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December 2021: EU Council reaches agreement on rules governing reduced VAT rates

On 7 December 2021, the EU Council reached an agreement on a proposal to update EU rules on VAT rates. The new rules reflect the member states current needs – aiming for more flexibility to apply reduced and zero VAT rates – and the policy objectives of the EU, such as fighting climate change, supporting digitalisation and protecting public health.

The main changes can be summarized as follows:

  • Member States may apply their reduced VAT rates to a maximum of 24 of the 33 headings
  • In addition, the Member States may subject 7 headings to a reduced VAT rate of less than 5% or an exemption with retention of VAT deduction (zero rate), insofar as it concerns headings 1, 2, 3, 4, 5, 6, 10quater or another section of Annex III for which the Member State already applied a reduced VAT rate of less than 5% or a zero rate on 01.01.2021 (with the exception of non-social housing)
  • Introducing new articles in the VAT Directive which shall be addressing possible future crises (i.e., pandemics, humanitarian crises or natural disasters) and Member States entitlement to respond swiftly to such exceptional circumstances.
  • No reduced VAT rate is possible for electronically supplied services, with the exception of headings 6, 7, 8 and 13 (certain publications, live streaming of events, webcasting of radio and television broadcasts, live streaming of sports events or sports lessons)
  • Abolition of the possibility to apply a reduced VAT rate to natural gas, electricity and district heating
  • Existing derogations that allowed some Member States to apply preferential rates for certain products shall be opened to all member states, under conditions.

Next steps:

The updated rules will be sent to the European Parliament for its consultation on the final text by March 2022. Once formally adopted by Member States, the legislation will come into force 20 days after its publication in the Official Journal of the European Union, allowing Member States to apply the new system as of that date.

The current intention is to implement the new rules as from January 1, 2025.