1. What Qualifies as a Digital Service for Tax Purposes?

Digital (electronically supplied) services are services that

- are supplied via the Internet or an electronic network and

- are essentially automated, meaning that they involve little or no human intervention.

Typical examples include: downloads (e-books, templates, software licences), subscriptions and memberships, and automated online courses without live instruction.

By contrast, services such as online consulting via video conference, individual coaching, programming or design services are not considered digital services for these purposes, as the personal service is the predominant element, even if the service is provided online.

2. Who Is the Customer? Business or Private Individual

The next step in determining the correct VAT treatment is to establish who the customer is:

A) Business Customers (B2B)

As a general rule, the standard place-of-supply rules apply, frequently together with the reverse-charge mechanism. The OSS scheme is not relevant in this case.

B) Private Customers (B2C)

For digital services, the destination principle generally applies. This means that VAT is due in the customer's country of residence – not in the country in which the supplier is established. OSS therefore only becomes relevant in the context of B2C transactions.

3. When Must the OSS Scheme Be Applied?

The OSS scheme (One-Stop Shop) is an EU-wide reporting system that allows businesses to centrally declare and pay VAT on cross-border supplies to private customers through a single EU Member State, without having to register for VAT separately in each customer's country.

For businesses established in only one EU Member State (e.g. Spain), EU law provides for a simplification:

As long as the combined total of

- cross-border B2C digital services and

- cross-border B2C distance sales of goods within the EU

does not exceed €10,000 per year (net), Spanish VAT (IVA) may continue to be applied.

Once this threshold is exceeded, it is mandatory to:

- apply the VAT rate of the respective EU country in which the customer is located and

- declare the VAT through the OSS scheme (in Spain: Modelo 369).

Once the €10,000 threshold is exceeded, the VAT of the customer's Member State must therefore be applied. The OSS scheme provides the centralised mechanism for declaring and paying this VAT without requiring separate VAT registrations in each Member State. Further information on the OSS scheme can be found in our article: E-Commerce and OSS (One-Stop Shop)

4. Special Case: Platforms (Amazon, Etsy & Co.)

For transactions carried out through platforms, it is also necessary to determine who is regarded as the seller for VAT purposes. The decisive factor is not simply that the sale is made through a platform, but whether the platform or the supplier is deemed to make the supply:

A) Platform Liable for VAT:

In many B2C cases, the platform is treated as a so-called “deemed supplier”.

For VAT purposes, this generally results in two separate supplies:

- a B2B supply from the supplier to the platform and

- a B2C supply from the platform to the end customer.

In these cases, the platform is regarded as the supplier to the end customer and is liable for the VAT. The original supplier therefore does not make its own taxable B2C supply to the end customer. Accordingly, these transactions do not have to be declared by the supplier through the OSS scheme.

B) Supplier as Seller (Platform Acting as Intermediary):

If the supplier sells directly to the end customer (e.g. through its own online shop, its own checkout system or where the platform merely acts as an intermediary, as may be the case with Etsy), the supplier remains the seller and person liable for VAT. In this case, the general rules for B2C transactions apply in full (application of the destination principle, the €10,000 threshold and OSS).

In this situation, there is generally a B2B intermediary service between the platform and the supplier, which must be assessed separately for VAT purposes.

Recommendation: For transactions carried out through platforms, it should always be determined whether the platform or the supplier is regarded as the seller (taking into account, among other factors, the contractual terms, invoicing arrangements and how the parties present themselves to the customer).

5. Practical Steps for Providers of Digital Services

1. Classify the service
   – automated (digital service) or individually provided?
2. Determine the type and location of the customer
   – business or private individual, Spain or another EU country?
3. Continuously monitor the €10,000 threshold
   – once exceeded: apply the VAT rules of the customer's Member State and use OSS (Modelo 369) for centralised reporting.
4. Separate the tax returns
   – Spanish VAT through Modelo 303,
   – OSS transactions through Modelo 369.

Conclusion:

Digital services are subject to specific VAT rules within the EU. Once the €10,000 threshold for the relevant cross-border B2C transactions is exceeded, VAT must generally be charged according to the customer's EU Member State, with the OSS scheme providing a centralised method for declaring and paying the corresponding VAT. Correctly classifying the service, identifying the type of customer and determining the customer's country are therefore essential.

Service Agreements for Businesses: