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Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

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Proposal to amend rules on VAT Directive rates

On 7 December 2021, the EU Council agreed on a proposal to update rules on value added tax (VAT) rates. This proposal builds on the 2016 VAT Action Plan - Towards a single EU VAT area which aims to put in place a “definitive VAT system” based on the principle of taxation in the country of destination of the goods supplied.

The current rules on VAT rates were designed in the 1990s based on the origin principle that VAT is paid in the country where the goods or services originate (i.e. where the supplier is located) and, therefore, so as to avoid unfair competition, the VAT rates had to be as similar as possible in all Member States. Under the new system, where the goods and services are taxed at destination, suppliers derive no significant benefit from being established in a lower-rate Member State, so the rules on VAT rates have limited potential to disrupt the functioning of the single market.

The proposal modifies the rules for establishing VAT rates across the EU, pursuing more flexibility for the Member States, while respecting the principle of equal treatment. At present, the VAT Directive sets a default standard VAT rate of at least 15% to be applied to all taxable goods and services. The proposal aims to allow all Member States to apply the following, in addition to the general standard VAT rate:

  • two reduced rates no lower than 5% to up to 24 categories of goods and services; and
  • a reduced rate of less than 5%, and an exemption with the right to deduct input VAT applicable to up to seven categories of goods and services considered to cover basic needs.

All Member States will further be able to apply rates no lower than 12% to specific goods and services that are already applied in some Member States as temporary derogations, on the same terms.

The proposal also envisages that the goods and services eligible for reduced rates must benefit the final consumer and must pursue objectives of general interest. In this context, the proposal updates and modernises the list of goods and services eligible for reduced rates in order to reflect the increasing digitalisation of the economy (e.g. allowing reduced rates for internet-access services and live-streamed activities where a reduced rate would have been applicable if the activity had been attended in person, and providing that the place of supply for services related to activities which are streamed or otherwise made virtually available is in the Member State of consumption).

Important EU policies such as the EU4Health Programme and the European Green Deal are also reflected in the proposal. New goods and services considered to be essential for the supply of health care (e.g. health protection masks and disability aids) or environmentally-friendly (e.g. solar panels and “green” heating systems) are included amongst the goods eligible for reduced rates.

Finally, to enable Member States to rapidly adapt to exceptional circumstances, such as pandemics, the proposal allows Member States to apply an exemption on goods imported for the benefit of disaster victims, as well as to grant an exemption with deductibility of input VAT in respect of intra-EU and domestic supplies of those goods and services, on the same terms.

Once the European Parliament issues its opinion on the proposal, the EU Council may formally adopt the amendments to the VAT Directive, but the real impact will depend on the options eventually exercised by each of the Member States.


uriamenendez, vat, digital