EU VAT reform 2025: Amendments on VAT rates and place of supply rules

On 6 April 2022, Council Directive (EU) 2022/542 amending the EU VAT Directive was published in the Official Journal of the EU with substantial changes on place of supply rules and re-shaping the VAT rate system.

Place of supply for virtual entertainment

Electronically supplied services are part of our daily life, but the taxation thereof still can pose challenge to the regulators and the taxpayers alike. Regarding the specific place of supply rules for webcam sessions the European Court of Justice (ECJ) had to consider the L.W. Geelen case (C-568/17), where such online entertainment activity is ‘physically carried out’ for the purposes of VAT place of supply. The ECJ’s decision in 2019 - arguing that in such cases ‘physically carried out’ should mean the place where the supplier has established his business - highlighted that the EU Directive did not necessarily keep pace with technical developments and the place of supply for entertainment services is still based on offline logic whereas an increasing number of entertainment services are now provided in the online space.

As a consequence, Council Directive (EU) 2022/542 contains that, in order to ensure taxation in the Member State of consumption, it is necessary for all services that can be supplied to a customer by electronic means to be taxable at the place where the customer is established, has his permanent address or usually resides. The current amendment to the Directive contains accordingly that

• in B2B relations, to admission to the events with virtual attendance the taxation at the place of the event rule is not applicable to services; and
• in B2C relations, where the services and ancillary services relate to activities which are streamed or otherwise made virtually available, the place of supply is the place where the non-taxable customer is established.

Member States now have to implement the modifications until 31 December 2024.

New VAT rate regime

In accordance with the previous proposal, as part of the European Green Deal, Member States should be given the possibility to contribute to a climate-neutral and green economy by means of applying additional reduced rates on environmentally friendly supplies, while, at the same time, preparing the phasing out of the existing preferential treatment of environmentally harmful supplies. The amendment also aims to address possible future crises (i.e. pandemics, humanitarian crises or natural disasters) and Member States entitlement to respond swiftly to such exceptional circumstances.

Until now, Member States: (1)  should apply a standard rate of no less than 15% for all goods and services (no maximum rate is regulated), (2) may apply a reduced rate of no less than 5% to goods or services listed in Annex III of the VAT Directive, and (3) may apply a special rate even under 5% as derogation (for historical reasons and under certain conditions).

According to Council Directive (EU) 2022/542, all Member States would be entitled to apply, in addition to the two reduced rates above 5%, one or two rates below 5% or equal to zero (with right of deduction) to some of the categories of goods and services listed in Annex III in line with the goals of the amendment (environmental commitment, flexibility in critical situations); e.g. goods and services considered to cover basic needs, solar panels, medicines, pharmaceutical products, health and hygiene products. The amendment also aims gradual abolition of reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions, as well as chemical fertilizers and chemical pesticides.

Simultaneously, Member States should limit the application of the various reduced rates to a maximum of:

• 24 of the categories referred to in Annex III in the case of reduced rates of more than 5%;
• 7 of the categories eligible for a rate of less than 5% (Member States which currently apply derogating rates to more than 7 categories will have until 1st January 2032 to be compliant).

The corresponding rules are expected to come into force gradually, Member States have by 2025, 2030 and 2032 at the latest to have their legislation and applicable rates aligned with the new rules.