Digital payment services: Τhe timeless question of the correct VAT treatment & new reporting challenges

03 May 2023

A key area linked to the unprecedented boost of e-commerce is obviously the digital payment of goods and services ordered online. This industry experienced a massive transformation going from traditional banks to the development of Fintech companies.

From a VAT standpoint, the treatment of payment services may look simple at first sight since the VAT legislation includes a specific exemption for payments and transfers under Article 135(1)(d) of Directive 2006/112/EC (the "VAT Directive"). Nevertheless, in practice the scope and applicability of this exemption is far from obvious and has been the topic of numerous cases of the Court of Justice of the European Union (CJEU).

Given the impact on the global marketplace, the EU Commission launched discussions with the EU VAT Committee on VAT implications arising from the digitalization of the payment sector in the context of e-commerce in order to promote a uniform application of the VAT provisions regarding common business models.

In the meantime, payment service providers (“PSPs") face new VAT challenges. As from 1st January 2024, they shall comply with the new recordkeeping and reporting obligations introduced by the EU Council Directive (EU) 2020/284 (“EU Payment Services Directive") where cross-border payments relating to e-commerce transactions originate from EU Member States (MS). Considering the importance of the information held by PSPs, the new rules aim to give the tax authorities greater insight into cross-border payments to help them detect and prevent VAT fraud.

This paper provides you with the view of the VAT Committee on the VAT treatment applicable to common business models of the payment sector as well as with key takeaways regarding the new VAT reporting obligations.