On 5 April 2022, Directive 2022/542/EU was ratified by the Council of the European Union, which updates the previous directives 2006/112/EC and 2020/285/EU which govern the concession of reduced rates of Value Added (VAT). The revision of the rules introduced more than two decades ago, based on the principle of taxation in the country of origin, became necessary to adapt them to the objectives of the new definitive VAT system for cross-border trade in goods and services, which provides for taxation in the Member State of destination. Member States will have to align themselves with the new provisions of Directive 2022/542/EU by 31 December 2024, as the new rules will be applicable from 1 January 2025.
The most significant change made by the Community legislator concerns the possibility for each Member State to introduce reduced VAT rates, on certain goods and services identifiable in Annex III of the directive, according to the following scheme:
- no more than two reduced rates, equal to at least 5%;
- a super-reduced rate, less than 5%;
- a zero rate, i.e. an exemption with the right to deduct input VAT.
The items listed in Annex III, which has been revised and updated with the publication of this Directive, have been increased from 24 to 33, thereby increasing the alternatives to which reduced rates may apply. In fact, each Member State will be able to apply one or two reduced rates to supplies of goods and services covered by a maximum of 24 points of Annex III, while the super-reduced rates and the zero rate can be applied to a maximum of seven points among the genres admitted in the same annex, and identifiable in points 1 to 6 and 10 quater. In this way, the possibility is guaranteed among the Member States to apply these lower rates on certain products, which benefit the final consumer or in the general interest, guaranteeing equal treatment between the States themselves.
If, on 1 January 2021, Member States applied super-reduced rates or granted exemptions with right to deduct input VAT at more than seven points set out in Annex III, they should limit the application of lower rates to the minimum of 5% and grant exemptions with the right to deduct input VAT, always in compliance with the limit of the seven points mentioned above. This adjustment must be implemented by 1 January 2032 or, if earlier, at the time of the adoption of the definitive VAT regime. However, some expressly identified genres remain excluded. In fact, there is an obligation to apply the ordinary rate starting from the year 2030 for fossil fuels, including methane and other goods with an impact similar to greenhouse gas emissions, such as peat and firewood, and from the year 2032 for pesticides and chemical fertilizers.
Reviewing the points included in Annex III, the operations allowed are mainly focused on sectors intended to cover basic needs, i.e. the supply of food products for human and animal consumption; the supply of water; the transfer of pharmaceutical products used for medical and veterinary purposes; medical protective equipment, devices and instruments; transport services for people and accompanying goods; the supply of cultural goods, such as books, newspapers and periodicals either on physical media or electronically (points 1 to 6).
Of particular interest is the inclusion in the list of some services belonging to the digitization sphere, with the aim of improving the coverage of internet access services and promoting their development (point 8), and enhancing the broadcasting of public events and sports streamed and webcasted (points 7 and 13).
In compliance with the environmental commitments undertaken by the European Union, regarding decarbonisation to support the transition towards the use of renewable energy sources and facilitate access to green energy by consumers, it is possible to include among the seven points the transfer and the installation of solar panels on private homes, public and other buildings used for public interest activities (paragraph 10c). In addition to this, Member States are also offered the possibility of applying a reduced VAT rate for the supply of electricity, district heating and cooling and biogas, the sale and installation of low-emission and high-efficiency heating systems, which meet the criteria of environmental legislation (point 22). Again from the point of view of the green economy, point 25 has been added which concerns the sale of bicycles, including electric bicycles, their rental and repair services.
In the building sector, the previous items 10 and 10bis of the annex, which referred to the “transfer, construction, restoration and transformation of homes provided under the social policy” and to the “repair and renovation of private homes, excluding materials constituting a significant part of the value of the service rendered”, are replaced with the operations of:
- “10) sale and construction of housing which does not fall within the scope of a social policy, (…); renovation and transformation, including demolition and reconstruction, and repair of housing and private homes; lease of real estate for residential use”;
- “10bis) construction and renovation of public buildings and other buildings used for public interest activities”.
It can be seen how, unlike the previous version, the negation has been inserted with reference to operations falling within the scope of a social policy. In the past, it was precisely the identification of the social sphere that allowed certain operations to be included in the facilitation, as argued by the Court of Justice in the judgment of 4 June 2015, case C-161/14, EU Commission against Kingdom United. The EU Commission has considered that interventions/operations concerning housing are provided as part of a social policy only if they stimulate housing opportunities for low-income people and if they ensure fair access to housing. This situation can also be found in our national legislation where, in fact, the application of the reduced rate of 4% is granted for the purchase of the first home, thus qualifying as an operation aimed at allowing and facilitating access to housing for those who do not yet have it, and therefore with a social purpose. Furthermore, in the rewritten point 10, the exclusion from the application of the reduced rate to materials that constitute a significant part of the service rendered is eliminated. Even now, in the case of operations involving the recovery of the building heritage carried out on buildings mainly for residential use, where certain assets constitute a significant part of the value of the supply, so-called significant assets, the reduced VAT rate is applied to these up to competition of the total value of the service, net of the value of such goods, as provided for by article 7 of law n. 488 of 23 December 1999. Therefore, after 31 December 2024, this provision will cease to be effective.
Finally, we note the inclusion of point 27 which concerns some services of a social nature, such as legal assistance services provided to employees and the unemployed, in the context of legal proceedings, in the field of employment and legal assistance services provided in the context of the legal aid scheme.
Through this analysis, it was possible to identify some of the principles underlying the new Community system of reduced VAT rates:
- the benefit of the final consumer who purchases goods and services on favorable terms;
- the general interest of the Member States, through the guarantee of equal treatment;
- greater attention to aspects related to ecology and the impact on pollution, but also to those of a social nature;
- limiting the number of items and reduced rates, in order to avoid excessive proliferation and diversity and above all to safeguard the internal market and avoid distortions of competition.
The Member States are therefore obliged to apply the reduced VAT rates within defined limits, but they can take advantage of their flexibility both in determining their value and in choosing the scope of application.
Laura Di Martino