On July 1, the EU officially ended the duty-free exemption for small packages valued at less than 150 euros, and in the blink of an eye, a full month has passed since then. Xiao Lin, who runs an independent e-commerce site in Shenzhen, recently crunched the numbers: what used to be a best-selling item with a profit margin of 25% has now seen its profit plummet to 8% after being squeezed by a 3-euro provisional tariff, a processing fee set to take effect in November, and VAT filing costs.

To make matters worse,Starting in August, the EU’s AI Content Regulation and Packaging Act (PPWR) is also entering its final countdown....and compliance costs continue to rise.

In today’s post, we’ll break down the actual cost breakdown for the EU market in August and, while we’re at it, outline a compliance path that still allows for profitability.

01

Elimination of the 150-euro tax-free allowance: It's not as simple as 3 euros

Many sellers initially believe that paying an additional 3 euros in customs duties per small package keeps costs under control. But in practice, it’s far more complicated than that.

First, the customs duty base is calculated based on the value of the goods.The 3-euro tariff is a temporary flat rate, but customs authorities will reclassify goods based on their HS codes, so the actual tax rate for some categories may be higher. For example, the actual tax rates for textiles, footwear, and 3C accessories vary significantly.

Second, import VAT must be paid.VAT rates on imports into the EU generally range from 19% to 27%. Small packages that were previously exempt from VAT are now subject to formal customs clearance, and the VAT cost is added directly to the retail price. Take a phone case priced at 30 euros, for example; the VAT could be as high as 6 to 8 euros.

Third, a 2-euro processing fee will be added starting in November 2026.This fee is collected by customs or the logistics provider to cover additional clearance costs. It’s basically impossible to ship small items with a low average order value. For items priced under 10 euros, customs duties, VAT, and handling fees could eat up the entire profit.

Fourth, return costs have doubled.In the past, when buyers returned items without cause, sellers could simply discard the packages. Now, every package has official customs duty and VAT records, so when items are returned, sellers must process tax refunds or offsets—a complex process that incurs higher costs.

02

IOSS/OSS: You'll lose money if you don't register

IOSS (Import One-Stop Declaration System) and OSS (One-Stop Declaration System) are simplified declaration tools designed by the European Union for small packages and distance sales.

IOSS applies to VAT declarations for imports of goods valued at less than 150 euros.Through IOSS, sellers can collect VAT directly from consumers at the time of sale and then file a single tax return and make a single payment to the EU member states, thereby avoiding the risk of goods being held at customs or having to charge consumers a second time.

OSS applies to distance sales within the European Union.If your goods are already stocked in an EU country (such as a German overseas warehouse), you can use the OSS to sell to all 27 member states while registering for VAT in just one member state.

Consequences of not registering for IOSS/OSS: packages held up at customs, high consumer refusal rates, soaring return rates, and traffic restrictions imposed by e-commerce platforms. Temu and SHEIN have been able to expand rapidly in the EU largely because they established their IOSS and local warehouse systems early on.

03

New Regulations on AI Content Oversight Take Effect on August 2

On August 2, 2026, certain provisions of the EU’s Artificial Intelligence Act will begin to apply to generative AI content. For cross-border e-commerce businesses, the greatest impact will be on AI-generated content in product descriptions, advertising materials, and customer service chats.

The new regulations require that AI-generated text, images, and video content be clearly labeled; content used in recommendation algorithms must be explainable; and AI applications that influence consumer decisions must undergo a risk assessment.

Direct Impact on Sellers: If your product detail page contains a significant number of AI-generated images and text, you must include an ”AI-generated” label; if you use AI-powered customer service to automatically respond to pre-sale inquiries, you must retain records of human review.

Penalties for violations can reach up to 7% of global annual revenue. For small and medium-sized sellers, this is essentially a death sentence.

04

Packaging Law PPWR: Packaging Must Be Changed by December

The EU Packaging and Packaging Waste Regulation (PPWR) will officially take effect on August 12, 2026, with a transition period extending through the end of the year. Key requirements include:

First, minimize packaging.Do not overpack; the weight and volume of the packaging should be commensurate with the product's protection needs.

Second, the percentage of recyclable materials.Certain product categories require a specific percentage of recycled materials.

Third, EPR registration.Sellers must register for the Packaging Act EPR in the country of sale and report recycling weights on time.

Many Chinese sellers typically use a three-part packaging setup consisting of “bubble wrap + cardboard box + packing material,” which may be deemed excessive packaging under PPWR regulations. We recommend that you begin testing lighter, thinner, and recyclable packaging solutions starting now.

05

Three Paths to Transformation That Can Still Generate Profits

Option 1: Price increases + localized pricing.

Don’t shoulder all the costs yourself. EU consumers are less price-sensitive than those in the U.S., so raising prices appropriately and making VAT, tariffs, and processing fees transparent can actually help you identify high-quality customers.

Option 2: Stock EU overseas warehouses.

By using OSS to stock goods at logistics hubs in Germany, the Netherlands, Poland, and other countries, companies can avoid import duties and handling fees while improving delivery times. This is the inevitable path forward in the medium to long term.

Option 3: Hong Kong/Offshore Entity + Compliance Structure.

Using a Hong Kong company as the entity for operations and receiving payments, in conjunction with local EU VAT registration and overseas warehouses, allows for a balance between financial compliance and tax costs. It also meets the platform’s verification requirements for business entities.

By August 2026, the EU market will have transitioned from the “traffic boom period” to the “compliance cost period.” The sellers who survive will be those who have thoroughly addressed VAT, EPR, and AI content compliance from the very beginning.

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