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9 Apr 2024 Article

CESOP: What is it? And What Do I Need to Know? 

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From early 2024, the Central Electronic System of Payment Information, or CESOP, is effective. All European Union payment service providers (PSPs) must now record and report transactional details for cross-border payments to local tax authorities. This requirement encompasses banks, electronic money institutions, and other regulated providers of payment services – including Brite. 

If a business offers payment services and falls under the scope of PSD2, it’s crucial to evaluate how CESOP will impact your operations and devise a suitable, efficient, and timely strategy in response. Unsure what actions to take? Don’t worry: this article provides a complete overview of CESOP, what it is, and how it will affect your business. 

What is CESOP? 

CESOP, short for the European Union’s Central Electronic System of Payment Information, is a measure put in place by the European Commission to tackle the VAT gap in the EU. This gap refers to VAT revenue lost due to errors and fraud. By collecting data on cross-border payments, CESOP will help the EU recover previously uncollected VAT. 

What are the regulations governing CESOP?

CESOP emerged from the updating of the EU VAT directive and adding a number of new rules. Essentially, it functions as a new administrative task for PSPs in the EU. EU PSPs will now have to keep track of cross-border payments and report information every three months.

Which transactions are in scope for CESOP reporting obligations?

All cross-border payments from EU payers are affected by CESOP. EU payment service providers handling these transactions must keep and share certain payment details. However, if both the payer’s and the recipient’s PSPs are in the EU, the payer’s PSP is exempt. But this exemption doesn’t cover any intermediary EU PSPs in payment chains with more than two parties.

If the number of payments made to one recipient exceeds 25 in a quarter, data for all these payments must be reported.

Indeed, CESOP is just one of many new regulations you need to know about in 2024. If you want to learn more about the latest EU payment changes, check out our article: European Payment Regulations and Changes You Need to Know for 2024

Who will be subject to CESOP?

The reporting requirement applies to PSPs as defined in the Payment Services Directive (PSD2), encompassing credit, electronic money, post office giro, and payment institutions. This also includes those eligible for small payment institutions exemption (SPIs).

In practice, banks, card schemes, merchant acquirers, and commercial payment service providers (CPSPs) are expected to be most affected. This also includes retailers and marketplaces with their own ’in-house’ payment service providers governed by PSD2.

Entities falling under exclusions or projecting payments below the de minimis threshold should monitor their status regularly. They should establish operational procedures to ensure CESOP compliance if they no longer qualify for exclusions or fall below the threshold.

PSD2 revolutionised payments for EU merchants, learn more about this and the impact of its latest revision, PSD3 with our PSD3 explainer

How will the data be reported?

EU PSPs with reportable data must send it to tax authorities in their home member states, and any host member states where they operate, as defined by PSD2. The BIC/IBAN number mainly determines the location of the payment’s payee and payer.

All data must be sent in a standardised XML format, accessible from the EU Commission’s CESOP website.

Next, local tax authorities must perform data quality checks before sending the information to the central EU-level database, CESOP.

How will CESOP affect EU payments? 

While CESOP is part of the broader digital finance strategy of the EU, specific details about its implementation and impact may evolve as the proposal moves through legislative processes and as market participants respond. However, we can anticipate several potential effects on EU payments:

1. Enhanced cross-border payments

One of the main goals of CESOP is to improve the efficiency of cross-border payments within the EU, making them as easy, fast, and secure as domestic payments. This would be a significant boon for the single market, facilitating smoother transactions for consumers and businesses across member states.

2. Reduced dependency

The EU aims to reduce its dependency on external (particularly non-European) payment infrastructures by establishing a homegrown payment market. This is not only a matter of economic competitiveness but also of financial sovereignty and security.

3. Improved payment security and privacy

CESOP could lead to enhanced security and privacy standards for payments within the EU, given the region’s stringent regulatory environment (e.g. GDPR). European consumers might benefit from higher data protection standards and potentially lower fraud risks.

4. Regulatory and compliance impacts

Businesses operating within the EU payments market must navigate the regulatory and compliance aspects of CESOP. Adapting to these requirements could entail significant changes to their operational, legal, and compliance frameworks.

How will CESOP affect Payment Service Providers?

In practical terms, banks, card schemes, merchant acquirers, and commercial payment service providers will likely feel the greatest impact. This also includes retailers and marketplaces that run their own ’in-house’ payment service providers governed by PSD2.

Entities falling under any exclusions or expecting their processed payments to stay below the de minimis threshold should monitor their status regularly. They should establish operational procedures to ensure compliance with CESOP reporting requirements if they no longer qualify for exclusions or fall below the threshold.

What do businesses need to know about CESOP?

Multiple-country reporting

EU PSPs operating in both their home member state and other host member states must set up efficient procedures to ensure timely compliance across all required jurisdictions.

Key considerations include:

  • Identifying the countries requiring CESOP reports.
  • Implementing measures to ensure reporting of all eligible transactions.
  • Establishing protocols to avoid duplicate reporting of transactions.
  • Identifying any differences in reporting methods and formats between local tax authorities.

These steps are crucial for EU PSPs to fulfil their CESOP obligations effectively and accurately across multiple jurisdictions.

Impact on systems

CESOP involves reporting data, and getting ready for compliance means locating the necessary data, checking its quality, and setting up procedures to extract and compile it. Because CESOP deals with a lot of data, it’s important to avoid putting too much pressure on systems whenever possible.

Key things to consider are:

  • Ensuring all the important systems and data sources are suitable for CESOP reporting.
  • Keeping systems running smoothly and reviewing data backups for reporting on time.
  • Setting up the right rules and checks that fit with how the business operates.

Answering these questions is crucial to ensure CESOP compliance goes smoothly while keeping things running efficiently and data accurate.

Data validation and quality assurance

Tax authorities will check the data each time they receive a CESOP report. If the data fails this check, the PSP must fix it and send a new data set.

Important things to think about are:

  • Checking data quality regularly.
  • Finding ways to avoid errors or questions during validation.
  • Setting up steps to follow if the data fails the check.

Addressing these elements is key to staying compliant with CESOP rules and keeping things running smoothly with tax authorities.

Faster, smarter, and more secure with Brite 

As a European Union Payment Service Provider, Brite records and reports transactional details for cross-border payments to local tax authorities. This is just one of the ways Brite ensures that its instant account-account payments are not only fast but secure and that payment fraud is tackled.

If you want to learn more about Brite’s low-cost payment services, contact one of our experts today.

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