How to Handle EU VAT Exemption in Shopify (2025 Guide)

Complete guide to implementing VAT exemption for EU business customers in Shopify. Learn manual methods, automated solutions, and stay compliant with EU tax regulations.

eu tax exemption app

Why VAT Exemption is Critical for Your Shopify Store

If you’re selling to businesses across the European Union, understanding VAT exemption isn’t just important—it’s legally required. The EU’s reverse charge mechanism fundamentally changes how you handle taxes for B2B transactions.

When a business in one EU country sells to a business in another EU country, the buyer becomes responsible for paying VAT in their own country. This is called the reverse charge mechanism, and it means you as the seller must not charge VAT on these transactions.

Getting this wrong can lead to serious consequences:

  • Double taxation for your customers (they pay VAT to you, then again in their country)
  • Tax authority penalties and audits
  • Loss of B2B customers who refuse to pay incorrect VAT
  • Complex refund processes when errors are discovered
  • Compliance issues that can affect your business operations

VAT exemption

Understanding EU VAT Rules for Cross-Border Sales

Before diving into implementation, let’s clarify the three scenarios you’ll encounter:

B2C Sales (Business to Consumer)

You always charge VAT on sales to individual consumers. The rate depends on where the customer is located and your annual sales thresholds. Since July 2021, the EU’s One-Stop Shop (OSS) system has simplified this process.

B2B Sales Within Your Country

For domestic B2B sales, you charge your country’s standard VAT rate. Both you and your customer are in the same VAT jurisdiction, so normal rules apply.

B2B Sales to Other EU Countries (Intra-Community Supply)

This is where the reverse charge applies. You must:

  1. Verify the customer has a valid VAT number
  2. Not charge VAT on the invoice
  3. Report the sale in your EC Sales List (recapitulative statement)
  4. Keep documentation proving the VAT number was valid at the time of sale

The key requirement is validation. You cannot simply take the customer’s word for it—you must verify their VAT number through the official VIES (VAT Information Exchange System) database.

Method 1: Manual VAT Exemption Process

While manual handling takes more time, it’s entirely possible and costs nothing. Here’s a comprehensive step-by-step approach:

Step 1: Set Up Your Shopify Tax Settings

First, ensure your Shopify tax configuration is correct:

  1. Go to Settings > Taxes and duties
  2. Enable tax collection for EU countries where you sell
  3. Set your default VAT rates for each country
  4. Enable “Charge tax on this product” for all relevant products

This baseline ensures VAT is calculated by default, which you’ll then override for validated B2B customers.

Step 2: Create a Custom Form for VAT Number Collection

You need a way for business customers to provide their VAT number. Here are several options:

Option A: Customer Registration Field Add a metafield to customer accounts:

  1. Go to Settings > Custom data > Customers
  2. Click Add definition
  3. Name it “VAT Number”
  4. Set type to “Single line text”
  5. Add validation if desired

Option B: Checkout Note Field Enable order notes in checkout settings, with instructions asking business customers to include their VAT number. This is simple but less structured.

Option C: Contact Form Create a dedicated contact form where business customers can submit their VAT details before placing orders. This allows you to validate and set them up proactively.

Step 3: Validate VAT Numbers Through VIES

For each VAT number you receive, you must verify it’s valid:

  1. Go to the EU VIES VAT validation tool
  2. Enter the country code (e.g., DE for Germany, NL for Netherlands)
  3. Enter the VAT number without the country code
  4. Click “Verify”

The system will confirm if:

  • The VAT number is valid
  • The company name and address (if provided)
  • Whether the number is registered for intra-community trade

Important: Save a screenshot or PDF of each validation result. You’ll need this documentation for tax audits.

Step 4: Create a Tax-Exempt Customer Tag

Once you’ve validated a customer’s VAT number:

  1. Open their customer profile in Shopify
  2. Add a tag like “VAT-Exempt-EU” or “Validated-Business-DE” (including country code helps with reporting)
  3. Record their VAT number in the customer notes or custom field
  4. Save the VIES validation documentation in your records

Step 5: Apply Manual Tax Exemptions

For each order from a validated business customer:

During Order Processing:

  1. When you receive an order from a tagged customer
  2. Go to the order details
  3. Click Edit next to the tax line
  4. Select “Tax exempt”
  5. Add a reason: “B2B Reverse Charge - VAT: [number]”

For Draft Orders: If you create orders manually:

  1. Create the draft order
  2. In the Taxes section, uncheck “Charge taxes”
  3. Add a note with the VAT number
  4. Send the invoice to the customer

Step 6: Maintain Documentation

Create a spreadsheet tracking:

  • Customer name and Shopify ID
  • VAT number
  • Country
  • Validation date
  • VIES confirmation reference (if available)
  • Orders where exemption was applied

This documentation is crucial for:

  • Your EC Sales List reporting
  • Tax audits
  • Annual compliance reviews
  • Accounting records

Step 7: Set Up Regular Revalidation

VAT numbers can become invalid if:

  • The company goes out of business
  • They move to a different country
  • Administrative changes occur

Best practice: Revalidate all stored VAT numbers quarterly. Add a reminder to your calendar and run through your entire list every 3 months.

Method 2: Semi-Automated Approach with Shopify Scripts

If you have Shopify Plus, you can use Scripts to partially automate the exemption process:

Using Shopify Scripts for Tax Exemption

Create a script that removes tax for tagged customers:

# Example script structure (simplified)
customer_tags = Input.cart.customer.tags rescue []

if customer_tags.include?('VAT-Exempt-EU')
  Input.cart.line_items.each do |line_item|
    line_item.set_tax_exempt(true)
  end
end

Output.cart = Input.cart

This approach still requires:

  • Manual VAT validation
  • Manual customer tagging
  • Periodic revalidation
  • Documentation management

But it automates the checkout experience, so validated customers automatically get tax-free pricing.

Method 3: Using Shopify Customer Tags and Discounts

Another creative manual approach uses the discount system:

  1. Calculate your average VAT rate (e.g., 21%)
  2. Create a discount code equal to that percentage
  3. Give this code only to validated business customers
  4. Tag customers so you remember who has received the code

Limitations:

  • Discounts show differently than tax exemptions on invoices
  • Not technically compliant (it’s a discount, not a VAT exemption)
  • Can cause confusion with accounting
  • Only works if your VAT rate is consistent

This method is not recommended for compliance reasons, but some small businesses use it as a temporary workaround.

Method 4: Automated VAT Exemption with Dedicated Apps

After implementing manual processes for several months, most Shopify merchants find the workload unsustainable. Automated solutions handle:

  • Real-time VAT validation during checkout
  • Automatic tax exemption application
  • Customer recognition on return visits
  • Complete audit trail documentation
  • Multi-language support
  • VIES API integration

An automated app like the EU Tax Exemption App can save 10+ hours per week for stores with regular B2B customers and eliminates validation errors.

How Automated Validation Works

1. Checkout Widget Integration A widget appears in the cart or checkout where customers can enter their VAT number. The validation happens in real-time via the VIES API.

EU Tax Exemption App Widget

2. Instant Verification The system checks:

  • Format correctness
  • VIES database validation
  • Cross-border supply eligibility
  • Previous validation history

3. Automatic Tax Removal If valid, the app instantly recalculates the order without VAT. The customer sees the business price immediately—no waiting for manual processing.

4. Customer Database Validated customers are stored, so returning customers don’t need to re-enter their VAT number. The system recognizes them automatically.

5. Audit Documentation Every validation is logged with:

  • Timestamp
  • VAT number
  • VIES response
  • Order reference
  • Customer details

All exportable to CSV for your accountant or tax authority.

Conclusion

Handling EU VAT exemption in Shopify requires careful attention to compliance, but it doesn’t have to be overwhelming. Whether you choose a manual approach or automated solution, the key is having a systematic process that:

  1. Validates every VAT number through VIES
  2. Documents all validations thoroughly
  3. Applies exemptions accurately
  4. Maintains records for audits
  5. Provides a smooth customer experience

Start with the manual method if you’re just beginning, but don’t hesitate to automate once you see consistent B2B order volume. The time you save can be invested in growing your business, while ensuring you remain fully compliant with EU tax regulations.

Ready to automate this entire process? Our free EU Tax Exemption App handles everything automatically—from real-time validation to complete audit documentation. Install it in minutes and never worry about VAT exemption compliance again.