European Union: The EU Council Approves Comprehensive Revamp of VAT Rates

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European Union’s Official Gazette released EU Council Directive No. 2022/542 of 5 April 2022, introducing reforms to value-added tax (VAT) rates for all member states. The majority of country-specific rates (i.e., derogations) will be made available to all member states. The new guidelines allow for broader usage of reduced rates, including the use of zero rates for essential items such as  


  • food,  
  • medications, and  
  • medical products.  


The Directive allows member states to apply up to four VAT rates:  


a. regular,  

b. reduced, and  

c. super-reduced (i.e., a rate that is lower than 5%)  

d. zero-rated.  


Key Changes 


  • Reduced VAT rate lower than 5% on specified goods and services 
  • Reduced rates and exemptions for fossil fuels until 1 January 2030 
  • Reduced rates and exemptions for chemical pesticides and fertilizers until 1 January 2032 
  • Update on the list of goods and services applicable for reduced VAT rates 




One could conclude member states’ policy objectives are now more achievable. Increasing the flexibility in the use of reduced rates will inevitably undermine member states’ resistance to economic pressure. This is negative news for national budgets, especially when member states are dealing with the pandemic’s effects.  


The reform also has a negative impact on management costs. Companies doing cross-border activities will face additional costs as a result of dealing with different rates, and smaller companies will have a difficult time expanding overseas. Reduced rates will be multiplied and may spark more tax related litigations, since reduced rates are the root of many VAT-related cases pending before national courts and the CJEU. 


Nevertheless, opportunities may emerge, specifically in the healthcare sector. The new legislation reduces the VAT burden on essential products in the VAT-exempt sector. The pandemic has proved the significance of a robust healthcare system. Member states may now target a VAT rate reduction for the industry. This should be reviewed before the pandemic memory fades away. 



Source: eur-lex.europa.eu 


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