Cross-border transactions inside the European Union are often perceived as simple. No customs, harmonised VAT rules, and a single market. Yet in practice, a single invoice between two countries can trigger three different tax logics at the same time: the seller’s rules, the buyer’s rules, and the EU framework that sits above them.
For many companies, this is where unexpected tax costs, denied VAT deductions, or compliance penalties begin.
One transaction, multiple tax perspectives
Imagine a German company purchasing services from a Hungarian service provider. The transaction appears straightforward: an invoice is issued, the service is delivered, and the payment is made.
However, the same invoice may be viewed differently by three parties:
1. The seller’s country (Hungary)
Hungarian rules determine how the invoice must be issued, how the transaction is reported, and whether the supplier correctly applied reverse-charge or domestic VAT.
2. The buyer’s country (Germany)
German tax authorities examine whether the buyer can deduct the VAT, whether the reverse-charge was properly accounted for, and whether the transaction is supported by sufficient documentation.
3. EU-level rules and case law
EU directives and court decisions define the overall framework. Concepts such as “place of supply,” “abuse of rights,” or “knew or should have known” can override local expectations.
As a result, a transaction that looks compliant in one country may raise red flags in another.
Where the problems usually start
Cross-border invoices most often lead to disputes in three areas:
Incorrect place of supply
If the service is treated as domestic instead of cross-border (or vice versa), VAT may be charged incorrectly. This can result in double taxation or denied deductions.
Mismatch between accounting treatments
If the seller and buyer record the transaction differently in their books, tax authorities may question the substance of the deal. Proper accounting alignment is critical in cross-border structures.
Lack of business substance
If the structure appears artificial or designed purely for tax savings, authorities may apply abuse-of-rights principles. In such cases, even formally correct invoices may not be enough to defend the tax position.
The “third rule”: substance over form
In recent years, both national tax authorities and EU courts have increasingly focused on the economic reality of transactions. This means that:
- A correctly issued invoice does not automatically guarantee VAT deduction.
- A formally compliant structure may still be challenged if it lacks real business purpose.
- The taxpayer’s awareness and due diligence are key factors in audits.
This is where proper structuring and legitimate tax optimization become essential. The goal is not simply to reduce taxes, but to create a structure that stands up to scrutiny in multiple jurisdictions.
Who actually “wins” in these situations?
In practice, three outcomes are common:
1. The tax authorities win
If the structure is inconsistent, poorly documented, or artificial, the company may face denied deductions, penalties, and interest.
2. The most prepared party wins
If one side maintains better documentation, stronger contracts, and clearer accounting logic, it is more likely to succeed in a dispute.
3. The well-structured company wins
Companies that build cross-border operations on real economic activity, proper documentation, and coordinated tax and accounting strategies usually avoid disputes altogether.
The practical lesson
A cross-border invoice is never just an invoice.
It is a transaction examined through at least three different legal and tax lenses.
Companies expanding across borders should not only ask:
- Is the invoice correct?
- Is the VAT treatment technically compliant?
They should also ask:
- Does the transaction make business sense?
- Is the accounting treatment aligned on both sides?
- Would this structure survive a tax audit in both countries?
Because in cross-border taxation, the real winner is not the company that pays the least tax today, but the one whose structure still stands after an audit tomorrow.
