Reduced VAT rate rules updated

On 7 December 2021, the EU Council reached an agreement on a proposal for updating the EU rules on reduced VAT rates. The new rules reflect the current needs of EU member states and the EU’s policy objectives, which have changed since the nearly 30-year old current rules were introduced. The changes focus on sustainability and digitalization and will level the playing field between EU member states and give them more flexibility and discretion to apply reduced and zero rates. The rules also phase out preferential treatment for goods that harm the environment.

Updated VAT rates

Current rules provide for a standard VAT rate of least 15% that applies to most supplies of goods and services. However, EU member states may apply one or two reduced VAT rates of at least 5% to products and services listed in Annex III of the EU VAT Directive. There also are “special rates,” whereby member states are permitted to depart from the normal rules due to transitional measures or derogations or they may apply a reduced VAT rate to products and/or services that are not listed in Annex III. The derogations and exemptions have resulted in a veritable patchwork of rates across the EU and unequal treatment between the member states that are permitted to apply special rates and those that are not.

The agreed upon rules are designed to eliminate some of the reduced rates and ensure that all EU member states are treated equally. Under the revised rules, member states will continue to apply a standard rate of VAT of at least 15%, and certain reduced/super reduced rates that historically were available only to some member states generally will be available to all member states. Member states may continue to apply one or two reduced VAT rates of at least 5% to goods and services in up to 24 categories listed in an updated Annex III. They also will be allowed to apply one reduced rate of less than 5% and a zero rate to up to seven categories of products and services listed in the Annex.

Member states that were applying reduced, super reduced or zero rates on items other than those mentioned above on 1 January 2021 may continue to do so in certain situations. However, those member states must provide information about the reduced/zero rates to the VAT Committee, after which other EU member states also will be allowed to apply reduced, super reduced or zero rates to the same products and services if certain requirements are met. EU member states that applied reduced VAT rates lower than 12% or zero rates on 1 January 2021 to products or services that are not listed in Annex III (and that are outside the scope of the transitional arrangements provided by the agreed proposal) may continue to apply those reduced or zero rates until 1 January 2032 or until a definitive VAT system for international trade takes effect, whichever is earlier.

Sustainability

An important concept in the new rules concerns sustainability. The idea is that products and services that contribute to the achievement of environmental or sustainability objectives should be taxed at a lower rate to encourage their purchase and use; conversely, products that pollute the environment and do not contribute to these objectives should not benefit from a reduced rate. The Council agreed to phase out reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions. Thus, it will not be possible to apply a reduced VAT rate (or a zero rate) to fossil fuels, peat and firewood as from 1 January 2030, and as from 1 January 2032, it will not be possible to apply a reduced rate (or zero rate) to chemical pesticides and fertilizers. However, a reduced VAT rate or zero rate may be applied to the supply of solar panels and their installation on private homes and public and other buildings used for activities of general interest.

Digitalization

As a result of the digital transformation of the economy, certain products provided by digital means are taxed differently than products provided by physical means. For example, in the case of theatre performances, EU member states currently may not apply a reduced VAT rate to online performances, whereas a reduced rate can be applied to live performances. The new rules will allow member states to apply the reduced rate to the live streaming of events (e.g., shows, theatre performances, circus performances and concerts), webcasting of radio or television programs via the internet, streaming of sporting events and online sports lessons, and the provision of internet access. (The option to apply the reduced VAT rate to books, magazines and newspapers already has been extended to digital versions.)

The rules governing the place of supply of services will be amended in certain circumstances to ensure taxation in the country of consumption.

The reduced rate on streaming events and online sports classes and the revised place of supply rules will apply as from 1 January 2025.

Next steps

The agreed upon rules now will be sent to the European Parliament for consultation on a final text by March 2022, and once the member states formally adopt the proposal, the legislation will become effective 20 days after publication in the EU official journal.

Madeleine Merkx
madeleine.merkx@bdo.nl