Incoterms 2020 are eleven delivery rules published by the International Chamber of Commerce (ICC). They define who pays for and organises transport, insurance and customs formalities, and at which place the risk passes from the seller to the buyer. Below you will find Incoterms 2020 explained rule by rule: we show which are meant for road transport and which for sea freight, and lists the most common mistakes.
What Incoterms 2020 cover and what they do not
Incoterms only apply if the buyer and seller agree on them in the contract. The correct wording states the rule, the exact place and the version, for example "FCA Lehrte, Musterstraße 1, Incoterms 2020". Older versions such as Incoterms 2010 may still be agreed if both parties want to.
Each rule defines three things:
- Costs: Who pays for pre-carriage, main carriage, on-carriage, loading and unloading.
- Transfer of risk: From which point the buyer bears the risk of loss or damage.
- Obligations: Who handles export and import clearance, who must insure the goods and which documents have to be provided.
Incoterms do not cover the transfer of ownership, the payment terms, the price or the consequences of a breach of contract. These belong in the sales contract.
Rules for any mode of transport
Seven rules are suitable for any mode of transport, including truck, rail, air freight and containers in combined transport. They are the right choice for road freight.
EXW: Ex Works
The seller makes the goods available at its own premises, not loaded and not cleared for export. From that moment the buyer bears all costs and risks, including loading, transport, export and import clearance. EXW is the rule with the fewest obligations for the seller.
FCA: Free Carrier
The seller hands the goods over to the carrier nominated by the buyer at the agreed place and handles export clearance. If the place is the seller's premises, the seller also loads the goods. If it is another place, the seller delivers them on the arriving vehicle, not unloaded. The risk passes to the buyer on handover. Since 2020 the parties can agree that the buyer instructs its carrier to issue the seller with an on-board bill of lading.
CPT: Carriage Paid To
The seller pays for transport to the named place of destination and handles export clearance. However, the risk already passes to the buyer when the goods are handed over to the first carrier. The transfer of costs and the transfer of risk therefore take place at different locations.
CIP: Carriage and Insurance Paid To
Like CPT, but the seller must also take out transport insurance. Since 2020, CIP requires comprehensive cover under the Institute Cargo Clauses (A), for at least 110 % of the contract value.
DAP: Delivered at Place
The seller bears costs and risk up to the named place of destination. There, the seller makes the goods available on the arriving vehicle, ready for unloading. Unloading, import clearance, duties and import VAT are the buyer's responsibility.
DPU: Delivered at Place Unloaded
Since 2020, DPU has replaced the former DAT rule. The seller delivers the goods to the named place and unloads them there. The risk only passes after unloading. Import clearance remains with the buyer. The seller must make sure that unloading at the destination is possible.
DDP: Delivered Duty Paid
The seller bears all costs and risks up to the place of destination, including import clearance, duties and import VAT. For the buyer, DDP is the most convenient rule. For the seller, it is the rule with the most obligations. Unloading is the buyer's responsibility.
Rules for sea and inland waterway transport
Four rules are only intended for transport by water. They refer to the vessel or the port of shipment.
FAS: Free Alongside Ship
The seller delivers the goods alongside the vessel at the named port of shipment, for example on the quay, and handles export clearance. From there, the buyer bears costs and risk. FAS is mainly used for bulk cargo and heavy individual items.
FOB: Free on Board
The seller delivers the goods on board the vessel nominated by the buyer at the port of shipment and handles export clearance. The risk passes as soon as the goods are on board. The buyer pays for sea transport.
CFR: Cost and Freight
The seller pays the sea freight to the port of destination. However, the risk already passes when the goods are on board at the port of shipment. As with CPT, the transfer of costs and the transfer of risk take place at different points.
CIF: Cost, Insurance and Freight
Like CFR, but the seller also takes out transport insurance. Under Incoterms 2020, minimum cover under the Institute Cargo Clauses (C) for 110 % of the contract value is still sufficient for CIF. The parties can agree on higher cover.
Who pays what: Incoterms 2020 explained at a glance
Transport
- Buyer organises and pays for the main carriage: EXW, FCA, FAS, FOB.
- Seller pays for the main carriage, but the risk passes at the place of departure: CPT, CIP, CFR, CIF.
- Seller pays and bears the risk up to the place of destination: DAP, DPU, DDP.
Insurance
- The seller is only obliged to insure under CIP and CIF.
- Under all other rules, each party decides for itself whether to insure its risk. Whoever bears the risk should do so.
Customs
- Export clearance by the buyer: EXW only.
- Export clearance by the seller: all other ten rules.
- Import clearance, duties and import VAT paid by the seller: DDP only.
- Import clearance by the buyer: all other ten rules.
Which Incoterms suit road freight
For road transport within Europe and, for example, between Turkey and Germany, only the seven rules for any mode of transport are suitable. In practice, these are the most common:
- FCA, if the buyer organises the transport and the seller handles export clearance.
- DAP, if the seller delivers to the customer and the buyer handles import clearance.
- CPT, if the seller pays for transport but the risk should pass early.
- DDP, if the buyer wants a delivery without any customs effort and the seller is able to handle the import.
FOB and CIF are often used out of habit for container or truck shipments as well. That does not fit: the risk is meant to pass on board a vessel, which is not involved in a truck transport at all. Use FCA, CPT or CIP instead.
Common mistakes when choosing Incoterms
EXW for exports
EXW looks convenient for the seller, but it is often problematic for exports from the EU. The export declaration usually has to be lodged by an exporter established in the EU, which a buyer from a non-EU country usually is not. In addition, the seller needs proof of export for a VAT-exempt export delivery, and with EXW the seller does not have that proof in hand. Without it, VAT may be charged retrospectively. For exports, FCA is usually the better choice.
DDP and import VAT
Under DDP, the seller must declare the import in the country of destination and pay the import VAT. A foreign seller often cannot deduct this tax as input VAT if it is not registered for VAT in the country of destination. The tax then becomes a real cost. Before agreeing on DDP, check who can act as importer and how the import VAT is treated. Sometimes DAP with customs clearance by the buyer is the cleaner solution. If in doubt, get tax advice.
Imprecise place of delivery
"FCA Hannover" leaves open where exactly the handover takes place. Always state an exact address or point, such as a specific warehouse or terminal.
Missing version
Without "Incoterms 2020", it is unclear which version applies. In a dispute, this leads to questions of interpretation.
Overlooking insurance
Under CPT and CFR, the seller pays for transport, but the buyer bears the risk in transit. Many buyers assume that the goods are insured. Clarify who takes out transport insurance.
Which documents are needed depending on the rule and the shipment is explained in our blog. Customs also pays attention to the delivery term on the commercial invoice, because it affects the customs value.
Frequently asked questions
How many Incoterms 2020 rules are there?
There are eleven rules: seven for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four for sea and inland waterway transport only (FAS, FOB, CFR, CIF).
What is the difference between DAP and DDP?
Under both, the seller delivers to the place of destination. Under DAP, the buyer handles import clearance, duties and import VAT. Under DDP, the seller does.
Which Incoterm is common for road freight?
FCA and DAP are frequently used, depending on who organises the transport. FOB and CIF are unsuitable for trucks because they refer to a vessel.
What does DAT have to do with DPU?
In Incoterms 2020, DPU replaced the former DAT rule. The place of delivery no longer has to be a terminal. It can be any place where the seller is able to unload.
Are you importing goods into Germany and need support with customs clearance? Learn more about customs clearance with FulFra, including our bonded warehouse in Lehrte.