The hidden working-capital cost of cross-border invoicing in the EU
For a freelancer or small company, invoicing a domestic customer rather than a customer in another EU Member State can create a meaningful working-capital advantage even when the fee before VAT is exactly the same.
This principle can apply throughout the EU, although its financial impact varies significantly from one country to another.
Why does the country of invoicing matter?
A business operating under the ordinary VAT regime normally incurs input VAT on its local business expenses.
When it invoices a domestic business, it generally charges local VAT. The output VAT collected from the customer can then be offset against the input VAT paid to suppliers.
When the same services are supplied to a business established in another EU Member State, the general B2B place-of-supply rule normally applies. The invoice is issued without the supplier’s domestic VAT, and the customer accounts for the tax under the reverse-charge mechanism.
The supplier normally retains the right to deduct its input VAT. However, because it does not collect domestic output VAT from the foreign customer, it may accumulate a VAT credit.
Whether this credit can be recovered monthly, quarterly or only annually depends on the Member State. Minimum thresholds, special applications, compliance checks and refund-processing periods may also apply.
During this waiting period, the freelancer or small company is effectively financing the VAT from its own resources.
This is not a tax saving.
The amount of deductible VAT is ultimately the same.
The potential benefit comes from recovering or offsetting that VAT earlier and therefore reducing the financing cost associated with having money tied up while waiting for a refund.
A simplified calculation is:
Input VAT as a percentage of revenue × annual financing cost × average waiting period ÷ 12
How significant can the difference be?
To illustrate the potential impact, we used a representative scenario based on the following assumptions:
Expenses before VAT: 50% of annual revenue.
All expenses are subject to the country’s standard VAT rate.
Revenue and expenses are distributed evenly throughout the year.
Input VAT is fully deductible.
Financing cost: 7% per year.
The services are ordinary B2B services subject to the general place-of-supply rule.
Refund applications are submitted correctly and on time.
Domestic customers pay their invoices promptly.
The ordinary VAT regime applies rather than a small-business VAT exemption.
Estimated financing cost avoided
SPAIN
Standard VAT: 21%
Refund scenario used: Ordinary quarterly taxpayer; annual refund received around the end of July.
Average financing period: 13 months.
Potential benefit as % of revenue: 0.80%
ROMANIA
Standard VAT: 21%
Refund scenario used: Quarterly refund; 45-day ordinary processing or up to 90 days with an advance inspection.
Average financing period: 3.8–5.3 months.
Potential benefit as % of revenue: 0.23%–0.33%
BELGIUM
Standard VAT: 21%
Refund scenario used: Quarterly refund paid by the end of the third month following the quarter.
Average financing period: 4.5 months.
Potential benefit as % of revenue: 0.28%
LUXEMBOURG
Standard VAT: 17%
Refund scenario used: Annual filer with turnover below €112,000; ordinary refund-decision period.
Average financing period: Approximately 13 months.
Potential benefit as % of revenue: 0.64%
ITALY
Standard VAT: 22%
Refund scenario used: Quarterly refund unavailable; credit recovered through the annual return.
Average financing period: Approximately 10–13 months.
Potential benefit as % of revenue: 0.64%–0.83%
For a professional invoicing €100,000 annually, the estimated financing effect could therefore range from approximately €230 to more than €800, depending on the country and the applicable refund mechanism.
What does this mean for freelancers?
The country from which you invoice does not necessarily change your final tax burden.
But it can affect how long your money remains tied up and, consequently, the cost of financing your business.
The actual result will depend on each professional’s circumstances, including the proportion of VAT-bearing expenses, applicable VAT rates, filing frequency, refund timing, eligibility thresholds and real financing costs.
The calculations also assume that the domestic customer pays punctually. If payment is delayed, the professional may have to remit output VAT before collecting it, reducing or potentially eliminating the working-capital advantage.
The DUKAT approach
At DUKAT, we believe transparency means looking beyond the headline number.
When professionals compare different contractual arrangements, the fee or margin is not necessarily the only factor that can affect their real earnings.
Payment conditions, contractual terms, indexation and even the country through which services are invoiced can have a real financial impact over time.
Transparency means understanding the full picture.
If you have questions about your specific situation or the conditions applicable to your contract, talk to us.
𝗗𝗨𝗞𝗔𝗧 𝗱𝗼𝗲𝘀𝗻’𝘁 𝗽𝗹𝗮𝗰𝗲 𝗰𝗼𝗻𝘀𝘂𝗹𝘁𝗮𝗻𝘁𝘀.
𝗪𝗲 𝗯𝘂𝗶𝗹𝗱 𝗹𝗼𝗻𝗴-𝘁𝗲𝗿𝗺 𝗰𝗮𝗿𝗲𝗲𝗿𝘀 𝗶𝗻 𝗘𝘂𝗿𝗼𝗽𝗲𝗮𝗻 𝗙𝗿𝗮𝗺𝗲𝘄𝗼𝗿𝗸𝘀.
