EU VAT Derogations

A new report by the European Commission shows significant disparities in how EU Member States apply VAT rate derogations, raising questions about transparency and fairness in the bloc’s tax system. The analysis reveals that just three countries—Luxembourg, Ireland, and Italy—account for 75% of the 64 derogations currently in force, while seven others (Malta, Cyprus, Greece, France, Portugal, Spain, and Austria) cover the remaining 25%.

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Sector-Specific Focus

The housing and construction sector dominates derogations, making up nearly 30% of all exceptions, followed by culture and tourism, public services, food and hospitality, and financial services (collectively 40%). Notably, super-reduced and parking rates account for over 90% of derogations, with 31 and 28 exceptions, respectively.

Country-Specific Trends

• Luxembourg leads with 45% of derogations under Annex III (goods and services like books and medicines).
• Ireland is the only country to apply zero VAT rates to children’s clothing and maritime services, while also leading in derogations for non-Annex III goods (50% of the 28 exceptions).
• Italy holds a monopoly on non-social housing derogations, using a 10% VAT rate for construction and renovation projects.

Low Cross-Border Adoption

Despite the availability of derogations from other Member States since 2021, their uptake has been minimal. Only Cyprus, Greece, and Malta opted into nine derogations, citing mismatched conditions.

The report underscores concern about fragmentation in VAT policy, leading to calls for harmonisation to ensure a level playing field. 

Background

Under the EU’s VAT Directive, Member States are granted flexibility to set VAT rates and apply them to specific goods and services within a structured framework. The standard rate must be at least 15%, while reduced rates—up to two at a minimum of 5%—can be applied to supplies in up to 24 categories listed in Annex III (e.g., books, medicines). Following the 2022 reform (Council Directive (EU) 2022/542), Member States may also apply a super-reduced rate below 5% or a zero rate for up to seven categories of essential goods and services, such as food and pharmaceuticals. Additionally, derogations allow certain Member States to apply reduced "parking rates" (minimum 12%) to goods and services outside Annex III, with transitional provisions for phasing out preferential treatment for environmentally harmful supplies. 

More information

Read the full report

VAT Rates