Good news from the EU - you don't hear that often...

Businesses delivering goods digitally to European customers will have to pay VAT even if they are based outside the European Union, according to a directive from the European Council which was ratified today.

This means European companies selling such things as computer games and software will not suffer a tax disadvantage when competing with US firms.

Miranda Cass, partner and tax lawyer at Bristows law firm, said: "This is definitely a good thing for EU companies. US counterparts will be on a level playing field as far as cost goes."

She added: "Maybe some non-EU companies will go out of business - 17.5 per cent VAT added onto goods bought by UK customers is a large cost to pass onto the customer or absorb internally."

But the regulation has outraged US-based companies as they will now have to register in an EU member state and pay VAT. Rates vary according to where the customer lives.

A spokeswoman from the US Trade Mission in Brussels said: "We are still concerned about the potential for discrimination against non-EU companies in terms of the tax rates to be charged and the administration and compliance burden."

Cass said the new law may have further positive effects on business in the EU. "This may encourage people to set up online businesses here rather than the US," she added.

Some European countries might find they have a larger administration burden than others though, Cass said.

"Some EU countries will be better at organising these tax registration systems than others. Companies are likely to want to register with countries that are better organised or that they've had good dealings with in the past, so places like the UK may have a bigger cost issue for administration."

She added: "The US and UK share a language as well, which will also attract extra companies."

The Directive must be implemented throughout the community by 1 July 2003.