Deemed Supply Chain: VAT Risks with Third-Country Connections

Online marketplace operators such as Amazon are increasingly blocking retailer accounts or withholding credit balances – even when the retailers are registered corporations (e.g., German companies with limited liability such GmbH or UG) with their official address in Germany. Retailers with operational ties to third countries – such as place of management, warehousing, or infrastructure outside the EU – are particularly affected. In such cases, marketplace operators often cite unfulfilled tax obligations under EU VAT regulations, frequently without offering specific justification. This creates considerable uncertainty, as many affected retailers believe they have already submitted all necessary tax documentation.

The root of this issue often lies in the tax obligations arising from the so-called deemed supply chain.

What is the deemed supply chain?

The deemed supply chain is a special VAT regulation that has been in force in the EU since July 1, 2021. It applies in particular to sales via online marketplaces by retailers based outside the EU who sell goods to private customers within the EU. In such cases, it is assumed that the marketplace operator purchases the goods from the retailer and then sells them to the end customer for VAT purposes even though the legal sale remains directly between retailer and private customer. This means that the marketplace operator becomes the original VAT debtor on the sale to the customer, while the retailer is deemed to have made a VAT-exempt supply to the marketplace.

Importantly, this mechanism is distinct from the secondary VAT liability of marketplace operators. Under the liability model, the retailer remains liable for the VAT, but the marketplace becomes secondarily liable if the retailer fails to comply. In contrast, under the deemed supply chain, the VAT liability is shifted entirely to the marketplace while the retailer is not liable at all. Thus, the deemed supply chain constitutes a statutory VAT reclassification rather than a liability rule.

When is a retailer considered to be established outside the EU?

Whether the deemed supply chain applies depends largely on the retailer’s VAT residence. This is determined not only by the legal registered office but also by the actual place of economic activity. The key criterion is where central business management is actually conducted. The following factors are evaluated:

• Location of core business decision-making
• Place of actual management
• Presence of staff and operational infrastructure

If the place of economic activity cannot be clearly determined, the location of decision-making takes precedence. A mere postal address, a letterbox company, or a VAT number alone does not establish VAT residence in the EU.

Furthermore, a fixed establishment – with its own staff and resources to provide or receive services – can also establish VAT residency.

Consequences of incorrect classification

The deemed supply chain also applies to companies that are formally registered in Germany or another EU country but are considered, for VAT purposes, to be residency outside the EU. This is especially relevant for shell companies without staff or infrastructure in the EU that use only a marketplace's fulfillment network.

For example, when opening an Amazon account using a German company with limited liability (e.g., a GmbH) with only a nominal registered office in Germany, misclassification is a real risk. Marketplaces may treat the company as EU-based and fail to apply the deemed supply chain. Upon later review, it may emerge that the company does not meet EU residence criteria, and the VAT should have been paid by the marketplace. In such cases, the marketplace may freeze retailer funds until the VAT is reimbursed. If the retailer has already paid VAT, recovery often involves complex and time-consuming refund applications to tax authorities in Germany or other EU countries.

Conversely, issues also arise when a genuinely EU-based retailer is incorrectly treated as a third-country business. In this case, VAT may not be paid by the retailer, even though they are liable. When such errors are discovered, retailers may face substantial additional VAT, interest charges, and even criminal penalties.

Recommendations to minimize risk

Retailers with third-country connections should carefully assess whether they qualify as EU-resident for VAT purposes before starting operations. Key considerations include the place of management, decision-making authority, and operational infrastructure (e.g., personnel, office space, equipment).
In practice, marketplaces like Amazon often request evidence of tax residence, such as:

• Proof of active business operations (e.g., lease agreements, photographs, invoices)
• Extracts from the commercial register or shareholder documentation
• Proof of managing directors' identities and EU residence
• Documentation of EU-based employees (e.g., payslips, contracts)

This documentation should always be readily available to prevent delays and misunderstandings.

Additionally, a certificate under USt 1 TS may be helpful (see BMF letter dated November 5, 2019, BStBl. I p. 1041). Issued by the competent tax office, this certificate confirms that the retailer is established in Germany under Sect. 13b German VAT Code (provision for VAT liability). Although not specifically designed for the deemed supply chain, it may serve as practical supporting evidence for marketplace operators.

Retailers should also ensure that all company data in their marketplace accounts is correct and consistent. In practice, even minor discrepancies (e.g., “GmbH” vs. “GmbH & Co. KG”) compared to records held by the German Federal Central Tax Office can lead to automatic account suspensions. This can affect both EU and non-EU businesses alike.

Conclusion

Accurate VAT classification is essential in cross-border e-commerce. Misjudging residency status in connection with marketplace sales can result in major tax and financial consequences – for both retailers and marketplace operators.

Do you need assistance?

We are happy to support you with VAT matters relating to marketplaces, residency status, and the deemed supply chain – in a practical, legally sound, and efficient manner. Feel free to contact us.