Reduced VAT rates: a reform that increases the flexibility of EU Member States

Pursuant to Article 100 of the VAT Directive calling on the European Council to review the scope of reduced VAT rates, the European Commission published on 18 January 2018 a proposal for a Council Directive amending the Directive 2006/112/EC (the « VAT Directive »). 

The proposal on reduced VAT rates is one of the measures of the VAT Action Plan aiming to create a robust single European VAT area. This reform increases the flexibility of Member States in setting VAT rates. Indeed, in addition to the two reduced rates of 5% minimum and the exemption with deductibility of the VAT paid at the preceding stage currently allowed as per Article 99 VAT Directive, the new measures will enable Member States to apply another rate between 0% and 5%. 

Besides, the Annex III of the said Directive currently listing specified goods and services benefitting from reduced rates no lower than 5% will be withdrawn and replaced by a “negative list” of goods and services to which reduced rates cannot apply. Member States will have to ensure that reduced VAT rates are foreseen for the benefit of the final consumer pursuing a general interest goal. 

The Member States would also need to ensure that the average reduced VAT rate applying to those products always exceeds 12%. 

In Luxembourg, the standard VAT rate is of 17%, while 8% (reduced rate) and 14% (intermediate rate) apply to specific goods and services listed below. The Luxembourg VAT Law also foresees a super-reduced rate of 3%. 

Should the new harmonised rules enter into force a legislative proposal will follow in order to adapt the Annex III of the VAT Directive accordingly. However, these new measures should not impact the current provisions of the Luxembourg VAT Law.

As a reminder, you can find here a document from the European commission with all VAT rates currently applied in the EU Member States.