A broad range of goods and services that are exempt from VAT fall under the category of ‘exemptions with the right to deduct’. In many cases, this is because VAT is collected in some other part of the chain. For example, an intra-EU supply may be exempt, but the corresponding intra-EU acquisition will be taxed.
The right to deduct refers to a taxable person’s right to claim the input VAT they paid on goods and services from tax authorities. VAT is deducted by subtracting the deductible amount from the VAT payable in the regular VAT return submitted to the tax authorities.
There are eight categories of exemptions with the right to deduct:
- Exemptions for intra-EU supplies
- Exemptions for triangular transactions
- Exemptions on exportation
- Exemptions related to international transport
- Exemptions for international bodies, embassies etc.
- Exemptions for customs warehousing etc.
- Exemptions for tax warehouses etc.
- Optional exemptions linked to export
Exemptions for intra-EU supplies
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.
Although an intra-EU supply in these circumstances is normally exempt, the input VAT incurred on goods and services used for making that supply may be deducted by the supplier (Article 169(b) VAT Directive). This is because the corresponding acquisition is taxed.
Case 1: Intra-EU supplies
| Supplier in EU country 1 | Customer in EU country 2 |
|---|---|
| Business (taxable person) |
|
Exceptions to Case 1
| Exceptions | Types of goods | Other conditions |
|---|---|---|
| Exception 1: supplies by 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 |
Exception 2: supplies by businesses dealing in second-hand goods, works of art, collectors’ items or antiques or Auctioneers selling in public auctions,
or 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 |
| Exception 3: any business | Second-hand means of transport (e.g. cars) | Subject to the transitional arrangements for these goods (Articles 326-332 VAT Directive) |
| Exceptions | Person involved | Conditions |
|---|---|---|
| Exception 4: 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 (Article 148 VAT Directive: Exemptions related to international transport) |
| Exception 5: 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 diplomatic and consular arrangements or to an international body etc (Article VAT Directive: Exemptions for international bodies, embassies etc) |
| Exception 6: 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 (Article 3(1)(b), 3(2)VAT Directive: see Taxable transactions: an intra-EU acquisition of goods) |
| Exception 7: 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 (Article 3(1)(b), 3(2)VAT Directive: see Taxable transactions: an intra-EU acquisition of goods) |
Case 2: New means of transport
| Supply involves | Destination |
|---|---|
| Dispatched or transported by or on behalf of the vendor or the customer from EU country 1 to: | A customer in EU country 2 who is:
(Article 138(2)(a) VAT Directive) |
Case 3: Goods subject to excise duty (e.g. cigarettes, alcoholic drinks, etc.)
| Supply involves | Destination |
|---|---|
Dispatched or transported
| A customer in EU country 2 who is:
(Article 138(2)(b) VAT Directive) |
Case 4: Any goods
| Supply involves | Condition |
|---|---|
| Transfer of goods by a business from EU country 1 to EU country 2 | The supply would have been exempt under Cases 1, 2 or 3 as an intra-EU supply if made on behalf of another business (Article 138(2)(a) VAT Directive) |
Exemptions for triangular transactions
A triangular transaction is one in which a business established in EU country 1 supplies goods to a customer in EU country 2, but the goods are shipped directly to a customer from EU country 3.
See 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.
- The Latvian manufacturer makes an intra-EU supply of goods to the German business. The place of that supply is Latvia (Article 32 of the VAT Directive).
- The German business makes an intra-EU acquisition of goods. The place of that acquisition is Poland (Article 40 VAT Directive).
- The German business makes a supply of goods to its Polish customer. The place of that supply is Poland (Article 31 VAT Directive).
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.
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
Exportation of goods takes place when goods are dispatched or transported from the territory of an EU country to a place outside the EU.
It is a fundamental principle of VAT in the European Union that exports do not bear VAT.
Thus, transactions that involve exportation (or are treated as doing so) are exempt but with the right to deduct. This is so that EU exporters are not penalised by having to reflect the VAT they have incurred in the price of their export goods.
| Type of supply | Conditions | Other |
|---|---|---|
| Case 1: 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: 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) | Except: goods for equipping, fuelling or provisioning private means of transport (e.g. pleasure boats, private aircraft) transported by the customer themself.
Also includes transport used for non-business purposes by non-taxable legal entities (Article 146(1)(b) VAT Directive) |
| Case 3: Goods exported outside the EU to an approved body (e.g. charity) | / | For use in the humanitarian, charitable or teaching activities of the approved body (Article 146(1)(c) VAT Directive) |
Case 4: Work on movable property carried out in EU country 1
e.g. Goods acquired or imported for that work to be done in the EU and then dispatched or transported out of the EU | Dispatched or transported by:
(Article 146(1)(d) VAT Directive) | / |
Case 5: Services, including transport and ancillary transactions, that are directly connected with the exportation or importation of goods:
(Article 61 VAT Directive)
(Article 157(1)(a)VAT Directive) | / | Services exempted because:
|
Exemptions related to international transport
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 is reserved for international air and sea transport (Article 148, VAT Directive). It provides a cash-flow advantage for the part of the transport sector which does not need to pre-finance the VAT. The exemption does not cover rail and road transport or domestic air and sea transport.
| Exempt transaction | Conditions |
|---|---|
| Case 1: Supply, modification, repair, maintenance, chartering and hiring of a vessel | If used for:
(Article 148(c) VAT Directive) |
| Example: Z is engaged to carry out repairs in the engine room of a cruise liner operating between Le Havre and the Caribbean while it is in dock in France. The transaction is exempt, so Z does not charge VAT. However, Z may still deduct VAT he incurs in order to carry out the repairs. | |
| Case 2: Supply of services other than those in Case 1 to a vessel | If supplied to:
(Article 148(d) VAT Directive) |
| Example: Company Y supplies refrigeration services for perishable goods carried by sea between Spain and Denmark. Y does not charge VAT on the supply but is able to deduct VAT it incurs in order to make the supply. | |
Case 3: Supply of goods for the fuelling and provisioning of a vessel*
*This exemption can be limited in scope by EU countries (Article 150 VAT Directive). | If supplied to:
(Article 148(a) and (b) VAT Directive) |
| Example: Y Ltd supplies fuel to a Marine nationale française aircraft carrier going on patrol in the Indian Ocean. The supply is exempt from VAT but Y Ltd may deduct the VAT it paid to the oil company from which it purchased the fuel. | |
| Case 4: 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 (Article 148(f) VAT Directive) |
| Example: W SA is an aircraft manufacturer. It sells an aircraft to an airline 90% of whose flights are to and from foreign airports. W’s supply to the airline is exempt, but it may deduct the VAT it paid its suppliers of navigation equipment incorporated in the aircraft. | |
| Case 5: Supply of services other than those in Case 4 to an aircraft | If supplied to:
(Article 148(g) VAT Directive) |
| Example: V Corp’s Belgian subsidiary supplies software for the air navigation equipment of a Belgian international carrier. The supply is exempt but the subsidiary may still deduct VAT paid for the services of freelance engineers hired to make modifications to the software. | |
| Case 6: Supply of goods for the fuelling and provisioning of an aircraft | If supplied to an aircraft qualifying under case 4 (Article 148(e) VAT Directive) |
| Example: U AG supplies fuel to international airlines operating from Frankfurt Airport. The supply is exempt from VAT but U AG may deduct the VAT it paid to the oil company from which it purchased the fuel. | |
Exemptions for international bodies, embassies etc.
Under international law or conventions, accredited diplomatic representations and certain international bodies (including the EU itself) are exempt from taxation. This means that certain supplies of goods and services to these entities are exempted from VAT, while preserving the right to deduct for the supplier.
See more:
The supply of goods and services is only exempt if an entity is accredited or recognised by its host EU country. Certain limits and conditions apply.
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 VAT refund.
If an EU country opts for this method, the supplier must charge VAT to the entity, which then needs to request a refund from their national tax administration.
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).
| Eligible entity | Exemption |
|---|---|
| Case 1: An embassy, Permanent Representation or consulate and their accredited staff |
(Article 151(1)(a) VAT Directive) |
| Example: Cars leased to accredited embassies for the use of their diplomatic personnel are supplied without charging VAT, but the supplier may deduct VAT incurred on the purchase of those cars. | |
| Case 2: The EU and bodies set up by it |
(Article 151(1)(aa) VAT Directive) |
| Case 3: Other international bodies and their members |
(Article 151(1)(b) VAT Directive) |
| Case 4: Armed forces of a NATO country and the civilian staff accompanying them |
(Article 151(1)(c) and (d) VAT Directive) |
| Example: T is a business supplying food and drink for the officers’ messes of US forces stationed in its country as part of the common NATO defence effort. The supplies are exempt from VAT but T retains the right to deduct VAT incurred in making those supplies. | |
| Case 5: UK armed forces |
(Article 151(1)(e) VAT Directive) |
| Example: S EPE is a Cypriot business supplying food and drink for the messes and canteens at the UK sovereign bases on the island. The supplies are exempt from VAT but S EPE retains the right to deduct VAT incurred in making those supplies. | |
Exemptions for customs warehousing etc.
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.
A customs warehouse is a premises or other location approved by and under the supervision of 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 the Union Customs Code.
Conditions for exemption:
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).
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 of the VAT Directive (Article 160(2) VAT Directive).
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).
| Eligible entity | Intended for |
|---|---|
Case 1: Supply of goods (Article 156(1)(a) VAT Directive) |
|
| Eligible entity | Intended for |
|---|---|
| Case 2: Supply of goods (Article 156(1)(b) VAT Directive) |
|
| Eligible entity | Intended for |
|---|---|
Case 3: Supply of goods (Article 156(1)(c) VAT Directive) |
|
| Eligible entity | Intended for |
|---|---|
Case 4a: Supply of goods (Article 156(1)(d) VAT Directive) | admission into territorial waters and then incorporated into drilling or production platforms for the purpose of:
|
Case 4b: Supply of goods (Article 156(1)(e) VAT Directive) | Intended for admission into territorial waters for the purpose of:
|
| Eligible entity | Intended for |
|---|---|
Case 5: Supply of services (Article 159 VAT Directive) | Involving goods in Cases 1 to 4 |
| Eligible entity | Intended for |
|---|---|
| Case 6: Supply of goods or services (Article 160(1)(a) VAT Directive) | Carried out in the locations specified in Cases 1 to 4 where one of the situations still applies in the EU country concerned |
Exemptions for tax warehouses etc
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.
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 authorised warehouse keeper in the course of their 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.
Conditions for exemption
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).
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 below).
| Eligible entity | Intended for |
|---|---|
Case 1a: Importation of goods (Article 157(1) VAT Directive) | Placing in tax warehouses or under similar arrangements |
| Eligible entity | Intented for |
|---|---|
Case 2: Supply of services (Article 159 VAT Directive) | Involving goods in Case 1b |
| Eligible entity | Carried out in |
|---|---|
Case 3: Supply of goods or services (Article 160(1)(b) VAT Directive) | The locations specified in Case 1b where the situations still apply in the EU country concerned |
| Eligible entity | Conditions |
|---|---|
| Case 4: Supply of goods and related services (Article 161 VAT Directive) | Condition of goods:
|
Optional exemptions linked 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.
Conditions for exemption
Member States must consult the VAT Committee before introducing this 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.
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).
Acquisitions and imports with a view to export
| Eligible entity | Conditions |
|---|---|
Case 1
| Goods intended for: Export from the EU as they are or after processing |
| Case 2: Supply of services to a business | Linked to: its export business |
Special rules for export 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.
| Goods intended for | In order to be | Conditions |
|---|---|---|
| Exception 1: 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:
|
| Excludes: goods transported by the customer themself 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: 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: businesses | Supplied to or for diplomatic representations or international bodies, etc | That supply being an exempt supply (see Exemptions for international bodies, embassies, etc) (Article 158(1)(c) VAT Directive) |
Legal texts
- Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax
- Council Implementing Regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax