Tax Exemption
What is it
A legal reason why no tax is charged on the invoice. It usually cites a specific tax law or regulation. It justifies the net amount.
When is it required
Whenever a taxable business issues an invoice with 0% tax. The authorities require a justification. Without it, the sender is liable for the tax.
Common exemption reasons
| Category | Description | Code Example (EU) |
|---|---|---|
| Export | Goods leaving the economic zone (e.g. EU to USA). | "Exempt Export Art. 146" |
| Reverse Charge | B2B cross-border service where buyer pays tax. | "Reverse Charge - Art. 196" |
| Intra-Community | B2B goods sale between EU member states. | "Intra-Community Supply" |
| Resale (USA) | Buyer is a reseller with a valid certificate. | "Resale Certificate #12345" |
Proof requirements
To validly apply 0% tax, you must keep proof. For Exports, this is the notification of exit from Customs. For Reverse Charge, it is the validated VAT number of the client. For Resale, it is the copy of the Resale Certificate.
Common pitfalls
- Writing "Tax Free" without citing the reason (e.g., "Export" or "Reverse Charge"). The citation must be specific.
- Applying exemption to clients who do not qualify. The specific conditions must be met.
- Failing to collect the client's VAT number for reverse charge mechanisms. This invalidates the exemption.
Common mistakes when filling the field
- Leaving the field blank when tax is zero. Silence is not an explanation.
- Using vague language like "No Tax".
- Citing the wrong regulation for the specific type of transaction.
Why is it there
It proves compliance during an audit. It explains to the tax authority why revenue was collected without tax. It shifts the tax liability correctly.