European Union VAT

The European Union (EU) tax laws as they regard VAT are not complicated though mistakes can be costly. Choose a collection and payment scheme that best suits your business type, annual turnover and personal accounting approach.

Up to four VAT rates apply to each EU state. Super reduced rates apply to a variety of goods and services set by each individual EU state. These may include food products, some beverages, clothing, pharmaceuticals, books and other printed media, television license fees, hotel and restaurant services, admissions to cinemas and sports events, waste treatment, passenger transport, construction and renovation of property, royalties, medical equipment, water distribution, social services, flowers and plants, and raw wool. The super reduced rate is about 4%, depending on locale.

Most countries that belong to the EU do not offer super reduced tax rates whilst nearly all offer a reduced rate and all offer a standard rate. A parking rate is offered by just four countries. The average reduced VAT rate is 5%, the typical standard rate is 17.5% with parking rates around 12%. Some EU states offer an exemption or 0% tax rate for very specific goods and services.

Nearly all goods and services are taxed at a rate where the good or service is consumed. Should a resident of Germany travel to Portugal and enjoy hotel accommodations, the stay will be taxed at 5%, the reduced rate offered in Portugal. However, should the tourist return to Germany with boxes of shoes manufactured in Portugal (no VAT has been paid) to sell at his shoe store, the goods will be taxed a VAT rate of 25%, Germany’s standard VAT rate. This is because the footwear will be consumed in Germany.

Electronic goods and services are additionally governed by the VAT tax laws. They are not taxed the rate where the creation or sale takes place but rather where the customer is located. Electronic goods and services include web hosting, distance maintenance of programmes and equipment, software and updates, access to databases and information, access to music and films, access to games including those used for entertainment and gambling, supplying broadcasts and events for any purpose as well as offering access to distance learning. When a supplier in Hungary sells an online football broadcast to a customer in the UK, the service is taxed at a VAT rate of 17.5 per cent, the standard in the UK.

As a general rule, an export VAT applies to all goods and services purchased in the EU and subsequently relocated outside the EU within three months. Depending on the nature of the good or service, an export tax refund may be refunded to the consumer. Exports are taxed at the standard VAT tax rate of the origination country.