Common system of value added tax (VAT) (‘the VAT Directive’)
This directive codifies the provisions implementing the common system of VAT, which applies to the production and distribution of goods and services bought and sold for consumption within the European Union (EU). To ensure that the tax is neutral in impact, irrespective of the number of transactions, taxable persons for VAT may deduct from their VAT account the amount of tax which they have paid to other taxable persons. VAT is finally borne by the final consumer in the form of a percentage addition to the final price of the goods or services.
Value added tax (VAT) is a general tax on consumption applied to commercial activities involving the production and distribution of goods and the provision of services. This VAT Directive codifies the provisions governing the introduction of the common system of VAT in the European Union (EU).
The common system of VAT applies to goods and services bought and sold for consumption within the EU. The tax is calculated on the basis of the value added to goods and services at each stage of production and of the distribution chain.
The tax is collected through a system of partial payments which allows taxable persons (firms identified for VAT) to deduct from their VAT accounts the amount of tax which they have paid to other taxable persons on their purchases for commercial purposes during the preceding stage. This mechanism means that the tax is neutral, irrespective of the number of transactions.
In the end, VAT is borne by the final consumer in the form of a percentage addition to the final price of the goods or services. This final price is the total of the value added at each stage of production and distribution. The supplier of goods or services (the taxable person) pays the VAT paid on the goods or services to the national tax administration after deducting the VAT already paid to his suppliers.
Transactions carried out for consideration on the territory of an EU country by a taxable person acting in that capacity are subject to VAT. Imports by any person are also subject to VAT.
Taxable transactions include:
- supplies of goods by a taxable person;
- intra-EU acquisitions in an EU country of goods from another EU country;
- supplies of services by a taxable person;
- imports of goods from outside the EU (a third territory * or a non-EU country).
An intra-EU acquisition of goods occurs only when goods are transported from one EU country to another. It occurs when goods sold by a taxable person in the EU country of departure are purchased in another EU country (of arrival) by a taxable person acting in that capacity or by a non-taxable legal person. It also occurs in the case of new means of transport * and of products subject to excise * duty purchased by other persons.
If the total amount of intra-EU acquisitions of goods by non-taxable legal persons and certain categories of exempt taxable persons does not exceed a minimum threshold of EUR 10 000 per year, these acquisitions are subject to VAT only if the purchaser decides to register.
Intra-EU acquisitions of second-hand goods, works of art, collectors’ items and antiques are not subject to VAT when the vendor is a taxable dealer or an organiser of sales by public auction who has paid the tax on these goods by using the special scheme of taxation of the profit margin.
EU VAT does not apply in the following third territories:
- the Island of Heligoland, the territory of Büsingen, Ceuta, Melilla, Livigno, Campione d’Italia and the Italian waters of Lake Lugano (territories which do not form part of the EU customs territory);
- Mount Athos, the Canary Islands, the French overseas departments, the Åland Islands and the Channel Islands (territories which form part of the EU customs territory).
In accordance with the Treaty, VAT also does not apply in Gibraltar or the part of Cyprus which is not under the effective control of the government of the Republic of Cyprus. These regions are treated as third territories.
Since the Principality of Monaco, the Isle of Man and the United Kingdom’s sovereign base areas of Akrotiri and Dhekelia are not regarded as non-EU countries, VAT applies there.
A taxable person is a person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Economic activity includes any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions. To the extent that they are bound to their employer by a contract of employment or by any other legal ties creating the relationship of employer and employee, the activities of salaried and other persons are not regarded as being carried out independently.
Any person who, on an occasional basis, supplies a new means of transport transported to another EU country is also regarded as a taxable person.
An EU country may also regard as a taxable person anyone who carries out, on an occasional basis, an operation relating to an economic activity and, in particular, the supply, before first occupation, of a building or part of a building and of the land on which the building stands or the supply of building land.
States, regional and local government authorities and other bodies governed by public law are not regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, except where their treatment as non-taxable persons would lead to significant distortions of competition. When they carry out certain commercial operations, such bodies are nevertheless taxable persons.
The supply of goods is the transfer of the right to dispose of tangible property as owner.
Any transaction which does not constitute a supply of goods constitutes a supply of services.
The intra-EU acquisition of goods is the acquisition of the right to dispose as owner of movable tangible property transported to the person acquiring the goods in another EU country.
The importation of goods is the entry into the EU of goods which are not in free circulation. The entry of goods which are in free circulation from a third territory is also an importation.
Place of transactions
The place of a supply of goods is:
- the location of the goods at the time of supply (where the goods are not dispatched or transported);
- the location of the goods at the time when dispatch or transport to the customer begins (where the goods are dispatched or transported);
- the place of departure of the passenger transport operation (where the goods are sold on board ships, aircraft or trains);
- the place where the customer is located (in the case of the supply of gas through a natural gas system within the EU or any network connected to such a system, the supply of electricity or the supply of heat or cooling energy through heating or cooling networks).
The place of an intra-EU acquisition of goods is deemed to be the place where transport of the goods to the person acquiring them ends.
The place of supply of services to taxable persons is deemed to be the place where the customer has established his business or, if provided to a fixed establishment that the customer has elsewhere, the place where that fixed establishment is located or, in the absence of any establishment, the place where the customer has his permanent address or usually resides. The place of supply of services to non-taxable persons is deemed to be the place where the supplier has established his business or, if provided from a fixed establishment that the supplier has elsewhere, the place where that fixed establishment is located or, in the absence of any establishment, the place where the supplier has his permanent address or usually resides.
There are, however, some exceptions to these general rules. The services concerned include those connected with immovable property, passenger transport and transport of goods, those relating to activities relating to culture, art, sport, science, education and entertainment, those of restaurant and catering services and those of short-term hiring of means of transport. The main purpose of these exceptions is to ensure that the service is taxed at the place where it is actually consumed.
In relations with non-EU countries, to avoid double taxation, non-taxation or the distortion of competition, the EU countries may consider:
- the place of supply of certain services situated within their territory as being situated outside the EU, if effective use and enjoyment takes place outside the EU;
- the place of supply of certain services situated outside the EU as being situated within the EU country, if effective use and enjoyment takes place within their territory.
The place of importation of goods is the EU country where the goods are located when they enter the EU.
Chargeable event and chargeability of VAT
In the case of intra-EU acquisition of goods, the chargeable event occurs when the acquisition is made and the tax becomes chargeable on the 15th day of the month following the acquisition. However, if an invoice is issued before that date, the tax becomes chargeable on the date the invoice is issued.
However, from 1 January 2013, when Directive 2010/45/EU comes into force, VAT shall become chargeable on issue of the invoice, or on expiry of the time limit referred to in Article 222 of this directive if no invoice has been issued by that time.
In the case of the importation of goods, the chargeable event occurs and tax becomes chargeable when the goods are introduced into an EU country.
In respect of the supply of goods and services and the intra-EU acquisition of goods, the taxable amount includes everything which constitutes consideration obtained by the supplier for transactions by the customer. This includes subsidies directly linked to the price of these transactions. The amount also includes taxes, duties, levies and charges (excluding the VAT itself) and incidental expenses charged by the supplier to the customer but excludes certain price reductions, rebates and price discounts and repayments of expenses incurred.
In the case of importations of goods, the taxable amount is the value for customs purposes. It includes taxes, duties, levies and other charges due outside the EU country of importation, and those due by reason of the importation (excluding the VAT itself) and incidental expenses (packing, transport, etc.).
Rates of VAT
Taxable transactions are taxed at the rates and under the conditions set by the EU country where they take place. The standard rate of VAT is set as a percentage of the taxable amount which, until 31 December 2015, may not be less than 15 %.
EU countries may apply one or two reduced rates of not less than 5 %. The reduced rates may only be applied to supplies of goods and services in the categories listed in Annex III to the VAT Directive (as last amended by Directive 2009/47/EC).
The EU countries may also, after consultation of the VAT Committee, apply a reduced rate to supplies of natural gas, electricity and district heating.
Finally, by way of derogation from the normal rules, certain EU countries have been authorised to maintain reduced rates, including those lower than the minimum, or zero rates, in certain areas.
Some of these derogations provided for in the act of accession of the ten countries which joined the EU on 1 May 2004 only applied until 31 December 2010. Others have been extended or incorporated into the general rules by Directive 2009/47/EC.
Goods and services which are exempt from VAT are sold to the final consumer without VAT applying to the sale. However, where the supply of goods or services is exempt, the supplier may not deduct the VAT on purchases. Such exemption without a right to deduct means that ‘hidden’ VAT remains included in the price paid by the consumer. This exemption should be clearly distinguished from a zero rate of VAT which certain EU countries have a derogation to retain and which means that the final price to the consumer includes no residual VAT.
There are also exemptions with a right to deduct whose main aim is to take into account the place where the goods or services are deemed to have been consumed and so taxed: these transactions are relieved of all VAT in their EU country of origin because they will be taxed in the country of destination.
Exemptions without a right to deduct
For socio-economic reasons, the following are exempted:
- certain activities of general interest (such as hospital and medical care, goods and services linked to welfare and social security work, school and university education and certain cultural services);
- certain transactions including insurance, the granting of credit, certain banking services, supplies of postage stamps, lotteries and gambling and certain supplies of immovable property.
To facilitate trade, certain importations of goods from outside the EU are exempt. These include the final importation of goods the supply of which is exempt in the EU country of importation and goods the final importation of which is governed by Directives 2007/74/EC (goods carried in travellers’ luggage), 2009/132/EC (goods imported for non-commercial purposes) and 2006/79/EC (small consignments of goods of a non-commercial character).
Exemptions with a right to deduct
To take account of the place where goods and services are deemed to have been consumed and hence taxed, the following transactions are exempt with a right to deduct:
- intra-EU supplies of goods, including new means of transport and products subject to excise duty dispatched from one EU country to another;
- exports of goods from the EU to a third territory or a non-EU country;
- certain transactions relating to international transport or treated as exports;
- supplies of services by intermediaries when they take part in transactions relating to exports;
- certain transactions relating to international trade, such as those concerning customs warehouses and other warehouses.
A taxable person who purchases goods or services has the right to deduct the amount of the VAT in the EU country where these transactions are carried out if the goods and services are used for his professional economic activity. A taxable person who has paid VAT in an EU country where s/he is not established may secure reimbursement through a special electronic procedure. There is no right to deduct in the case of an exempt economic activity or if the taxable person qualifies for a special scheme (e.g. exemption from VAT for small firms).
In certain cases deductions may be limited or adjusted. To exercise the deduction requires certain conditions to be fulfilled, particularly the obligation to hold an invoice.
Obligations of taxable persons and certain non-taxable persons
VAT is payable:
- by any taxable person carrying out a taxable supply of goods or services, except in certain specific cases where the tax is payable by another person, particularly a customer using the reverse charge procedure;
- by the person making an intra-EU acquisition of taxable goods;
- on an importation by the person designated or recognised as liable by the EU country of importation.
A taxable person must state when his activity as a taxable person commences, changes or ceases and must keep sufficiently detailed records.
A taxable person must ensure that a sufficiently detailed invoice is issued for goods and services which s/he supplies to another taxable person or a non-taxable legal person. An invoice must also be issued in certain other cases.
Under certain conditions, EU countries may be authorised to introduce derogations to simplify the collection of VAT or to avoid certain tax fraud or evasion.
There are special VAT schemes for:
- small firms;
- farmers (common flat-rate scheme);
- second-hand goods, works of art, collectors’ items and antiques;
- investment gold;
- travel agents;
- electronically supplied services.
Some VAT schemes concern not only economic operators directly but also private persons and final consumers. This is the case for example where a private person buys goods in another EU country. When the consumer takes the goods home him-/herself, VAT is paid in the EU country where they were sold and bought (i.e. at their origin). Some exempt taxable persons and non-taxable legal persons also have the right to acquire a limited quantity of goods in another EU country as a result of the rules governing the taxation of trade between the EU countries. For those persons, the scheme is already based on the principle of taxation in the EU country of origin of the goods and services supplied (see end of this summary).
However, the origin principle does not apply when the goods are sold at a distance, i.e. when the purchaser and the seller are in different EU countries and the goods are being dispatched. If the value of goods sold on an annual basis exceeds a certain threshold (EUR 35 000 or EUR 100 000 depending on the EU country), the supplier must apply the destination principle, and must do so in any event in the case of distance sales of products subject to excise duty. Under this principle, the supplier accounts for VAT in the EU country of destination at the rate applicable there.
The origin principle does not apply when new means of transport are bought in another EU country. In that case, the purchaser pays the VAT in the EU country of destination.
Combating tax evasion
Tax evasion obstructs the functioning of the internal market by creating unjustified flows of goods and by allowing goods to be placed on the market at abnormally low prices.
To combat this scourge, Directive 2008/117/EC introduces the following measures:
- the establishment of a one-month deadline for information on intra-EU supplies of goods;
- the introduction of the same tax period for both the supplier and the purchaser or customer in the context of intra-EU transactions;
- the reduction of administrative burdens;
- an authorisation for operators to submit on a quarterly basis the recapitulative statements concerning intra-EU supplies of goods.
This VAT Directive is a recast of the Sixth Directive 77/388/EEC on the common system of value added tax and the uniform basis for assessment which has been amended more than thirty times since it was adopted. It codifies the provisions of Directive 77/388/EEC from 1 January 2007 without altering the substance of the legislation in force.
|Act||Entry into force||Deadline for transposition in the Member States||Official Journal|
OJ L 347 of 11.12.2006
|Amending act(s)||Entry into force – Date of expiry||Deadline for transposition in the Member States||Official Journal|
OJ L 384 of 29.12.2006
OJ L 346 of 29.12.2007
According to the provisions, between 1.1.2009 and 1.1.2015
OJ L 44 of 20.2.2008
OJ L 14 of 20.1.2009
OJ L 116 of 9.5.2009
OJ L 175 of 4.7.2009
OJ L 10 of 15.1.2010
9.4.2010 – 30.6.2015
OJ L 72 of 20.3.2010
OJ L 189 of 22.7.2010
OJ L 326 of 10.12.2010
Successive amendments and corrections to Directive 2006/112/EC have been incorporated into the basic text. This consolidated version is for reference only.
- For more information, visit the website of the Directorate General for Taxation