VAT exemptions – new EU rules also applying to Poland

From 2025, EU countries, including Poland, will be able to freely exempt from VAT the supply of food, water, medicines, medical equipment, books and magazines for the libraries, passenger transport as well as the supply and installation of solar panels.

Alternatively – if they so decide – they will be able to apply a preferential VAT rate lower than 5% to these supplies.

This is the result of the draft amendment to the VAT directive, on which a political compromise was reached in the EU Economic and Financial Affairs Council (ECOFIN). The draft has yet to receive an opinion from the European Parliament and only then will it be finally approved by ECOFIN.

According to the current wording of Art. 98 and art. 99 of the EU Directive, Member States may apply reduced VAT rates only to goods and services specified in Annex 3 to the Directive. They cannot be lower than 5%.

VAT regulations are standardized throughout the European Union, so individual countries (including Poland) cannot freely introduce a zero rate of this tax or lower the basic rate to a preferential level. The European Commission does not agree to such reductions, even as part of the application for a temporary derogation of the regulations,

This aroused criticism from member states that would like to freely lower the VAT rate, e.g. on children’s clothes and shoes. Poland, which applied such a preference without the consent of the European Commission, lost the case before the Court of Justice of the European Union on October 28, 2010 (file reference number C-49/09) and was forced to increase the tax rate from 2012.

In January 2018, the European Commission published a draft of relevant amendments to the VAT Directive.

According to the project initially approved by ECOFIN, EU countries will be able, from 2025 – for up to seven categories of goods and services – to apply a reduced VAT rate, lower than 5%, or to grant a tax exemption along with the right to deduct input tax at an earlier stage trading.

It concerns the supply of: food, pharmaceuticals and medical equipment, water, solar panels with their installation, delivery and borrowing of books at the library (also in electronic form) and passenger transport services.

In addition, if any EU country applied on January 1, 2021, an exemption with the right to deduct input tax or a VAT rate lower than 5%. for any other goods or services (than those listed), other countries will also gain this right. To this end, they will have to implement and apply identical taxation rules and inform the EU’s committee of VAT experts.

Regardless of this, the reduced rate, but not lower than 5%, will be applicable to a maximum of 24 categories of goods and services listed in the amended Annex 3 to the VAT Directive. It goes, among others o: supply of electricity, children’s clothes, legal services provided for employees and the unemployed in employment matters, admission services to the theater and concerts and sports events (also in electronic form), reception of radio and television (also via the Internet), delivery, the construction, renovation and conversion of buildings as part of social policy, the supply of goods and the provision of services used in agricultural production (excluding capital goods such as machinery and buildings). However, preferences for pesticides and chemical fertilizers may be applied no longer than until January 1, 2032.

In this regard, the project also provides that if any EU country applied the reduced rate on January 1, 2021, not lower than 12%. for any goods or services not listed in Annex 3 to the VAT Directive, this right will also be gained by other EU countries. It will be a condition of applying identical tax rules and informing the EU’s committee of VAT experts about it.