EU Finance Ministers agree on update of VAT rates

On 7 December, the EU finance ministers (unanimously) agreed to update the current rules governing VAT rates for goods and services. The updated rules will now be sent to the European Parliament for its consultation on the final text by March 2022. Member States will have until 31 December 2024 to transpose the (amending) Directive and the new rules will hence in principle enter into force on 1 January 2025.

The common rules on VAT rates already date back from 1992 and are now outdated and inflexible. Under the current regime, Member States can only apply reduced rates in a limited number of sectors and products. In addition, some reduced rates are allowed which can have potentially detrimental effect on the environment. According to the Commission, the choices in the past were mainly driven by the concern that a lot of flexibility for the Member State in determining the VAT rates would distort competition as the VAT system was back then largely based on the origin principle (i.e. VAT is due in the Member State where the seller/service provider is located). As the Commission’s intention is now to shift to a definitive VAT system for cross-border B2B trade in goods that would be based on the taxation in the Member State of destination, this concern is no longer relevant. Hence, the new rules aim to provide Member States with more flexibility to determine its own VAT rates. In addition, the new VAT rates regime should also be in line with other EU policy priorities such as the green and digital transitions and the protection of public health.

Under the new rules, the minimum standard VAT rate will remain at least 15%. Member States may in principle apply (A) a maximum of two reduced rates of a minimum of 5%, (B) one reduced rate lower than the minimum of 5% and (C) an exemption with the right to deduct input VAT (i.e. a zero rate). 

The goods and services eligible for the reduced rates with a minimum of 5% will be limited to a maximum of 24 items listed in Annex III to Directive 2006/112/EC, whereas those eligible for a reduced rate of lower than 5% and the zero rate will be limited to 7 items listed in Annex III. The latter chosen among the goods and services considered to cover basic needs, namely those related to the supply of foodstuffs, water, medicines, pharmaceutical products, health and hygiene products, transport of persons and some cultural items (books, newspapers and periodicals). Some additions to the list of Annex III are, for example, (i) internet access, (ii) livestreaming of cultural and sports events, (iii) bicycles, green heating systems and solar panels, (iv) personal protective equipment, masks and certain medical equipment (to protect public health, i.e. crucial tools in the fight against COVID-19) and (v) legal services under a legal aid scheme. 

Existing derogations for Member States (e.g. with respect to rates not lower than 12%) that are aligned with the general principles on VAT rates can be maintained provided they are in line with the EU Green Deal and pursue public policy objectives, but an “equal treatment” clause makes them available for other Member States as well. Member States will need to end any derogations that are not in line with the EU's Green Deal by 2030 (e.g. with respect to fossil fuels).

Guido De Wit - Partner / Brussels
Sören Vandeweyer - Managing Associate / Brussels