be registered for VAT and must provide their VAT ID (e.g., DE123456789, SK2020123456). You can verify VAT IDs using the EU VIES system.

A reverse charge invoice must clearly state that the reverse charge applies. The text should reference Article 196 of the EU VAT Directive and should ideally be in both the supplier's local language and English.

euinvoice.app automatically includes the correct legal text for each country. For example, a Slovak supplier's invoice will include: "Prenesenie danovej povinnosti podla section 69 ods. 12 zakona c. 222/2004 Z. z. / Reverse charge -- Article 196 EU VAT Directive 2006/112/EC."

The invoice must also show both the supplier's and client's VAT IDs, and the VAT amount must be shown as 0.00.

Consider a Slovak IT freelancer (Novak s.r.o., IC DPH: SK2020123456) providing web development services to a German company (Acme GmbH, USt-IdNr: DE987654321).

The invoice would be issued with 0% VAT, as all three reverse charge conditions are met: B2B transaction, cross-border within the EU (SK to DE), and the German client has a valid VAT ID.

The invoice includes the legal text in both Slovak and English, referencing the relevant Slovak law and Article 196 of the EU VAT Directive. Acme GmbH would then account for 19% German VAT on this purchase in their own VAT return.

When you create an invoice and enter a client in a different EU country with a valid VAT ID, euinvoice.app automatically detects that the reverse charge mechanism applies and suggests switching to a reverse charge invoice.

You can also manually select the reverse charge invoice type at any time, or use the dedicated reverse charge invoice generator page.