What are Incoterms?
Incoterms, short for International Commercial Terms, are standard trade rules published by the International Chamber of Commerce. They are used in contracts for the sale of goods and create a shared language between sellers, buyers, freight forwarders, carriers, customs brokers and insurers.
A correctly drafted Incoterm answers four operational questions:
Who arranges the transport?
Who pays freight, loading, insurance, export or import costs?
Where does the risk of loss or damage transfer from seller to buyer?
Who must provide the documents needed for shipment, customs clearance and delivery?
Incoterms are widely used in international trade, but they can also be used for domestic movements of goods. Their purpose is the same: to avoid grey areas in the delivery of goods.
What Incoterms cover, and what they do not cover
Incoterms are important, but they are not the whole contract. Treating them as a tax rule or as a transfer of ownership clause is one of the classic mistakes.
| Incoterms cover | Incoterms do not cover |
| Allocation of transport costs | Transfer of ownership of the goods |
| Contractual delivery point | Price, payment terms or commercial penalties |
| Transfer of transport risk | Product compliance, warranties or quality disputes |
| Certain document obligations | Governing law of the contract |
| Export/import formalities depending on the rule | The full VAT treatment of the transaction |
| Transport insurance under CIP and CIF | All tax reporting obligations |
The distinction matters. An Incoterm can influence the customs and VAT analysis, but it does not decide taxation by itself. To qualify a transaction correctly, you still need to review the physical flow, country of departure, country of arrival, customer status, importer of record, customs declarations and invoice wording.
The 11 Incoterms 2020 rules
Incoterms 2020 contains 11 rules. Seven can be used with any mode of transport. Four are reserved for sea and inland waterway transport.
| Rule | Full name | Transport mode | Simple meaning |
| EXW | Ex Works | Any mode | The seller makes the goods available at its premises or another named place. The buyer takes almost everything from there. |
| FCA | Free Carrier | Any mode | The seller delivers the goods to the carrier nominated by the buyer at the named place. |
| CPT | Carriage Paid To | Any mode | The seller pays carriage to the named destination, but risk transfers earlier. |
| CIP | Carriage and Insurance Paid To | Any mode | Same logic as CPT, with transport insurance arranged by the seller. |
| DAP | Delivered At Place | Any mode | The seller delivers at the named destination, ready for unloading, without import clearance. |
| DPU | Delivered at Place Unloaded | Any mode | The seller delivers and unloads the goods at the named place. |
| DDP | Delivered Duty Paid | Any mode | The seller delivers in the destination country and also handles import clearance, duties and taxes. |
| FAS | Free Alongside Ship | Sea/inland waterway | The seller delivers alongside the vessel at the port of shipment. |
| FOB | Free On Board | Sea/inland waterway | The seller delivers once the goods are loaded on board the vessel. |
| CFR | Cost and Freight | Sea/inland waterway | The seller pays sea freight to the destination port, but risk transfers at the departure port. |
| CIF | Cost, Insurance and Freight | Sea/inland waterway | Same logic as CFR, with insurance arranged by the seller. |
Incoterms for any mode of transport
These seven rules can be used for road, air, rail, containerised sea freight or combined transport. They are often the right starting point for modern supply chains.
EXW - Ex Works
Under EXW, the seller makes the goods available at its premises or at another named place. The buyer organises collection, loading, main carriage, export formalities, import formalities and final delivery.
EXW looks simple for the seller, but it can be risky for exports. If the buyer controls the collection and export process, the seller may struggle to obtain the proof of export needed to support a VAT exemption.
FCA - Free Carrier
Under FCA, the seller delivers the goods to the carrier nominated by the buyer at the named place. That place can be the seller's premises, a warehouse, a terminal or another agreed point.
FCA is often cleaner than EXW for export sales because the seller keeps better control over the handover to the carrier and the export documentation. It is also generally more coherent than FOB for container shipments delivered to a terminal before loading on board.
CPT - Carriage Paid To
Under CPT, the seller pays the main carriage to the named destination. The risk, however, transfers to the buyer when the goods are handed over to the first carrier.
This is where many disputes start: paying for transport does not necessarily mean bearing the transport risk until arrival.
CIP - Carriage and Insurance Paid To
CIP works like CPT, but the seller must also arrange transport insurance for the buyer's benefit. Under Incoterms 2020, the expected insurance level under CIP is more protective than under CIF.
CIP can make sense when the buyer wants the seller to organise transport while also securing a higher level of insurance cover.
DAP - Delivered At Place
Under DAP, the seller delivers the goods at the named destination, ready for unloading. The buyer normally handles unloading and import clearance.
DAP is often used when the seller wants to control transport to the customer's site without becoming the importer of record in the destination country. The buyer must still be warned that import duties, import VAT and clearance fees may be payable on arrival.
DPU - Delivered at Place Unloaded
Under DPU, the seller delivers the goods unloaded at the named place. It is the only Incoterms 2020 rule that expressly places unloading on the seller.
DPU requires operational discipline. The seller must be sure it can organise unloading at the exact destination, not only transport to the gate.
DDP - Delivered Duty Paid
Under DDP, the seller takes the maximum obligation. It delivers the goods in the destination country, handles import clearance and pays the duties and taxes due on importation.
DDP can be commercially attractive because the customer receives an all-inclusive delivery. It is also the rule that creates the most VAT and customs friction for the seller. Depending on the country, DDP may require local VAT registration, fiscal representation, import VAT recovery checks and a more formal customs setup.
Incoterms for sea and inland waterway transport
FAS, FOB, CFR and CIF are reserved for sea and inland waterway transport. They are not designed for air, road or courier shipments, and they are often misused for containerised freight delivered to a terminal before the goods are physically loaded on the vessel.
FAS - Free Alongside Ship
Under FAS, the seller delivers the goods alongside the vessel at the port of shipment. The buyer then takes charge of loading, sea freight and risk from that point.
FAS is mainly used for bulk, heavy or non-containerised goods.
FOB - Free On Board
Under FOB, the seller delivers when the goods are loaded on board the vessel at the port of shipment. Risk transfers at that moment.
FOB is well known, but it is often used too broadly. For containerised goods handed over at a terminal, FCA is usually more accurate.
CFR - Cost and Freight
Under CFR, the seller pays sea freight to the port of destination. Risk transfers when the goods are loaded on board at the departure port.
As with CPT, the key is to separate freight cost from transport risk.
CIF - Cost, Insurance and Freight
CIF works like CFR, with transport insurance arranged by the seller. It remains a maritime rule only.
CIF is common in commodity trading and bulk shipments. It is not the natural rule for e-commerce, parcel shipping or multimodal flows.
Seller and buyer obligations by Incoterm
| Incoterm | Main carriage | Insurance | Export clearance | Import clearance | Main risk transfer |
| EXW | Buyer | Buyer | Buyer | Buyer | Buyer from availability of goods |
| FCA | Buyer | Buyer | Seller | Buyer | Buyer when handed to the carrier |
| CPT | Seller | Buyer | Seller | Buyer | Buyer when handed to the first carrier |
| CIP | Seller | Seller | Seller | Buyer | Buyer when handed to the first carrier |
| DAP | Seller | As agreed | Seller | Buyer | Seller until the named place |
| DPU | Seller | As agreed | Seller | Buyer | Seller until unloading at the named place |
| DDP | Seller | As agreed | Seller | Seller | Seller until the named place |
| FAS | Buyer | Buyer | Seller | Buyer | Buyer when goods are alongside the vessel |
| FOB | Buyer | Buyer | Seller | Buyer | Buyer when goods are on board |
| CFR | Seller | Buyer | Seller | Buyer | Buyer when goods are on board |
| CIF | Seller | Seller | Seller | Buyer | Buyer when goods are on board |
Incoterms, customs and VAT: the points to check
The Incoterm should be reviewed with logistics, customs, finance and VAT teams before the first shipment. A convenient sales promise can become a tax exposure if the customs and VAT setup does not match the contract. Product classification through tariff codes is a prerequisite for correct import duty assessment.
Incoterms do not decide VAT by themselves
VAT depends on the real movement of goods, country of departure, country of arrival, B2B or B2C status, importer of record, customs documents and applicable VAT regime. The Incoterm is a contractual indicator, not a standalone VAT rule.
EXW can weaken export proof
Under EXW, the buyer often controls collection and export formalities. If the seller cannot retrieve the evidence that the goods left the territory, the VAT exemption for an export sale can be challenged.
For exports from the European Union, FCA is often more robust than EXW when the seller needs reliable handover evidence and export documents.
DDP can create local VAT obligations
Under DDP, the seller takes responsibility for import clearance, duties and import taxes. That may place the seller in the position of importer of record or require a local VAT registration or fiscal representative, depending on the destination country. One useful mechanism is customs procedure 42, which defers import VAT in certain flows.
Before offering DDP, check five points:
Who will appear as importer of record on the customs declaration?
Who will pay import VAT?
Is the import VAT recoverable, and by whom?
Is a local VAT registration required?
Would the customer accept DAP if DDP creates disproportionate tax or customs friction?
DAP often limits the seller's import exposure
Under DAP, the seller keeps control of transport up to the named place, but the buyer remains responsible for import clearance. This is often simpler for a seller that does not want to become importer of record in the destination country.
The trade-off is customer experience: the buyer may have to pay duties, import VAT and customs clearance fees on arrival.
The Incoterm must be written precisely
To avoid inconsistencies between the contract, purchase order, invoice and transport documents, write the rule in full.
Recommended format:
Incoterm + precise place + version.
Examples:
FCA Marseille, France - Incoterms 2020DAP Madrid, Spain - Incoterms 2020DDP Berlin, Germany - Incoterms 2020CIF Port of Casablanca, Morocco - Incoterms 2020
An Incoterm without a precise place is incomplete. DAP Spain or FOB Europe is not enough.
How to choose the right Incoterm
The right Incoterm depends on the level of transport control the seller wants, the buyer's ability to handle import clearance, the mode of transport and the VAT/customs obligations in the destination country.
| Situation | Often relevant Incoterm | Point to watch |
| Export sale with a carrier nominated by the buyer | FCA | Secure proof of export and handover documents |
| Sale where the seller organises transport but not import | DAP | Tell the customer duties and taxes may be due on arrival |
| Sale marketed as all-inclusive delivery | DDP | Check VAT registration, customs setup and import VAT recovery |
| Containerised transport | FCA, CPT, CIP, DAP | Avoid FOB/CIF if goods are handed to a terminal |
| Bulk goods loaded at port | FOB, CFR, CIF | Keep these rules for sea/inland waterway movements |
| Goods must be delivered unloaded on site | DPU | Confirm unloading resources at destination |
Frequent mistakes with Incoterms
The first mistake is choosing an Incoterm by commercial habit instead of matching it to the real physical flow. FOB and CIF are still used too widely, despite being reserved for sea and inland waterway transport.
The second mistake is confusing freight payment with risk transfer. In CPT, CIP, CFR and CIF, the seller pays the main transport cost, but risk can transfer long before arrival.
The third mistake is selling under DDP without checking import VAT, importer of record and local registration consequences in the country of importation.
The fourth mistake is forgetting the precise place. An Incoterm must be attached to a clear geographic point: factory, warehouse, terminal, port, customer address or named destination.
Conclusion
Incoterms 2020 are essential for structuring a sale of goods, but they must be used with precision. They allocate delivery, costs and transport risk; they do not replace the customs, VAT and contractual analysis.
For an international seller, the Incoterm should be chosen at the same time as the logistics flow, invoice wording, customs declaration and VAT treatment. That alignment is what prevents disputes, unexpected charges and tax adjustments. See our guide on EORI.
See also: international transport VAT rules
FAQ
What is the current version of Incoterms?
The current reference is Incoterms 2020. It entered into force on 1 January 2020 and remains the version used for the 11 ICC rules.
How many Incoterms 2020 rules are there?
There are 11 Incoterms 2020 rules: EXW, FCA, CPT, CIP, DAP, DPU, DDP, FAS, FOB, CFR and CIF.
What is the difference between DAP and DDP?
Under DAP, the seller delivers to the named place, but the buyer normally handles import clearance, duties and import VAT. Under DDP, the seller also handles import clearance and pays the import duties and taxes.
Which Incoterm is best for an export sale?
FCA is often more robust than EXW for export sales because the seller has better control over the handover to the carrier and can usually secure export evidence more reliably.
Do Incoterms determine VAT treatment?
No. Incoterms influence the analysis, but VAT treatment depends on the actual movement of goods, countries involved, customer status, customs documents, importer of record and applicable VAT regime.
Why can EXW be risky for exports?
EXW can make it difficult for the seller to obtain proof that the goods left the territory, because the buyer often controls collection and export formalities. Without export evidence, a VAT exemption may be challenged.
Can FOB and CIF be used for air or road transport?
No. FOB and CIF are reserved for sea and inland waterway transport. For air, road or multimodal transport, use rules such as FCA, CPT, CIP, DAP, DPU or DDP.
How should an Incoterm be written on an invoice?
Write the rule, the precise place and the version. For example: `DAP Milan, Italy - Incoterms 2020`. A vague wording such as `DAP Europe` or `FOB port` is incomplete.
