Although the general principle is that the input VAT on purchases and acquisitions that go directly towards the making of an exempt supply is not deductible, there is a broad range of exempt transactions the input VAT associated with which is nevertheless deductible. In many cases, this is because VAT is collected in some other part of the chain. So, for example, an intra-EU supply may be exempt but the corresponding intra-EU acquisition will be taxed
These exemptions with the right to deduct are of eight different kinds:
Exemptions for intra-EU supplies
- What is an intra-EU supply?
- The exemptions: Case 1
- The right to deduct
- Exceptions to the exemption in Case 1
- Other exempt cross-border supplies (Cases 2, 3 and 4)
What is an intra-EU supply?
An intra-EU supply of goods is a transaction in which goods are dispatched or transported by (or on behalf of) the supplier or the customer from one EU country to a destination in another EU country.
The exemption
Case 1
Supplier in EU country 1 | Customer in EU country 2 |
---|---|
Business (taxable person) |
|
the transaction is exempt (Article 138(1) VAT Directive), although there are some exceptions
When an intra-EU supply takes place, the customer makes a corresponding intra‑EU acquisition. This is a transaction that is normally taxed.
The right to deduct
Although an intra-EU supply in these circumstances is normally exempt, the input VAT incurred on goods and services used for the purposes of making that supply may be deducted by the supplier (Article 169(b) VAT Directive). This is because the corresponding acquisition is taxed.
Example |
The exemption for intra-EU supplies is therefore an example of an exemption with the right to deduct.
Exceptions to the exemption in Case 1
The exemption for intra-EU supply does not apply to:
Case 1 Exception 1
Supplies by | Types of goods | Other conditions |
---|---|---|
Small businesses benefiting from an exemption or other relief under the special scheme for small enterprises (e.g. because their turnover is below the registration threshold) | Any goods | None |
Case 1 Exception 2
Supplies by | Types of goods | Other conditions |
---|---|---|
Businesses dealing in second-hand goods, works of art, collectors’ items or antiques or Auctioneers selling in public auctions | Second-hand goods, works of art, collectors’ items and antiques | Subject to the special scheme for these goods Subject to the special scheme for sales by public auction |
Case 1 Exception 3
Supplies by | Types of goods | Other conditions |
---|---|---|
Businesses dealing in second-hand means of transport | Second-hand goods, works of art, collectors’ items and antiques | Subject to the special scheme for these goods Subject to the special scheme for sales by public auction |
Any business | Second-hand means of transport (e.g. cars) | Subject to the transitional arrangements for these goods (See Articles 326-332 VAT Directive) |
Case 1 Exception 4
Type of transaction | Person involved | Conditions |
---|---|---|
Intra-EU acquisition of goods in EU country 1 | A business or a legal person (other than a business) acting as such | Where supply of those goods in EU country 1 would be exempt as supply of goods for international transport etc (under Article 148 VAT Directive: see Exemptions related to international transport) |
Case 1 Exception 5
Type of transaction | Person involved | Conditions |
---|---|---|
Intra-EU acquisition of goods in EU country 1 | A business or a legal person (other than a business) acting as such | Where supply of those goods in EU country 1 would be exempt as supply of goods:
(under Article VAT Directive: see Exemptions for international bodies, embassies etc) |
Case 1 Exception 6
Type of transaction | Person involved | Conditions |
---|---|---|
Intra-EU acquisition of goods(other than those referred to in Exception 5, new means of transport or goods subject to excise duty) in EU country 1 | A legal person (other than a business) acting as such | The acquisition is not subject to VAT because it falls below the intra-EU acquisitions threshold in EU country 1 (under Article 3(1)(b), 3(2)VAT Directive: see Taxable transactions: an intra-EU acquisition of goods) |
Case 1 Exception 7
Type of transaction | Person involved | Conditions |
---|---|---|
Intra-EU acquisition of goods in EU country 1 | A business whose only supplies are those in respect of which VAT is not deductible (e.g. an insurance company) | The acquisition is not subject to VAT because it falls below the intra-EU acquisitions threshold in EU country 1 (under Article 3(1)(b), 3(2)VAT Directive: see Taxable transactions: an intra-EU acquisition of goods) |
Other exemptions for intra-EU supplies:
Case 2
Goods | Supply involves | Destination |
---|---|---|
New means of transport in EU country 1 | Dispatch or transport by or on behalf of the vendor or the customer to: | A customer in EU country 2 who is: |
The transaction is exempt (Article 138(2)(a) VAT Directive)
Case 3
Goods | Supply involves | Destination |
---|---|---|
Goods subject to excise duty (e.g. cigarettes, alcoholic drinks etc) in EU country 1 | Dispatched or transported
| A customer in EU country 2 who is:
|
The transaction is exempt(Article 138(2)(b) VAT Directive)
Case 4
Goods | Supply involves | Condition |
---|---|---|
Any goods in EU country 1 | Transfer of the goods by a business to EU country 2 such that treated as a supply of goods | The supply would have been exempt under Cases 1, 2 or 3 as an intra-EU supply if made on behalf of another business |
The transaction is exempt (Article 138(2)(a) VAT Directive)
Exemptions for triangular transactions
Introduction
A triangular transaction is one in which a business established in EU country A supplies goods to a customer in EU country B, but the goods are shipped directly to the customer from a third EU country (C).
Example A business in the Germany receives an order for widgets from a customer in Poland. The widgets are made on behalf of the German supplier by a manufacturer in Latvia, who ships them directly to the Polish customer. |
Thus, there are two supplies and an intra-EU acquisition:
|
Under the normal rules, the German business would have to register for VAT in Poland where it makes the intra-EU acquisition and account for Polish VAT on that acquisition and on its supply to the Polish customer.
However, under the simplification rule in Article 141 VAT Directive, the intra-EU acquisition made by the German business is exempt (with the right of deduction), provided that the Polish customer is registered for VAT in Poland and is liable to account for the VAT on the supply to him. Since the acquisition is now exempt, the German business does not need to register for VAT in Poland in respect of that triangular transaction.
The general rule
More generally, an EU country (Country A) must take measures to ensure that VAT is not charged on an intra-EU acquisition made within its territory, where:
- A business that is not established in Country A but is registered for VAT purposes in another EU country (B) makes that acquisition in Country A;
- The acquisition is made for the purposes of the subsequent supply by that business of those goods in Country A;
- The goods are directly dispatched or transported from an EU country (C) other than Country B to the customer of that subsequent supply; and
- The customer is a business or a non-taxable legal entity (such as a public body), registered for VAT purposes in Country A, which has been designated as liable for payment of the VAT due on that subsequent supply.
Exemptions on exportation
What is exportation?
An exportation of goods takes place when goods are dispatched or transported from the territory of an EU country to a place outside the EU.
Why is it exempt?
It is a fundamental principle of VAT in the European Union that exports do not bear VAT, so that transactions that involve exportation (or are treated as doing so) are exempt but with the right to deduct, so that EU exporters are not penalised by having to reflect the VAT they have incurred in the price of their export goods.
What transactions are exempt under this rule?
The transactions that Member States EU countries must exempt are listed in Article 146 VAT Directive and are:
Case 1
Type of supply | What is done | Other conditions |
---|---|---|
Goods | Dispatched or transported to a destination outside the EU | By or on behalf of the vendor (Article 146(1)(a) VAT Directive) |
Case 2
Type of supply | What is done | Other conditions |
---|---|---|
Goods | Dispatched or transported from EU country 1 to a destination outside the EU | By or on behalf of a customer not established in EU country 1 (Article 146(1)(b) VAT Directive) |
Exception to Case 2
Type of goods | What is done | Includes also |
---|---|---|
Goods for equipping, fuelling or provisioning private means of transport (e.g. pleasure boats, private aircraft) | Transported by the customer himself | Transport used for non-business purposes by non-taxable legal entities (Article 146(1)(b) VAT Directive |
Case 3
Type of supply | Customer | Purpose |
---|---|---|
Goods exported outside the EU | Approved body (e.g. charity) | For use in the humanitarian, charitable or teaching activities of the approved body (Article 146(1)(c) VAT Directive) |
NB: the exemption may be given by a refund of VAT
Case 4
Type of supply | What is done | By |
---|---|---|
Work on movable property carried out in EU country 1 | Goods:
and then
| Dispatched or transported by:
(Article 146(1)(d) VAT Directive) |
Case 5
Type of supply | Other conditions | Excluding |
---|---|---|
Services, including transport and ancillary transactions | Directly connected with the exportation or importation of goods:
(all goods covered by Article 61 VAT Directive
(goods covered by Article 157(1)(a)VAT Directive) | Services exempted because:
|
Exemptions related to international transport
What is exempt?
EU countries must exempt certain supplies of goods and services connected with the provision of international transport services involving both goods and passengers.
The exemption in Article 148 VAT Directive is reserved for international air and sea transport. It provides a cash-flow advantage for that part of the transport sector which does not need to pre-finance the VAT.
It does not cover rail and road transport or domestic air and sea transport. Those parts of the transport sector cannot benefit from the exemption.
When does the exemption apply?
The exemption is limited to specific supplies that meet with certain conditions.
Sea transport
Case 1
Exempt transaction | Conditions for exemption |
---|---|
Supply, modification, repair, maintenance, chartering and hiring of a vessel | If used for
|
Example |
Case 2
Exempt transaction | Conditions for exemption |
---|---|
Supply of services other than those in Case 1 to a vessel | If supplied
(Article 148(d) VAT Directive) |
Example |
Case 3
Exempt transaction | Conditions for exemption |
---|---|
Supply of goods for the fuelling and provisioning of a vessel* | If supplied to
(Article 148(a) and (b) VAT Directive) |
Example |
Air transport
Case 4
Exempt transaction | Conditions for exemption |
---|---|
Supply, modification, repair, maintenance, chartering and hiring of an aircraft | If used by an airline whose main activity is international transport of fare-paying passengers |
Example |
Case 5
Exempt transaction | Conditions for exemption |
---|---|
Supply of services other than those in Case 4 to an aircraft | If supplied
|
Example |
Case 6
Exempt transaction | Conditions for exemption |
---|---|
Supply of goods for the fuelling and provisioning of an aircraft | If supplied to an aircraft qualifying under case 4 |
Example |
* This exemption can be limited in scope by EU countries (Article 150 VAT Directive).
Exemptions for international bodies, embassies etc
What is exempt?
Under international law or specific international conventions, accredited diplomatic representations and certain international bodies enjoy a degree of immunity from taxation, as does the EU itself.
For VAT purposes, this immunity is granted by exempting certain supplies of goods and services to these entities, while preserving the right to deduct for the supplier.
When does exemption apply?
The exemption is not granted automatically but rests in the hands of EU countries. The supply of goods and services is only exempt if an entity is accredited or recognised by its host EU country.
Once the entity is accredited or recognised, however, the EU countries concerned must grant the exemption but only within certain limits and under certain conditions.
Case 1
Entity eligible | Exemption |
---|---|
An embassy, Permanent Representation or consulate and their accredited staff |
|
Example |
Case 2
Entity eligible | Exemption |
---|---|
The EU and bodies set up by it |
|
Case 3
Eligible entity | Exemption |
---|---|
Other international bodies and their members |
|
Case 4
Eligible entity | Exemption |
---|---|
Armed forces of a NATO country and the civilian staff accompanying them |
|
Example |
Case 5
Eligible entity | Exemption |
---|---|
UK armed forces |
|
Example |
How to apply the exemption
For supplies exempt under these rules, the supplier generally does not need to charge VAT. Where the goods are not dispatched or transported out of the EU country in which the supply takes place, and in respect of services, the exemption may be granted by means of a refund of VAT. If an EU country opts for this method, the supplier has to charge VAT to the entity, which then needs to turn to the tax administration for a refund.
The supplier must verify that the entity is entitled to exemption and what are the limits and conditions for exemption. Where the entity is based in another EU country, the supplier needs to obtain a VAT exemption certificate from the entity (Article 51 and Annex II VAT Implementing Regulation).
Exemptions for customs warehousing etc.
What is exempt?
EU countries may exempt certain supplies of goods and other transactions relating to customs warehouses and similar arrangements for storing imported goods before their release into free circulation. Also included under this head are goods intended for drilling rigs etc.
These are all exemptions with the right to deduct.
For exemptions relating to tax warehouses, see Exemptions for tax warehouses .
Must these transactions be exempt?
No. EU countries do not have to exempt any of these transactions.
What is a customs warehouse?
A customs warehouse is a premises or any other location approved by and under the supervision of the customs authorities of an EU country where non-EU goods may be stored free of import duties, VAT, other charges and commercial policy measures
In line with the provisions of Union Customs Code.
What transactions may EU countries exempt?
The transactions that EU countries may exempt are:
Case 1
Transaction | Intended for | |
---|---|---|
Supply of goods |
and (where applicable)
|
Case 2
Transaction | Intended for placing in | |
---|---|---|
Supply of goods | A free zone or free warehouse |
Case 3
Transaction | Intended for placing under | |
---|---|---|
Supply of goods |
|
Case 4
Transaction | Intended for | For which purpose? |
---|---|---|
A: Supply of goods (Article 156(1)(d) VAT Directive) | Admission into territorial waters and then incorporated into drilling or production platforms |
of these platforms
|
B: Supply of goods (Article 156(1)(e) VAT Directive) | Admission into territorial waters |
|
Case 5
Transaction | Involving | |
---|---|---|
Supply of services (Article 159 VAT Directive) | Relating to goods in Cases 1 to 4 |
Case 6
Transaction | Carried out in | |
---|---|---|
Supply of goods or services | The locations specified in Cases 1 to 4 where one of the situations still applies in the EU country concerned |
Parity for tax warehouses
If EU countries choose to exempt Case 6 transactions carried out in customs warehouses, they must also provide exemption for the same transactions carried out in a tax warehouse or other similar warehouse where they involve the goods specified in Annex V to the VAT Directive.
(Article 160(2) VAT Directive)
Parity for intra-EU acquisitions
If EU countries choose to exempt any of the transactions in Cases 1 to 4, they must also make sure that intra-EU acquisitions of goods intended for placing in a customs warehouse, free zone or free warehouse etc are given the same treatment as a supply of goods carried out within their territory under the same conditions.
(Article 162 VAT Directive)
Preventing double taxation
Once goods are taken out of or cease to be covered by these customs arrangements, import VAT becomes payable. The EU country concerned must take measures guarding against double taxation.
(Article 163 VAT Directive)
Exemptions for tax warehouses etc
What is exempt?
EU countries may exempt certain supplies of goods and other transactions relating to tax warehouses and similar arrangements (referred to in the VAT Directive as ‘warehouses other than customs warehouses’) for storing imported goods before their release into free circulation.
These are all exemptions with the right to deduct.
For exemptions relating to customs warehouses, see Exemptions for customs warehousing etc.
Must these transactions be exempt?
No. EU countries do not have to exempt any of these transactions unless they exempt transactions relating to customs warehousing etc.
What is a tax warehouse?
A ‘tax warehouse’ is a place where goods subject to excise duty are produced, processed, held, received or dispatched under duty-suspension arrangements by an authorized warehouse keeper in the course of his business, subject to certain conditions laid down by the competent authorities of the Member State where the tax warehouse is located.
(Article 4(11) of Council Directive 2008/118/EC ).
In the case of other products, this means a place defined as such by the EU country concerned.
What transactions may EU countries exempt?
The transactions that Member States EU countries may exempt under this head are:
Case 1
Transaction | Intended for |
---|---|
A: Importation of goods (Article 157(1) VAT Directive) | Placing in tax warehouses or under similar arrangements |
Case 2
Transaction | Involving |
---|---|
Supply of services (Article 159 VAT Directive) | Relating to goods in Case 1B |
Case 3
Transaction | Carried out in |
---|---|
Supply of goods or services (Article 160(1)(b) VAT Directive) | The locations specified in Case 1B where the situations still applies in the EU country concerned |
Special rules for retail goods
Goods that are not subject to excise duty and are intended for supply at the retail stage may not normally be placed in tax and other warehouses that are not customs warehouses.
(Article 157(2) VAT Directive)
However, an exception is made to this rule in certain cases where the goods are intended for export. See Optional exemptions linked to export.
Goods subject to temporary importation or in transit
EU countries may choose to exempt the following:
Case 4
Type of transaction | Condition of goods |
---|---|
Supply of goods and related services | A: not in free circulation entering the EU:
or B: in free circulation entering the EU from a third territory forming part of the customs territory of the European Union |
Parity for intra-EU acquisitions
If EU countries choose to exempt any of the transactions in Cases 1 to 4, they must also make sure that intra-EU acquisitions of goods intended for placing in a tax warehouse or other similar warehouse are given the same treatment as a supply of goods carried out within their territory under the same conditions.
(Article 162 VAT Directive)
Optional exemptions linked to export
- Acquisitions and imports with a view to export
- Special rules for export retail goods
- Limited exemption for acquisitions and imports with a view to export
EU countries may choose to exempt certain intra-EU acquisitions and imports of goods where those goods are obtained for the purpose of exporting them, with or without prior processing.
The exemption covers the following transactions:
Case 1
Type of transaction | Goods intended for |
---|---|
A: Intra-EU acquisition of goods made by a business B: Imports for and supplies of goods to a business | Export from the EU as they are or after processing |
Case 2
Type of transaction | Linked to |
---|---|
Supply of services to a business | Its export business |
Limit to the exemption
The total amount of any Case 1 or Case 2 exemption must not exceed the value of exports carried out by the business concerned in the previous 12 months.
Condition for granting the exemption
Member States must consult the VAT Committee before introducing this exemption.
Mandatory further exemption
Where EU countries apply this exemption, they must also (again after consulting the VAT Committee) apply it to intra-EU supplies carried out by the business, but to a value not exceeding the previous 12 months’ intra-EU supplies carried out by it.
(Article 164 VAT Directive)
Special rules for export retail goods
Rule 1 Goods that are not subject to excise duty and are intended for supply at the retail stage may not normally be placed in tax and other warehouses that are not customs warehouses. |
However, an exception is made to Rule 1 in the following circumstances:
Exception 1
Goods intended for | In order to be | Conditional on |
---|---|---|
Tax-free shops inside airports or ports | Carried in the personal luggage of travellers:
to third territories or countries outside the EU | Being exempt as a supply:
|
Excluding: goods transported by the customer himself for equipping, fuelling and provisioning leisure boats and private aircraft or any other means of private transport. (Article 158(1)(a) VAT Directive)
Exception 2
Goods intended for | In order to be | Conditional on |
---|---|---|
Businesses | Supplied to travellers on board
in the course of a flight or sea crossing | The place of arrival must be situated outside the EU (Article 158(1)(b) VAT Directive) |
Exception 3
Goods intended for | In order to be | Conditional on |
---|---|---|
Businesses | Supplied to or for diplomatic representations or international bodies etc | That supply being an exempt supply (Article 158(1)(c) VAT Directive) |
All exemptions referred to in this page are exemptions with the right to deduct. They must not be confused with the mandatory exemption for export transactions (see Exemptions on exportation ).