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Most businesses selling digital services across borders are already familiar with VAT. Fewer are prepared for a second, separate tax obligation sitting alongside it: the digital services tax.
DST and VAT on digital services are not the same thing. They are calculated differently, they apply to different parts of the transaction, and in many countries they run in parallel with no credit between them. Understanding the distinction is the starting point for managing both correctly.
A digital services tax is a levy on the gross revenue that large digital businesses earn from users in a particular country. It usually targets online advertising, digital marketplaces and the sale of user data, and it applies whether or not the business makes a profit there or has any physical presence in the country.
The policy rationale is a gap in corporate income tax rules, which tie taxing rights to a physical footprint such as an office. Digital groups can generate significant revenue from a country’s users without either, so governments introduced DSTs as an interim measure to tax a share of that value while a global solution was negotiated.
VAT on digital services is a consumption tax, charged on each supply and ultimately borne by the end customer. In the EU, B2C digital services are taxed where the customer belongs, with the supplier collecting VAT and reporting it, while most B2B supplies fall under the reverse charge.
Put simply, VAT taxes what the customer spends, while a digital services tax falls on what the provider earns.
Most European DSTs share a two-tier test: a global revenue threshold and a domestic threshold for in-scope digital revenue. Beyond that, the detail differs considerably:
Narrower regimes also exist. Poland taxes audiovisual media at 1.5% and proposed a broader 3% DST in January 2026, Denmark and Portugal tax streaming, and Belgium plans a 3% DST from 2027. Not every change is upward: a French amendment doubling the rate to 6% did not become law, Canada repealed its DST in 2025, and India abolished its equalisation levy from April 2025.
Take an online marketplace charging commission to Spanish sellers. That commission falls within the Spanish digital services tax and is also subject to Spanish VAT. Neither tax gives credit for the other, which creates several problems:
Stacked tax cost: A DST is levied on gross revenue, so it applies even if a company is making a loss, and it is generally not creditable against VAT or income tax.
Cascading: Several large platforms now pass DST on to customers as a separate surcharge. That surcharge generally forms part of the taxable amount for VAT, so VAT ends up being charged on top of a tax.
Conflicting location data: DSTs often locate users by IP address or device data, while EU VAT relies on evidence such as billing address or bank details. The two rarely agree perfectly.
Different calendars: DST returns are typically annual, VAT returns monthly or quarterly, and the figures need to reconcile across both.
Pillar One’s Amount A was designed to replace DSTs. It would have reallocated part of the residual profit of the very largest multinationals to market countries, in return for those countries withdrawing their DSTs. A 2021 standstill paused new DSTs while the multilateral convention was negotiated, but the deadline passed in mid-2024 without agreement.
The US withdrew from the negotiations in January 2025, and in February 2026 US Treasury officials described Pillar One as “dead.” Without US ratification, the convention cannot take effect, leaving no multilateral route to unwind existing DSTs. More countries are now considering their own measures, while the US threatens trade retaliation. For businesses, DSTs should be treated as a lasting compliance obligation, not a temporary one.
We recommend working through the following steps:
1. Map revenue streams: Split revenue by country and service type, such as advertising, marketplace fees and data sales, since DST and VAT treatment differ.
2. Test thresholds at group level: Check global and domestic revenue against each country’s thresholds annually, using group-level figures from the prior period.
3. Align location data: Agree on one source for user location where possible, and document any differences between DST and VAT methods.
4. Review invoicing: Show DST surcharges separately on invoices and confirm the VAT treatment in each jurisdiction.
5. Build a combined calendar: Track DST registration, payment and filing deadlines alongside VAT and OSS deadlines in a single compliance calendar.
Platform VAT rules are also changing, as covered in our guide to VAT in the Digital Age (ViDA). For managing multiple registrations, see our article on simplifying EU VAT compliance.
Which revenue threshold triggers digital services tax liability?
Most countries apply two tests, and both must be met: worldwide group revenue, commonly EUR 750 million, and in-scope domestic revenue, ranging from EUR 3 million in Spain to EUR 25 million in France. Italy now applies only the global test. Thresholds are usually measured on the previous calendar year, so liability often begins the year after a group crosses them. The UK also exempts the first GBP 25 million of UK digital revenue.
Is digital services tax deductible as a business expense?
In most jurisdictions that levy it, yes. A DST is generally treated as a deductible operating cost for corporate income tax purposes, as the UK confirms for its own DST. It is, however, usually not creditable as a foreign income tax in the group’s home country, because it is charged on gross revenue rather than profit. The treatment should be confirmed with a direct tax adviser for each jurisdiction.
Can a US business owe DST without a local office?
Yes. Digital services tax liability is triggered by revenue from local users, not by physical presence, so a US group selling advertising or marketplace services into Europe can owe DST with no local office or staff. Non-resident businesses typically need to register directly with the local tax authority, and some countries require a local tax representative.
How does DST interact with existing income tax treaties?
DSTs are deliberately designed as taxes on turnover rather than income, which places them outside the scope of most double tax treaties. Treaty protections, such as the permanent establishment requirement or relief through the mutual agreement procedure, are therefore generally unavailable. This is a key reason the US views DSTs as discriminatory and has pursued trade measures instead of treaty-based dispute resolution.
Does DST apply to B2B digital services or only B2C?
Mostly B2B revenue. DSTs typically tax amounts paid by businesses, such as advertisers buying ad space or sellers paying marketplace commissions, even where the platform’s users are consumers. Direct consumer sales, such as subscriptions to the platform’s own content, are often excluded. VAT works the other way round: B2C digital supplies are usually where the supplier must account for VAT itself, while B2B supplies shift to the reverse charge.
Running digital services tax and VAT obligations in parallel leaves little room for error. Our team helps businesses manage VAT on digital services across the EU and beyond and keep pace with changing rules.
Get in touch with our team to discuss your digital tax compliance position.
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