Since the outcome of the ECOFIN Council (EU finance ministers) debate on the 2018 Commission’s proposal to review VAT rates, intense discussions between Member States have continued. The Slovenian Presidency of the Council worked on a text accommodating the different views expressed by the Member States and a compromise has been reached.

New rates

• Member States will now have the possibility to apply two reduced rates as low as 5% to goods and services in up to 24 categories included in an updated Annex III of the VAT Directive.
• Member States may also now apply one reduced rate lower than 5% and one exemption (‘zero rate’) with the right to deduct input VAT to a maximum of 7 categories on the list considered to cover basic needs
  • e.g. foodstuffs, medicines, pharmaceutical products, health and hygiene products, transport of persons and some cultural items (books, newspapers and periodicals). NB: These two rates only apply to the following points of Annex III:
    • points (1), (2), (3), (4), (5), (6) and (10c):
    • any other point of Annex III falling under the options provided for in Article 105a(1)
• Member States that were applying such lower rates to more than 7 points of supplies of goods and services listed in Annex III on 1 January 2021 should limit the application of reduced rates which are lower than the minimum of 5 % and of exemptions with the right to deduct input VAT to 7 points of Annex III by 1 January 2032 or by the time of adoption of the definitive arrangements, whichever is the earlier. The above amendments do not affect the arrangements for derogations concerning the application of the exemptions without the right to deduct VAT set out in Annex X to Directive 2006/112/EC

NB: Member States will continue to apply a standard rate of VAT above 15%.

List of goods and services that can benefit from reduced rates

• Member States have agreed to widen the current list of goods and services (Annex III of the VAT Directive) that can benefit from reduced VAT rates. In particular, the list has been updated to include:
• Digital services that previously did not qualify for reduced rates such as internet access and livestreaming of cultural and sports events.
• Goods which protect public health and that have shown to be crucial tools in the fight against COVID-19 and that could prove useful in future crises, such as personal protective equipment, masks and certain medical equipment; as well as more items considered as essential aids for the disabled.
• Certain items such as bicycles, green heating systems and solar panels installed in private homes and public buildings, which can have a positive impact on the EU’s climate change priorities
  Diverse products and services deemed appropriate and useful by Member States, which are driven by the general interest of public policy objectives.

NB: The updated list has been compiled according to a number of general principles to which Member States will need to adhere going forward. These include: equal treatment between Member States, alignment of the list with EU priorities in support of the green and digital transitions, and public health protection, and the exclusion of certain goods and services for which reduced rates are not considered appropriate.

Existing derogations and exemptions:

• Existing derogations for Member States that are aligned with the general principles on VAT rates can be kept provided they are in line with the EU Green Deal (environmental objectives) and pursue public policy objectives, but an ‘equal treatment’ clause makes them available for other Member States who wish to use them.
• ‘Super-reduced rates’ which allow stand-alone reduced rates below 5% in some Member States as well as ‘parking rates’ which allow reduced rates no more than 3 percentage points lower than the standard rate for certain specific products may also be kept under the same conditions.

Goods and services excluded from reduced rates

• Reduced rates for goods and services that were permissible under the previous system but are deemed out of step with the European Green Deal will have to be ended in those Member States that apply them by 2030 at the latest.
• A number of items that can have a detrimental effect on the environment and, as a consequence, on climate change mitigation action, have been explicitly excluded from Annex III.
• Other existing derogations that are not justified by public policy objectives will need to be ended by 2032.

Next steps:

Member States have unanimously agreed on this reform. The updated rules will now be sent to the European Parliament for its consultation on the final text by March 2022. Member States will apply the new measures from 1 January 2025.