VAT on Digital Services in Cyprus

What counts as a digital service for VAT purposes?

Digital services for VAT purposes are services delivered over the internet or an electronic network, where delivery is essentially automated and requires minimal human intervention. The key characteristic is that the service cannot be provided without technology and the technology is central to the service — not just the delivery mechanism. Examples include SaaS software subscriptions, mobile app purchases, streaming services, digital downloads, online gaming, cloud storage, website hosting, and automated online courses. A live webinar delivered by a human instructor is not a digital service. A pre-recorded online course accessed automatically is.

Digital services VAT classification — examples

B2B digital services — reverse charge applies

When you supply digital services to a VAT-registered business customer in another country the reverse charge mechanism applies. You invoice without VAT. Your customer accounts for the VAT in their own country on their own return. You do not need to register for VAT in your customer's country. You do need to verify that your customer is actually a VAT-registered business — ask for their VAT number and validate it on the EU VIES system. If a customer provides a VAT number that turns out to be invalid the supply defaults to B2C and you owe the VAT.

B2C digital services — OSS and local rates

When you supply digital services to consumers — individuals or businesses without a VAT number — the place of supply is where the consumer is located. A French consumer is charged French VAT at 20%. A German consumer is charged German VAT at 19%. A Swedish consumer is charged Swedish VAT at 25%. Once your cross-border EU B2C digital service sales exceed €10,000 in a calendar year you must either register for VAT in each country — which is impractical — or register for OSS in Cyprus and report all EU B2C sales in a single quarterly return.

Identifying B2B vs B2C customers

Your checkout process must distinguish between business customers providing a VAT number and consumers who are not. For business customers — collect their VAT number, validate it on VIES, apply reverse charge and invoice without VAT. For consumers — determine their location using at least two non-contradictory pieces of evidence, apply their local VAT rate, and report via OSS. The evidence requirement for consumer location includes: billing address, IP address, bank country, SIM card country for mobile purchases. Relying on only one piece of evidence is insufficient.

Two pieces of evidence required for consumer location

• Billing address provided by the customer
• IP address of the device used to access the service
• Bank details — country of the bank used for payment
• Country code of the SIM card for mobile purchases
• Location of a fixed land line for telephone-delivered services
• Other commercially relevant information confirming location

Reduced rates for digital services in some EU countries

Most EU countries apply their standard VAT rate to digital services. However some member states apply reduced rates to specific categories — particularly electronic books, digital newspapers and online educational content. France applies a 5.5% rate to e-books. Germany applies 7% to e-books. These reduced rates apply when charging B2C consumers in those countries via OSS. Your billing system needs to correctly identify both the customer's country and the applicable rate for your specific service category — not just the standard rate.

Marketplace and platform rules

If you sell digital services through a third-party marketplace or platform the marketplace may be deemed the supplier for VAT purposes. Under EU rules digital marketplaces that control the key elements of the supply — pricing, terms, customer interface — are treated as if they made the supply themselves and are responsible for the VAT. If your marketplace handles VAT you do not need to register for OSS for sales through that channel. However you remain responsible for VAT on direct sales outside the marketplace. Confirm with each platform whether they are handling the VAT before assuming you have no obligation.