Reform of reduced VAT rates in EU

The current EU rules on VAT rates for goods and services were set almost 30 years ago and need to be modernised to correspond to developments in EU legislation. In 2018, the European Commission therefore proposed a reform of VAT rates, and an agreement was reached by the EU member states’ finance ministers at the end of 2021.

The proposed changes concern an update of Annex III to the VAT Directive, which sets out a list of goods and services on which the reduced rate can be applied. Goods and services serving to protect public health and goods and services that are environmentally friendly or facilitate digitisation are proposed to be added to the list.

Once the new measure enters into force, it will also be possible for member states to exempt selected goods and services for essential consumption from VAT, or to introduce a super-reduced rate of up to five percent on these items. In the Czech Republic, such a rate could be applied, among other things, to electricity and gas supplies.

Exceptions from the application of reduced rates on goods and services that are not in line with the EU’s climate change targets are to be cancelled by the end of 2030.

Historic exceptions granted only to some member states are to be applicable in all member states to meet the principle of equal treatment / level playing field. However, all existing derogations will have to be abolished by the end of 2032, unless justified as serving the common good.

The updated rules will now be discussed by the European Parliament, with a view to consulting on the final text by March 2022 at the latest. Once formally adopted by member states, the rules will enter into force 20 days after their publication in the Official Journal of the European Union.

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