2025 Changes To EU Reduced VAT Rates System

From the 1st of January 2025 the so-called ‘VAT Rates Directive’ (Council Directive (EU) 2022/542 of 5 April 2022) will introduce significant changes to the existing EU system on the operation by the EU Member States of their national reduced VAT rates systems.

The new rules have been long-awaited by some EU Member States, in particular the ‘newest’ ones who joined the EU from 2004 and who in the past – under the rules in force up to the end of 2024 – were denied the right of applying the reduced or zero rate to certain categories of goods (e.g. children’s clothing), to which at the same time some of the ‘older’ members of the EU were allowed to apply a reduced/super-reduced or even zero rate by virtue of certain ‘pre-accession derogations’.

The new measures are finally better harmonizing these rules, ensuring that all Member States will be treated equally and be given the same possibilities of the application of reduced VAT rates to the same catalogue of goods and services. The new provisions will furthermore allow for more categories of goods and services to fall under a reduced VAT rating and grant Member States greater freedom and flexibility on shaping their national reduced VAT rates systems.

Principles and features of the new EU reduced VAT rates system from 2025

·???????? Member States can operate up to two reduced VAT rates of not less than 5% (no change to the current rules);

·???????? Reduced rates of not less than 5% can be applied only to a maximum of 24 (out of 29) categories of goods and services listed in Annex III to the EU VAT Directive (currently there are only 19 categories to which reduced rates may be applied and EU countries can apply reduced rates to all of them);

·???????? Introduction of a possibility for all Member States to additionally apply one extra reduced rate of less than 5% and an exemption with the right to deduct input VAT (hereinafter ‘zero-rate’);

·???????? The lower than 5% rate as well as the zero rate can only be applied to a maximum of 7 specific categories of goods and services of Annex III, which are considered as covering basic needs like foodstuff, water, medicines, pharmaceutical products, health and hygiene products, transport of persons and certain cultural items (books, newspapers, periodicals) – there are certain exceptions to this rule though;

·???????? Currently, reduced VAT rates cannot apply to electronically supplied services (except for e-books, e-newspapers, e-periodicals) – from 2025 a reduced or zero rate still cannot be applied to most of the electronically supplied services, however the list of exceptions to this rule will be expanded by the access to the live-streaming of certain cultural and sporting events, the reception of radio and TV broadcasting services and webcasting of such programmes, the internet access services provided as part of digitalisation policy defined by Member States, in addition to the supplies of e-books, e-newspapers, e-periodicals;

·???????? Extension of the list of goods and services included in Annex III to EU VAT Directive, to which reduced rates may be applied, from the current 21 categories to 29 categories. The new categories include for instance:

-????????? Children’s clothing and footwear;

-????????? Children’s car seats;

-????????? Supply and installation of solar panels;

-????????? Supply of electricity, district heating or cooling;

-????????? Letting of immovable property for residential use;

-????????? Live equines and the related services;

-????????? Live plants and other floricultural products;

-????????? Supply of bicycles, incl. electric ones, rental and repairing of such bicycles;

-????????? Certain legal services;

-????????? Tools and equipment for use in rescue or first aid services when supplied to public bodies or non-profit organizations active in civil or community protection;

-????????? Services related to the operation of lightships, lighthouses or other navigational aids and life-saving services.

·???????? Broadening the scope of the existing categories of goods and services, to which reduced rates may apply, e.g.

-????????? The existing category of the admission of certain cultural events (e.g. shows, theatres, circuses, fairs) is broadened to include also the access to live-streaming of those events;

-????????? The existing category of the reception of radio and TV broadcasting services is broadened to now also include webcasting of such programmes as well as to the internet access services provided as part of digitalisation policy defined by Member States;

-????????? The existing category of the admission to sporting events is broadened to include the access to the live-streaming of those events.

·???????? Clarification that Member States can use not only the Combined Nomenclature but also the statistical classification of products by activity (which has been historically used by some Member States), or both, to establish the precise coverage of the application of a reduced or zero rate within a particular category of Annex III.

·???????? Lastly, Member States that were applying reduced or zero rates based on derogations on 1 January 2021 should communicate to the VAT Committee the main provisions and conditions of those derogations in their national law applied on 1 January 2021 to enable equal access to those derogations for all Member States.

As a result of the introduction of the new rules governing the EU reduced VAT rates application system from 2025, it is expected that a lot of EU Member States will take this opportunity and will revisit their existing national reduced VAT rating structures. Therefore watch this space! Essentia will keep you posted on the relevant developments announced by the Member States in this field.

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