New geoblocking regulation – a true burden to e-commerce

The EU’s geoblocking regulation enforced as of December 2018 will significantly change the obligations of the online merchants and service providers. From this point forward, cross-border trade might mean in worst cases additional tax obligations and performing product and consumer protection obligations of other countries. As of 3 December 2018, the geoblocking in cross-border sales of goods and services will partially disappear. Although the purpose of the regulation is noble – to reduce the location-based discrimination of the consumers – it can still mean additional obligations for the online merchants. The regulation concerns product sales and service provision, this also means that it covers traditional online shops and, for example, IT solutions such as web hosting or other software services.

What is geoblocking?

To sum up, geoblocking means that the consumer’s options to purchase goods or services are limited based on their location. For instance, until now, Martins who lives in Latvia, could not buy a vacation package from a German service provider. The aim of the geoblocking regulation is to lose such limitations. If until now an Lithuanian online shop has not been obligated to sell goods or services to Maria living in Germany, then starting from 3 December 2018 the merchant can no longer refuse to sell. Thus, as of December, the geoblock disappears and so does the merchants’ possibility to protect themselves from additional obligations such as VAT or consumer or packaging obligations of other countries.

Geoblock loses the currently valid barriers

The regulation ends several barriers that have been enforced until now. For the consumer this will mean:

• The consumers must be able to purchase goods or services from all web shops, regardless of their citizenship or location. This affects both direct sales to the consumers and partially also the sales to businesses if the business purchases goods or services for their end use. For example, Anna living in Estonia can buy herself a designer handbag from an Italian web store and this cannot be prohibited due to her location in Estonia;
• The consumers must have access to all web shops, automatic forwarding to the web shop of other countries must disappear. Thus, if Janis from Latvia wants to buy new shoes from the German page of some international web shop then he must not be automatically forwarded to the Latvian web shop;
• Same rights for purchasing the goods must apply to the buyer from another member state as are valid for the local consumer, incl. same price and conditions, meaning if Sten buys himself new glasses from a cheaper German web shop instead of the Estonian web shop, then the merchant cannot ask the price of the Estonian web shop from Sten.
• It must be possible to buy goods and services using all payment types available on the said web environment, meaning that Piret must be able to use her credit card issued in Estonia to pay in a Spanish web shop.

For the merchant this means:

• The merchants cannot refuse selling to a consumer because of their location or citizenship;
• The merchants cannot refuse selling to a consumer based on where the consumer or their bank is located.

In general, the merchants do not have to provide three things, but this also highlights the issues with the new regulation:

• The merchants are not obliged to ship the goods, thus, Anna may buy the designer bag from the Italian web shop, but she needs to find a way to deliver the bag to Estonia herself;
• The merchant is not obliged to ensure that the goods or services comply with the consumer’s homeland requirements (safety, product information requirements, nature of the products), thus, even if Janis buys the shoes from the German web shop, the shop is not obliged to forward him an information sheet in Latvian on caring for the shoes;
• The merchants can set different prices for different web sites (the consumer will pay the VAT according to the requirements of the country where the final delivery is made, prices cannot be changed automatically based on the consumer’s IP address).

The aforementioned illustrates that although the new regulation should not mean additional obligations for the merchants regarding VAT or product requirements, such issues might nevertheless arise.

Problem No. 1 – what is targeting another member state?

In certain situations, it is possible that although the web shop only sells its products, for instance, to customers in Finland, active economic activities also take place in other countries, meaning that the shop is targeting another member state. If there exists targeting of another member state, the merchants have the following obligations:

• Obligation to follow the consumer protection requirements;
• Obligation to follow product requirements, incl. languages on the labels;
• VAT related issues;
• Matters concerning applicable legislation and jurisdiction which occur in case of cross-border consumer contracts.

But what is active economic activity? In reality, there is no uniform understanding. It has always been a case-specific analysis, so it cannot be stated in uniform that a certain trading activity is or is not targeting another member state. Relevant EU guides have not provided uniform answers either, rather have directed the merchants to relevant judicial practice.

Problem No. 2 – following the requirement does not mitigate risks

At least that is what concerned institutions say. For example, the respective guide of EuroCommerce says: „When you comply with the Regulation and allow access to your website, sell to customers or accept payments – this alone is not likely to put you in a position of targeting the customer’s country, but it cannot be excluded with a 100% certainty.“ To sum up, the guide says that even if the merchant merely follows the requirements of the regulation, then presumably this is not active economic activity, but it cannot be excluded with a 100% certainty, either. Thus, active targeting another member state may occur also in a situation where the merchant simply follows the orders of the new regulation. In my opinion, this means lack of legal certainty for all merchants, because in reality, the national consumer protection boards are likely unsure, too, as to how to act in the new situation.

Problem No. 3 – assisting the client with the purchase and offering customer support

Setting up customer support and offering them assistance in their language may mean that it is active sales procedure. But offering customer support does not mean only opening a telephone line or communication channel in the consumer’s language. In case of Estonia, it can also mean that a client from Finland asks an Estonian company for product information in Finnish and they receive a response also in Finnish. In this case, we are already dealing with active sales. It can be especially problematic in case of countries that share the same official state language, like Germany and Austria, or the Netherlands and Belgium. Or in case on websites that offer automatic translation into the consumer’s native language, so that the consumer does not even realise that the website is not actually in their native language.

Problem No. 4 – offering shipping or referring to shipping options

Shipping to other countries to which sales were not done previously definitely means active sales. At the same time, if no shipping is done, but the consumers are directed to a company that offers the shipping option, then this means active sales. This means even if the consumer is advised on shipping via e-mail. This also means helping the consumer with the shipping before the consumer has made the purchase, incl. communication via e-mail regarding shipping advice or pointers.

Neglecting the regulation is not a suitable solution to avoid problems

According to the new regulation, the national consumer protection boards or other public bodies will start supervising the web shops. Necessary elements of a misdemeanour will be established, which will ensure that the companies will offer goods and services in compliance with the geoblock regulation. Thus, on the one hand, companies may face additional burden concerning taxes and other requirements. On the other, avoiding the risk and neglecting what is provided in the geoblock regulation could mean an ample fine.

Plan, edit, execute

In order to keep up with the new regulation, it is necessary to map your activities, identify the risks and change the current procedure to avoid problems in future. Neglecting the geoblock regulation can mean severe consequences. However, when following it, it is essential to avoid active economic activities in certain countries to evade concerns related with VAT, consumer rights, jurisdiction and applicable legislation, as well as product information obligations. Online merchants can change their trading conditions and thus inform that certain countries are excluded in the sense of active economic activities. If you believe that your company may be affected by the new regulation, contact us and we will find a solution together!