Reduced VAT rates: agreement reached by EU Finance ministers to update and modernise the current rules

Europe

The Council of the European Union reached a political agreement on 7th December 2021 for the adoption of a directive aiming at modernising and harmonising the rules for the application of reduced VAT rates.

The provisions of the draft directive proposed by the European Commission in 2018 have been substantially amended and the European Parliament will, therefore, be consulted again on the final text before its adoption, probably in spring 2022.

Until now, Member States may apply up to two reduced VAT rates, which in principle cannot be lower than 5%, to categories of goods and services of their choice among those listed in Annex III to the VAT Directive 2006/112/EC.

In addition to this general rule, Member States apply, based on various derogations:

  • reduced rates which comply with the 5% threshold to certain goods or services which are not included in the common list in Annex III;
  • and/or rates lower than the 5% threshold or even an exemption with a right to deduct (also called "zero rate");
  • as well as, for certain Member States, reduced rates of more than 12% (i.e. a rate lower than the standard rate, which cannot be less than 12%) for goods and services not eligible for reduced rates.

Under the draft directive agreed by the Member States, the goods and services covered by these derogations would be included in the list of categories of goods and services eligible for a reduced rate of VAT and made available to all countries to ensure equal treatment and avoid distortions of competition.

In addition, all Member States would henceforth be authorized to apply, in addition to the two reduced rates above 5%, one or two rates below 5% or equal to zero to some of the categories of goods and services listed in Annex III (goods and services considered to cover basic needs such as foodstuffs, water, medicines and hygiene or health products, transport as well as books, newspapers and periodicals, etc.)

On the other hand, Member States should limit the application of the various reduced rates to a maximum of:

  • 24 of the categories referred to in Annex III in the case of reduced rates of more than 5%;
  • 7 of the categories eligible for a rate of less than 5% (Member States which currently apply derogating rates to more than 7 categories will have until 1st January 2032 to be compliant).

In addition, the list of categories of goods or services eligible for a reduced rate would be updated to include products that protect public health, are good for the environment and support the digital transition. At the same time, the possibility for Member States to apply reduced rates and exemptions to goods and services deemed detrimental to the environment and to the EU's climate change objectives will be removed by 2030.

Most of these measures will come into force 20 days after the publication of the Directive.

More on this topic will follow soon.