The Differences in VAT Rates Across Europe 

Introduction 

Most goods and services sold in Europe include a value-added tax (VAT), which is a consumption tax added to the product’s original price. For European countries that are member states of the European Union (EU), there is a requirement for VAT to be no less than 15%, with a current average of 21%.  Today we’ll examine VAT compliance and what companies need to know when operating in Europe.

Why should businesses be aware of VAT in Europe? 

If you are a business expanding to Europe, it is important to know the VAT rates in each country.  

There may be a difference in rates between suppliers, and you will need to charge the correct VAT rate to your customers. You must also account for VAT when you import or export goods. Furthermore, a business should consider that there are also differences in the minimum invoice values for refunds to be applicable. VAT rates, like all applicable taxations, might impact a decision on where to do business, where to establish your business in Europe, and the type of entity you decide to establish. 

The EU standard VAT rate is 21%, with member states setting their own levels to a minimum level of 15%. Luxembourg currently has the lowest rate in the EU at 17%, and Hungary has the highest at 27%. Switzerland has the lowest VAT level of 7.7%, which will rise to 8% in January 2024.  

Reduced VAT Rates and refunds 

Reduced VAT rates apply in some sectors or to specific products. Some examples of goods and services subject to reduced VAT rates include food, books, newspapers, pharmaceuticals, and passenger transport. A lower 5% to 10% VAT rate is more common.    

You can claim a VAT refund if you carry out a transaction that is not taxable in that country, and this will depend on any agreements between countries, such as Double Tax Agreements. You must be registered for VAT if you are undertaking taxable activities in-country. VAT deductions may be applicable, and a VAT refund could be requested. This would be calculated as the VAT charged deducted from the expenditure.  Refund applications are submitted electronically via tax portals in each country. There are differences in each country as to the exemptions and categories in which VAT refunds may be applied. Vehicles, transport, food, or accommodation are some included exemptions.  

VAT Exemptions  

Tax incentives exist in the form of VAT exemptions, allowing businesses to provide goods and services with no added VAT. The exemptions vary from country to country but can include medical care, education, and financial services. 

There are also several VAT-exempt areas within Europe, such as the Canary Islands and Ceuta in Spain, Heligoland in Germany, and Mount Athos in Greece.  

Some European countries apply a ‘zero-rated’ VAT approach instead of, or alongside, exemptions. Companies must correctly apply VAT rates in these situations.  

How does this impact your business?  

Businesses expanding to Europe must understand the indirect taxes applicable to their business and include them invoices if necessary.  Taxation rates differ from country to country across Europe and may significantly impact the cost of doing business.  Companies should assess the VAT applicable to their business and supply chain, considering any exemptions or lower rates that can apply.