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VAT Exemption
A VAT exemption means a transaction is not subject to VAT, either without the right to deduct input VAT (exempt without credit) or with full input VAT recovery (zero-rated).
A VAT exemption means that VAT is not charged on a particular supply. However, not all exemptions work the same way. The key distinction is whether the supplier can deduct input VAT they paid on purchases related to that exempt supply.
Two Types of VAT Exemption
| Type | Output VAT | Input VAT Recovery | Examples |
|---|---|---|---|
| Exempt without credit | 0% — not charged | Not deductible | Financial services, insurance, healthcare, education |
| Zero-rated (exempt with credit) | 0% — not charged | Fully deductible | Exports, intra-EU supplies, international transport |
| Reverse charge (B2B) | 0% on supplier invoice | Buyer accounts for VAT | Cross-border B2B digital services in the EU |
B2B Reverse Charge: The Most Common Exemption for SaaS
For SaaS businesses selling to EU B2B customers, the most relevant 'exemption' is the reverse charge mechanism. When you sell to a verified EU business customer, you issue a zero-VAT invoice and include the note 'Reverse charge'. The buyer self-accounts for VAT in their country. This is not a true exemption — it's a shift of tax liability from seller to buyer.
Warning
The reverse charge mechanism only applies when the customer has a valid EU VAT number. Always validate the VAT number via VIES or an API before issuing a zero-VAT invoice. Wrongly applying reverse charge creates compliance liability for you as the supplier.
Frequently asked questions
What is the difference between exempt and zero-rated?
Zero-rated means VAT is charged at 0% — the supplier can still deduct input VAT on purchases. Exempt (without credit) means the supply is outside the VAT system entirely — the supplier cannot deduct input VAT related to exempt supplies.
Does reverse charge count as a VAT exemption?
Not technically. Reverse charge shifts the VAT accounting obligation from the supplier to the buyer. The supplier issues a zero-VAT invoice, but VAT is still accounted for — just by the buyer in their jurisdiction.
Are SaaS products ever VAT-exempt?
Generally no. SaaS products are not in any EU member state's list of VAT-exempt supplies. The applicable treatment is either standard-rated (B2C), reverse charge (B2B with valid VAT number), or out-of-scope (non-EU customer).
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Related terms
Standard VAT Rate
The default VAT rate applied to most goods and services in a country, ranging from 17% (Luxembourg) to 27% (Hungary) across EU member states.
Reduced VAT Rate
A lower VAT rate applied to specific categories of goods and services deemed socially or culturally important, such as food, books, and medical goods. EU reduced rates range from 5% to 15%.
Place of Supply
The tax jurisdiction where a supply of goods or services is deemed to take place for VAT purposes, determining which country's VAT rules apply to the transaction.