Skip links

EU reduced VAT rate freedoms agreed for 2025

EU Finance Ministers agree reduced VAT rate freedoms at December ECOFIN; January 2025 implementation

A new proposal for more use of reduced VAT rates – including below 5% for the first time (in addition to existing 0% rate option) – has been agreed at the 7th of December Ecofin on 7th December – meeting forum for EU member states’ Ministers of Finance. This is led by Slovenia, the current rotating President of the Council of the European Union.

The EU Parliament will now have to approve this measure, which is likely this summer.

For regular free updates register for our global VAT and GST news.

4 main elements to new reduced VAT rates compromise

  1. The measure contains freedoms for member states to apply a new reduced rate below 5% to up to 7 of a list of 24 categories of products and services. They could then also apply reduced rates of 5% or above to the remaining 24 categories of the same list.  This covers basic needs, namely those related to the supply of foodstuffs, water, medicines, pharmaceutical products, health and hygiene products, transport of persons and some cultural items (books, newspapers and periodicals), or among other supplies of goods and services listed in Annex III.  Any member state with a current special dispensation for a reduced rate below the existing 5% level would have to include those in their new limit of 7 categories.
  2. Member states would still have to retain a minimum effective 12% VAT rate across a weighted range of taxable supplies for the balance of other taxable supplies.  This is designed to prevent tax competition and distortion to the EU Single Market.
  3. Crisis mechanism for rapid cuts in VAT rates in the case of future exceptional circumstances, like pandemics, humanitarian crises or natural disasters.
  4. A sunset clause for 2030 for reduced rates on carbon-intensive supplies, which will likely now be matched to the European Green Deal. This would include chemical fertilisers and chemical pesticides for 2032 having a varied timetable to support small farmers.

EU Parliament highlights costs of reduced rates

A recent EU Parliamentary Research Service study highlighted that the use of reduced VAT rates by member states raises the compliance costs for businesses. In states with no or only limited reduced rates, compliance costs are estimated at this €600 per businesses. However, countries such as Italy, Spain, Poland and Czechia, with large numbers of reduced rates and goods or services allocated to them, costs rise to over €6,000. EU VAT rates could potentially be cut to 15% if all reduced rates were withdrawn (see below).

Failure in June 2021 compromise

During the Portuguese Presidency, the one before Slovenia there was a proposal to include a ‘standstill clause’ that would allow all Member States to continue to apply their current VAT derogations on reduced, zero and super-reduced rates, save those harmful to the environment. However, Germany, France and Sweden blocked it over fear of a profligacy of varying rates.

Most Member States supported Portugal’s proposal of phasing out environmentally harmful goods from reduced rates, including pesticides, chemical fertilisers, firewood and natural gas.

EU VAT reforms

Reform (click for details) Update
2025 VAT registration thresholds equivalence foreign businesses On track
Further reduced VAT rate setting freedoms On track
2024 Payment providers' seller transaction reporting and bookkeeping obligations On track
Live transactional reporting and e-invoice In consultation
2023 DAC 7 - marketplace reporting obligations on sellers' activities On track
2022 EU definitive VAT system Members not agreed on format
VAT in the Digital Age proposals On track for Q3 2022
2021 Financial Services VAT exemption reform proposals Consultation stage completed on track
Proposal for VAT treatment of the platform economy Roadmap due in Autumn
One-Stop-Shop (OSS) single EU VAT return In effect
Ending €22 import VAT exemption; new IOSS return In effect
Marketplace deemed supplier EU VAT reforms In effect
2020 EU four Quick Fixes for VAT In effect
Tax authorities anti-VAT fraud cooperation In effect
Tax Package - 25 VAT and other tax reforms roadmap See 'VAT in the Digital Age' and others
2019 Simplification of e-services compliance In effect
Single and multi-use vouchers In effect
2018 Lower e-book and publications VAT rates In effect, although not all EU states have adopted the option
EU Generalised Domestic Reverse Charge VAT Mechanism In effect, although no country has adopted this voluntary option
2015 B2C electronic services VAT reforms - MOSS return In effect

Leave a comment