The EU VAT rate reform

On 7 December 2021, after several years of discussions, the Economic and Financial Affairs Council (ECOFIN) of the European Union's Economic and Finance Ministers reached an agreement on the amendment of the EU's Directive on the common system of value added tax ("VAT Directive").

The new rules will ensure equal treatment and more flexibility for Member States to apply reduced or zero VAT rates. Reduced rates will be extended to environmentally friendly goods and services (e.g. solar panels, high-efficiency, low-emission heating systems, conventional and electric bicycles and waste recycling services), digital services and children's clothing. In addition, preferential treatment for environmentally harmful goods will be phased out.

The current rule, which allows Member States to apply up to two reduced VAT rates, the lowest of which should be at least 5 per cent, will continue to apply (Hungary currently has two reduced rates: 5 per cent and 18 per cent). However, these reduced VAT rates will only apply to a maximum of 24 points listed in Annex III of the VAT Directive, which contains the goods and services subject to reduced rates.

Besides, the VAT Directive will be amended to allow for an additional tax rate of less than 5 per cent, but even 0 per cent, which will also give the right to an input VAT deduction. This extra-low rate will apply to up to 7 basic necessities points in Annex III, namely foodstuffs, water, pharmaceuticals, pharmaceutical products, sanitary and hygiene products, passenger transport services and certain cultural necessities.

By 1 January 2030, reduced VAT rates or exemptions for fossil fuels and other products with a similar impact on greenhouse gas emissions will be phased out.

Reduced rates and exemptions for chemical fertilisers and plant protection products will be phased out by 1 January 2032 to give small farmers more time to adapt.

Once the European Parliament has issued its opinion on the proposal, the European Council will formally adopt the Directive. Member States will then have to transpose the above provisions into their national law, so that they can apply from 1 January 2025. 

21 December, 2021

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This newsletter provides general information and does not constitute tax advice