Incoterms 2020 are eleven delivery terms established by the International Chamber of Commerce (ICC). They specify who pays for and arranges transportation, insurance, and customs formalities, and at what point the risk passes from the seller to the buyer. This article explains all eleven terms, identifies which ones are intended for truck transport and which for ocean freight, and highlights the most common mistakes.
What Incoterms 2020 Cover and What They Don't
Incoterms apply only if the buyer and seller agree to them in the contract. The correct format specifies the clause, exact location, and version, for example, “FCA Lehrte, Musterstraße 1, Incoterms 2020.” Older versions, such as Incoterms 2010, may still be agreed upon if both parties so desire.
Each clause specifies three things:
- Costs: Who pays for the pre-transport, main transport, post-transport, loading, and unloading?
- Transfer of Risk: At what point does the buyer assume the risk of loss or damage?
- Responsibilities: Who handles export and import clearance, who is responsible for insurance, and what documents must be provided.
The transfer of ownership, the terms of payment, the price, and the consequences of a breach of contract are not addressed. These matters should be included in the sales contract.
Clauses for All Modes of Transportation
Seven clauses are suitable for any mode of transport, including trucks, rail, air freight, and containers in intermodal transport. They are the right choice for road freight transport.
EXW – Ex Works
The seller makes the goods available on its premises, unloaded and not cleared for export. From that point on, the buyer bears all costs and risks, including loading, transportation, and export and import customs clearance. EXW is the term that imposes the fewest obligations on the seller.
FCA – Free Carrier
The seller delivers the goods to the carrier designated by the buyer at the agreed location and completes the export clearance. If the location is the seller’s premises, the seller also loads the goods. If it is another location, the seller delivers them onto the arriving vehicle, unloaded. Risk passes to the buyer upon delivery. Since 2020, the parties may agree that the buyer will instruct its carrier to issue the seller a bill of lading with an on-board endorsement.
CPT – Carriage Paid To
The seller pays for transportation to the named destination and handles the export. However, the risk passes to the buyer upon delivery to the first carrier. Thus, the transfer of costs and risk occurs at different points.
CIP – Carriage Paid, Insured
As with CPT, the seller must also take out cargo insurance. Since 2020, CIP has required comprehensive coverage in accordance with the Institute Cargo Clauses (A), covering at least 110% of the contract value.
DAP – Delivered at Named Place
The seller bears the costs and risk up to the named destination. There, the seller shall make the goods available on the arriving vehicle, ready for unloading. The buyer is responsible for unloading, import clearance, customs duties, and import sales tax.
DPU – Delivered and unloaded at the named location
Since 2020, DPU has replaced the former DAT clause. The seller delivers the goods to the named location and unloads them there. Risk does not pass until after unloading. The buyer is responsible for customs clearance upon import. The seller must ensure that the goods can be unloaded at the destination.
DDP – Delivered Duty Paid
The seller bears all costs and risks up to the destination, including import clearance, customs duties, and import sales tax. DDP is the most convenient term for the buyer, but for the seller, it is the term that entails the most obligations. The buyer is responsible for unloading the goods.
Clauses for Maritime and Inland Waterway Transport
Four clauses apply only to water transport. They relate 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, at the wharf—and handles the export formalities. From that point on, the buyer bears the costs and risk. FAS is primarily used for bulk cargo and heavy individual items.
FOB – Free on Board
The seller delivers the goods on board the vessel designated by the buyer at the port of shipment and handles the export formalities. Risk passes as soon as the goods are on board. The buyer pays for the ocean freight.
CFR – Cost and Freight
The seller pays the ocean freight to the port of destination. However, the risk passes as soon as the goods are on board at the port of shipment. As with CPT, the transfer of costs and the transfer of risk occur at different times.
CIF – Cost, Insurance, and Freight
As with CFR, the seller also takes out cargo insurance. Under CIF, according to Incoterms 2020, minimum coverage under the Institute Cargo Clauses (C)—covering 110% of the contract value—remains sufficient. The parties may agree on higher coverage.
Who Pays What: An Overview of the Provisions
Transportation
- The buyer arranges and pays for the main transportation: EXW, FCA, FAS, FOB.
- The seller pays for the main transportation, but risk passes at the point of departure: CPT, CIP, CFR, CIF.
- The seller pays for and bears the risk until the destination: DAP, DPU, DDP.
Insurance
- The seller is required to provide insurance only under CIP and CIF terms.
- For all other clauses, each party decides for itself whether to insure against the risk. Whoever bears the risk should do so.
Inch
- Export clearance at the buyer's location: EXW only.
- Export clearance by the seller: all other ten clauses.
- Import clearance, customs duties, and import sales tax at the seller's end: DDP only.
- Import clearance by the buyer: all other ten clauses.
Which Incoterms are suitable for truck transport?
For road transport within Europe and, for example, between Turkey and Germany, only the seven clauses applicable to all modes of transport are relevant. In practice, the following are used most frequently:
- FCA, when the buyer arranges transportation on its own and the seller handles the export.
- DAP, when the seller delivers to the customer and the buyer handles the import process on their own.
- CPT, when the seller pays for transportation but the risk is to pass early.
- DDP, when the buyer wishes to receive a shipment without having to handle customs clearance themselves and the seller is able to handle the import process.
FOB and CIF are often used out of habit even for container or truck shipments. This is incorrect: the risk is supposed to pass when the goods are on board a ship, which is not involved at all in truck transport. Use FCA, CPT, or CIP instead.
Common Mistakes When Choosing Incoterms
EXW for Exports
EXW is convenient for the seller, but often poses problems when exporting from the EU. The export declaration must generally be filed by an exporter based in the EU, which a buyer from a third country usually is not. In addition, the seller needs proof of export for the VAT-exempt export delivery, which the seller does not have under EXW terms. If this proof is missing, VAT may be retroactively assessed. For exports, FCA is usually the better choice.
DDP and Import Sales Tax
Under DDP terms, the seller must declare the import in the destination country and pay the import sales tax. A foreign seller often cannot claim this tax as an input tax credit if they are not registered for sales tax in the destination country. The tax then becomes an actual cost. Before agreeing to a DDP arrangement, check who can act as the importer and how the import sales tax will be handled. Sometimes, DAP with customs clearance by the buyer is the cleaner solution. If in doubt, seek tax advice.
Inaccurate delivery address
"FCA Hannover" does not specify exactly where the handover will take place. Always provide an exact address or a specific location, such as a particular Warehouse or terminal.
Missing version
Without specifying “Incoterms 2020,” it is unclear which version applies. This leads to questions of interpretation in the event of a dispute.
Overlooked Insurance
Under CPT and CFR terms, the seller pays for transportation, but the buyer bears the risk during transit. Many buyers assume that the goods are insured. Clarify who is responsible for purchasing transportation insurance.
The article “Customs Documents Explained” details which documents are required depending on the clause and shipment. Customs officials also pay close attention to the terms of delivery listed on the commercial invoice, as these affect the customs value.
Frequently Asked Questions
How many Incoterms 2020 are there?
There are eleven clauses: seven that apply to all modes of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four that apply only to maritime and inland waterway transport (FAS, FOB, CFR, CIF).
What is the difference between DAP and DDP?
Under both terms, the seller delivers to the destination. Under DAP, the buyer is responsible for customs clearance, duties, and import sales tax; under DDP, the seller is responsible.
Which Incoterm is commonly used for truck shipments?
FCA and DAP are frequently used, depending on who organizes the transport. FOB and CIF are unsuitable for truck transport because they are tied to shipping.
What does DAT have to do with DPU?
In Incoterms 2020, DPU replaced the former DAT clause. The place of delivery no longer has to be a terminal; it can be any location where the seller can unload the goods.
Do you import goods into Germany and need help with customs clearance? Learn more about customs clearance services at FulFra, including our customs bonded warehouse in Lehrte.