EU’s Freedom of Rates Reform Update: more choice and fragmentation
Luxembourg, Ireland and Italy account for most rate cuts
When the EU updated its VAT framework in 2022, one of the headline changes was the so-called “Freedom of Rates” reform.
For the first time, all 27 Member States were given far more leeway to apply reduced, super-reduced and zero rates on a wide range of goods and services, so long as they respected a few baseline rules in the VAT Directive. The idea was to promote fairness, give countries flexibility to respond to national priorities, and modernise a system that for decades had been stuck with a rigid list of what could and couldn’t benefit from lower VAT.
The European Commission has now published its first review of how Member States have actually used this freedom. The verdict? A fascinating mix of enthusiasm, concentration, and restraint.
States more frequently cuts rates
The Commission’s report shows that uptake has been anything but even. Out of a total of 64 derogations (special exceptions from the normal VAT rules):
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Another seven Member States — Malta, Cyprus, Greece, France, Portugal, Spain and Austria — share the rest.
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The remaining countries haven’t really tapped into the new powers at all.
So while the reform theoretically freed all 27 countries, in practice, it’s a small group that’s experimenting.
Where are the reduced rates going?
The housing and construction sector dominates, representing nearly 30% of all derogations. That includes everything from renovation works to social housing. After that, we see a spread across culture and tourism, public services, food and hospitality, and financial services — together making up about 40% of the picture.
There are also targeted measures in agriculture, animal welfare and broadcasting, but these are much smaller in scale.
Three types of derogations
The Commission breaks the derogations into three categories:
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Annex III goods and services (with super-reduced rates)
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Seven Member States have applied 33 derogations here, with Luxembourg alone accounting for 45%.
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Rates go as low as 2.1% in places like France, Cyprus, Spain and Greece.
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Ireland is unique in applying a zero rate on children’s clothing and maritime services.
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Goods and services outside Annex III (parking rates)
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Six Member States applied 28 derogations in this category.
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These must be set at a minimum of 12% to remain permanent, with rates ranging from 12% to 14%.
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Ireland again leads the way, accounting for half of all derogations. Luxembourg, Malta, Portugal, Austria and Greece split the rest.
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Non-social housing (Italy only)
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Italy uses a 10% VAT rate for various housing-related works.
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This is allowed to continue until at least 1 January 2042, so long as the rate doesn’t dip below 12% in the long run.
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States not opting to replicate others
An interesting quirk of the reform was the ability for Member States to adopt derogations that other countries were already applying as of January 2021. In theory, this gave every country a menu of tested reduced rates to choose from.
In practice? Almost no one used it. Only Cyprus, Greece and Malta opted into a total of nine derogations from six other Member States — split fairly evenly between super-reduced and parking rates. The Commission suggests that, often, the conditions attached just didn’t suit national needs.
Narrow adoption
The “Freedom of Rates” reform clearly widened the playing field, but the actual use is highly uneven. A handful of countries (Luxembourg, Ireland, Italy) are enthusiastically pushing the boundaries, while many others have stayed cautious or simply chosen the status quo.
From a policy perspective, the report highlight three features:
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Concentration of benefits: most of the reductions are happening in housing, construction and a few consumer-facing sectors.
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Revenue and fairness trade-offs: super-reduced and zero rates can be politically popular, but they’re costly. Not every Member State feels able to take on the fiscal impact.
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Fragmentation risk: with 27 countries free to diverge, the EU VAT landscape is becoming more complex — not less. Businesses trading cross-border need to keep an even closer eye on local rate rules.
