Taxation and Customs Union

Exemptions with the right to deduct

Although the general principle is that the input VAT on purchases and acquisitions that go directly towards the making of an exempt supply is not deductible, there is a broad range of exempt transactions the input VAT associated with which is nevertheless deductible. In many cases, this is because VAT is collected in some other part of the chain. So, for example, an intra-EU supply may be exempt but the corresponding intra-EU acquisition will be taxed

These exemptions with the right to deduct are of eight different kinds:

Exemptions for intra-EU supplies

What is an intra-EU supply?

An intra-EU supply of goods is a transaction in which goods are dispatched or transported by (or on behalf of) the supplier or the customer from one EU country to a destination in another EU country.

The exemption

Case 1

Supplier in EU country 1 Customer in EU country 2
Business (taxable person)
  • Business or
  • Non-taxable legal entity (such as public body) acting as such

the transaction is exempt (Article 138(1) VAT Directive), although there are some exceptions

When an intra-EU supply takes place, the customer makes a corresponding intra‑EU acquisition. This is a transaction that is normally taxed.

The right to deduct

Although an intra-EU supply in these circumstances is normally exempt, the input VAT incurred on goods and services used for the purposes of making that supply may be deducted by the supplier (Article 169(b) VAT Directive). This is because the corresponding acquisition is taxed.

Example
An Irish electronics manufacturer supplies circuit boards to a French company for use in the French company’s factory in Montpellier.
The Irish company’s supply is exempt from Irish VAT as an intra-EU supply. However, the input VAT the Irish company incurs is deductible.
The French company makes an intra-EU acquisition of goods, which is subject to French VAT.

The exemption for intra-EU supplies is therefore an example of an exemption with the right to deduct.

Exceptions to the exemption in Case 1

The exemption for intra-EU supply does not apply to:

Case 1 Exception 1

Supplies by Types of goods Other conditions

Small businesses benefiting from an exemption or other relief under the special scheme for small enterprises (e.g. because their turnover is below the registration threshold)

Any goods None

Case 1 Exception 2

Supplies by Types of goods Other conditions

Businesses dealing in second-hand goods, works of art, collectors’ items or antiques or Auctioneers selling in public auctions

Second-hand goods, works of art, collectors’ items and antiques

Subject to the special scheme for these goods

Subject to the special scheme for sales by public auction

Case 1 Exception 3

Supplies by Types of goods Other conditions

Businesses dealing in second-hand means of transport

Second-hand goods, works of art, collectors’ items and antiques

Subject to the special scheme for these goods

Subject to the special scheme for sales by public auction

Any business Second-hand means of transport (e.g. cars)

Subject to the transitional arrangements for these goods (See Articles 326-332 VAT Directive)

Case 1 Exception 4

Type of transaction Person involved Conditions
Intra-EU acquisition of goods in EU country 1 A business or a legal person (other than a business) acting as such

Where supply of those goods in EU country 1 would be exempt as supply of goods for international transport etc

(under Article 148 VAT Directive: see Exemptions related to international transport)

Case 1 Exception 5

Type of transaction Person involved Conditions
Intra-EU acquisition of goods in EU country 1 A business or a legal person (other than a business) acting as such

Where supply of those goods in EU country 1 would be exempt as supply of goods:

  • under diplomatic and consular arrangements or
  • to an international body etc

(under Article VAT Directive: see Exemptions for international bodies, embassies etc)

Case 1 Exception 6

Type of transaction Person involved Conditions
Intra-EU acquisition of goods(other than those referred to in Exception 5, new means of transport or goods subject to excise duty) in EU country 1 A legal person (other than a business) acting as such

The acquisition is not subject to VAT because it falls below the intra-EU acquisitions threshold in EU country 1

(under Article 3(1)(b), 3(2)VAT Directive: see Taxable transactions: an intra-EU acquisition of goods)

Case 1 Exception 7

Type of transaction Person involved Conditions
Intra-EU acquisition of goods in EU country 1 A business whose only supplies are those in respect of which VAT is not deductible (e.g. an insurance company)

The acquisition is not subject to VAT because it falls below the intra-EU acquisitions threshold in EU country 1

(under Article 3(1)(b), 3(2)VAT Directive: see Taxable transactions: an intra-EU acquisition of goods)

Other exemptions for intra-EU supplies:

Case 2

Goods

Supply involves

Destination

New means of transport in EU country 1 Dispatch or transport by or on behalf of the vendor or the customer to:

A customer in EU country 2 who is:
A business or non taxable legal entity (such as public body) acting as such
and
the customer’s intra-EU acquisitions are below the intra-EU acquisitions threshold
or
a private person (or other non-taxable person)

The transaction is exempt (Article 138(2)(a) VAT Directive)

Case 3

Goods

Supply involves

Destination

Goods subject to excise duty (e.g. cigarettes, alcoholic drinks etc) in EU country 1

Dispatched or transported

  • under duty suspension arrangements or released for consumption in EU country 1 and held for commercial purposes in EU country 2 (see Articles 17 or 32 and 33 Directive 2008/118/EC)
  • by or on behalf of the vendor or the customer to:

A customer in EU country 2 who is:
A business or non-taxable legal entity (such as public body)
and
the customer’s intra-EU acquisitions of other goods:

  • are below the intra-EU acquisitions threshold or
  • the goods fall within Case 1 Exception 4 or Case 1 Exception 5

The transaction is exempt(Article 138(2)(b) VAT Directive)

Case 4

Goods

Supply involves

Condition

Any goods in EU country 1 Transfer of the goods by a business to EU country 2 such that treated as a supply of goods

The supply would have been exempt under Cases 1, 2 or 3 as an intra-EU supply if made on behalf of another business

The transaction is exempt (Article 138(2)(a) VAT Directive)

Exemptions for triangular transactions

Introduction

A triangular transaction is one in which a business established in EU country A supplies goods to a customer in EU country B, but the goods are shipped directly to the customer from a third EU country (C).

Example
A business in the United Kingdom receives an order for widgets from a customer in Poland. The widgets are made on behalf of the UK supplier by a manufacturer in Latvia, who ships them directly to the Polish customer.

Thus, there are two supplies and an intra-EU acquisition:

  • The Latvian manufacturer makes an intra-EU supply of goods to the UK business. The place of that supply is Latvia (Article 32 of the VAT Directive).
  • The UK business makes an intra-EU acquisition of goods. The place of that acquisition is Poland (Article 40 VAT Directive).
  • The UK business makes a supply of goods to its Polish customer. The place of that supply is Poland (Article 31 VAT Directive).

Under the normal rules, the UK business would have to register for VAT in Poland where it makes the intra-EU acquisition and account for Polish VAT on that acquisition and on its supply to the Polish customer.

However, under the simplification rule in Article 141 VAT Directive, the intra-EU acquisition made by the UK business is exempt (with the right of deduction), provided that the Polish customer is registered for VAT in Poland and is liable to account for the VAT on the supply to him. Since the acquisition is now exempt, the UK business does not need to register for VAT in Poland in respect of that triangular transaction.

The general rule

More generally, an EU country (Country A) must take measures to ensure that VAT is not charged on an intra-EU acquisition made within its territory, where:

  • A business that is not established in Country A but is registered for VAT purposes in another EU country (B) makes that acquisition in Country A;
  • The acquisition is made for the purposes of the subsequent supply by that business of those goods in Country A;
  • The goods are directly dispatched or transported from an EU country (C) other than Country B to the customer of that subsequent supply; and
  • The customer is a business or a non-taxable legal entity (such as a public body), registered for VAT purposes in Country A, which has been designated as liable for payment of the VAT due on that subsequent supply. 

Exemptions on exportation

What is exportation?

An exportation of goods takes place when goods are dispatched or transported from the territory of an EU country to a place outside the EU.

Why is it exempt?

It is a fundamental principle of VAT in the European Union that exports do not bear VAT, so that transactions that involve exportation (or are treated as doing so) are exempt but with the right to deduct, so that EU exporters are not penalised by having to reflect the VAT they have incurred in the price of their export goods.

What transactions are exempt under this rule?

The transactions that Member States EU countries must exempt are listed in Article 146 VAT Directive and are:

Case 1

Type of supply What is done Other conditions
Goods Dispatched or transported to a destination outside the EU By or on behalf of the vendor (Article 146(1)(a) VAT Directive)

Case 2

Type of supply What is done Other conditions
Goods Dispatched or transported from EU country 1 to a destination outside the EU

By or on behalf of a customer not established in EU country 1 (Article 146(1)(b) VAT Directive)

Exception to Case 2

Type of goods What is done Includes also
Goods for equipping, fuelling or provisioning private means of transport (e.g. pleasure boats, private aircraft) Transported by the customer himself

Transport used for non-business purposes by non-taxable legal entities (Article 146(1)(b) VAT Directive

Case 3

Type of supply Customer Purpose
Goods exported outside the EU Approved body (e.g. charity)

For use in the humanitarian, charitable or teaching activities of the approved body (Article 146(1)(c) VAT Directive)

NB: the exemption may be given by a refund of VAT

Case 4

Type of supply What is done By
Work on movable property carried out in EU country 1

Goods:

  • Acquired or imported in order for that work to be done in the EU

and then

  • Dispatched or transported out of the EU

Dispatched or transported by:

  • The supplier
  • The customer (if established outside EU country 1) or
  • On behalf of either the supplier or such a customer or of both of them

(Article 146(1)(d) VAT Directive)

Case 5

Type of supply Other conditions Excluding
Services, including transport and ancillary transactions

Directly connected with the exportation or importation of goods:

  • Not in free circulation but placed in a customs warehouse or similar or
  • In free circulation but under the internal EU transit procedure or
  • Under temporary importation arrangements and totally exempt from import duty or
  • Under external transit arrangements

(all goods covered by Article 61 VAT Directive
or

  • To be placed in a tax warehouse or other warehousing arrangement that is not a customs warehouse or similar

(goods covered by Article 157(1)(a)VAT Directive)

Services exempted because:

  • in the public interest (Article 132 VAT Directive: see Exemption for activities in the public interest) or
  • under Article 135 VAT Directive (see Other exemptions without the right to deduct)

Exemptions related to international transport

What is exempt?

EU countries must exempt certain supplies of goods and services connected with the provision of international transport services involving both goods and passengers.

The exemption in Article 148 VAT Directive is reserved for international air and sea transport. It provides a cash-flow advantage for that part of the transport sector which does not need to pre-finance the VAT.

It does not cover rail and road transport or domestic air and sea transport. Those parts of the transport sector cannot benefit from the exemption.

When does the exemption apply?

The exemption is limited to specific supplies that meet with certain conditions.

Sea transport

Case 1

Exempt transaction Conditions for exemption
Supply, modification, repair, maintenance, chartering and hiring of a vessel

If used for

  • navigation on the high seas, and
    • carrying passengers for reward, or
    • commercial, industrial or fishing activities, or
    • rescue or assistance at sea, or
  • inshore fishing

    (Article 148(c) VAT Directive)

Example
Z is engaged to carry out repairs in the engine room of a cruise liner operating between Le Havre and the Caribbean while it is in dock in France. The transaction is exempt, so Z does not charge VAT. However, Z may still deduct VAT he incurs in order to carry out the repairs

Case 2

Exempt transaction Conditions for exemption
Supply of services other than those in Case 1 to a vessel

If supplied

  • to a vessel qualifying under Case 1, and
  • for its direct needs or the direct need of its cargoes

(Article 148(d) VAT Directive)

Example
Company Y supplies refrigeration services for perishable goods carried by sea between Spain and Denmark. Y does not charge VAT on the supply but is able to deduct VAT it incurs in order to make the supply.

Case 3

Exempt transaction Conditions for exemption
Supply of goods for the fuelling and provisioning of a vessel*

If supplied to

  • a vessel qualifying under Case 1 except where used for inshore fishing, or
  • a fighting ship going abroad

(Article 148(a) and (b) VAT Directive)

Example
Y Ltd supplies fuel to a (UK) Royal Navy aircraft carrier going on patrol in the Indian Ocean. The supply is exempt from VAT but Y Ltd may deduct the VAT it paid to the oil company from which it purchased the fuel.

Air transport

Case 4

Exempt transaction Conditions for exemption
Supply, modification, repair, maintenance, chartering and hiring of an aircraft

If used by an airline whose main activity is international transport of fare-paying passengers
(Article 148(f) VAT Directive)

Example
W SA is an aircraft manufacturer. It sells an aircraft to an airline 90% of whose flights are to and from foreign airports. W’s supply to the airline is exempt, but it may deduct the VAT it paid its suppliers of navigation equipment incorporated in the aircraft.

Case 5

Exempt transaction Conditions for exemption
Supply of services other than those in Case 4 to an aircraft

If supplied

  • to an aircraft qualifying under Case 4,and
  • for its direct needs or the direct needs of its cargoes

    (Article 148(g) VAT Directive)

Example
V Corp’s Belgian subsidiary supplies software for the air navigation equipment of a Belgian international carrier. The supply is exempt but the subsidiary may still deduct VAT paid for the services of freelance engineers hired to make modifications to the software.

Case 6

Exempt transaction Conditions for exemption
Supply of goods for the fuelling and provisioning of an aircraft

If supplied to an aircraft qualifying under case 4
(Article 148(e) VAT Directive)

Example
U AG supplies fuel to international airlines operating from Frankfurt Airport. The supply is exempt from VAT but U AG may deduct the VAT it paid to the oil company from which it purchased the fuel.

* This exemption can be limited in scope by EU countries (Article 150 VAT Directive). 

Exemptions for international bodies, embassies etc

What is exempt?

Under international law or specific international conventions, accredited diplomatic representations and certain international bodies enjoy a degree of immunity from taxation, as does the EU itself.

For VAT purposes, this immunity is granted by exempting certain supplies of goods and services to these entities, while preserving the right to deduct for the supplier.

When does exemption apply?

The exemption is not granted automatically but rests in the hands of EU countries. The supply of goods and services is only exempt if an entity is accredited or recognised by its host EU country.

Once the entity is accredited or recognised, however, the EU countries concerned must grant the exemption but only within certain limits and under certain conditions.

Case 1

Entity eligible Exemption
An embassy, Permanent Representation or consulate and their accredited staff
  • if accredited
  • when meeting limits and conditions laid down by the host EU country

    (Article 151(1)(a) VAT Directive)

Example
Cars leased to accredited embassies for the use of their diplomatic personnel are supplied without charging VAT, but the supplier may deduct VAT incurred on the purchase of those cars.

Case 2

Entity eligible Exemption
The EU and bodies set up by it
  • if covered by the Protocol on Privileges and Immunities (PPI)
  • when meeting limits and conditions laid down in the PPI

    (Article 151(1)(aa) VAT Directive)

Case 3

Eligible entity Exemption
Other international bodies and their members
  • if recognised as an international body
  • when meeting limits and conditions laid down in conventions or head­quarters agreements

    (Article 151(1)(b) VAT Directive)

Case 4

Eligible entity Exemption
Armed forces of a NATO country and the civilian staff accompanying them
  • if stationed abroad in an EU country that is part of NATO
  • when taking part in the common defence effort
  • when meeting limits and conditions laid down in the NATO Treaty

    (Article 151(1)(c) and (d) VAT Directive)

Example
T is a business supplying food and drink for the officers’ messes of US forces stationed in its country as part of the common NATO defence effort. The supplies are exempt from VAT but T retains the right to deduct VAT incurred in making those supplies.

Case 5

Eligible entity Exemption
UK armed forces
  • if stationed in Cyprus
  • when meeting limits and conditions laid down in the Treaty of Establish­ment of Cyprus

    (Article 151(1)(e) VAT Directive)

Example
S EPE is a Cypriot business supplying food and drink for the messes and canteens at the UK sovereign bases on the island. The supplies are exempt from VAT but S EPE retains the right to deduct VAT incurred in making those supplies.

How to apply the exemption

For supplies exempt under these rules, the supplier generally does not need to charge VAT. Where the goods are not dispatched or transported out of the EU country in which the supply takes place, and in respect of services, the exemption may be granted by means of a refund of VAT. If an EU country opts for this method, the supplier has to charge VAT to the entity, which then needs to turn to the tax administration for a refund.

The supplier must verify that the entity is entitled to exemption and what are the limits and conditions for exemption. Where the entity is based in another EU country, the supplier needs to obtain a VAT exemption certificate from the entity (Article 51 and Annex II VAT Implementing Regulation).

Exemptions for customs warehousing etc.

What is exempt?

EU countries may exempt certain supplies of goods and other transactions relating to customs warehouses and similar arrangements for storing imported goods before their release into free circulation. Also included under this head are goods intended for drilling rigs etc.

These are all exemptions with the right to deduct.

For exemptions relating to tax warehouses, see Exemptions for tax warehouses .

Must these transactions be exempt?

No. EU countries do not have to exempt any of these transactions.

What is a customs warehouse?

A customs warehouse is a premises or any other location approved by and under the supervision of the customs authorities of an EU country where non-EU goods may be stored free of import duties, VAT, other charges and commercial policy measures
In line with the provisions of Union Customs Code.

What transactions may EU countries exempt?

The transactions that EU countries may exempt are:

Case 1

Transaction Intended for

Supply of goods
(Article 156(1)(a) VAT Directive)

  • Presentation to customs

and (where applicable)

  • Placing in temporary storage

Case 2

Transaction Intended for placing in

Supply of goods
(Article 156(1)(b) VAT Directive)

A free zone or free warehouse

Case 3

Transaction Intended for placing under

Supply of goods
(Article 156(1)(c) VAT Directive)

  • Customs warehousing arrangements or
  • Inward processing arrangements

Case 4

Transaction Intended for For which purpose?

A: Supply of goods

(Article 156(1)(d) VAT Directive)

Admission into territorial waters and then incorporated into drilling or production platforms

  • Construction
  • Repair
  • Maintenance
  • Alteration or
  • Fitting-out

of these platforms
or

  • Linking them to the mainland

B: Supply of goods

(Article 156(1)(e) VAT Directive)

Admission into territorial waters

  • Fuelling and provisioning these platforms

Case 5

Transaction Involving

Supply of services

(Article 159 VAT Directive)

Relating to goods in Cases 1 to 4

Case 6

Transaction Carried out in

Supply of goods or services
Article 160(1)(a) VAT Directive)

The locations specified in Cases 1 to 4 where one of the situations still applies in the EU country concerned

Parity for tax warehouses

If EU countries choose to exempt Case 6 transactions carried out in customs warehouses, they must also provide exemption for the same transactions carried out in a tax warehouse or other similar warehouse where they involve the goods specified in Annex V to the VAT Directive.

(Article 160(2) VAT Directive)

Parity for intra-EU acquisitions

If EU countries choose to exempt any of the transactions in Cases 1 to 4, they must also make sure that intra-EU acquisitions of goods intended for placing in a customs warehouse, free zone or free warehouse etc are given the same treatment as a supply of goods carried out within their territory under the same conditions.

(Article 162 VAT Directive)

Preventing double taxation

Once goods are taken out of or cease to be covered by these customs arrangements, import VAT becomes payable. The EU country concerned must take measures guarding against double taxation.

(Article 163 VAT Directive)

Exemptions for tax warehouses etc

What is exempt?

EU countries may exempt certain supplies of goods and other transactions relating to tax warehouses and similar arrangements (referred to in the VAT Directive as ‘warehouses other than customs warehouses’) for storing imported goods before their release into free circulation.

These are all exemptions with the right to deduct.

For exemptions relating to customs warehouses, see Exemptions for customs warehousing etc.

Must these transactions be exempt?

No. EU countries do not have to exempt any of these transactions unless they exempt transactions relating to customs warehousing etc.

What is a tax warehouse?

A ‘tax warehouse’ is a place where goods subject to excise duty are produced, processed, held, received or dispatched under duty-suspension arrangements by an authorized warehouse keeper in the course of his business, subject to certain conditions laid down by the competent authorities of the Member State where the tax warehouse is located.

(Article 4(11) of Council Directive 2008/118/EC ).

In the case of other products, this means a place defined as such by the EU country concerned.

What transactions may EU countries exempt?

The transactions that Member States EU countries may exempt under this head are:

Case 1

Transaction Intended for

A: Importation of goods
B: Supply of goods

(Article 157(1) VAT Directive)

Placing in tax warehouses or under similar arrangements

Case 2

Transaction Involving

Supply of services

(Article 159 VAT Directive)

Relating to goods in Case 1B

Case 3

Transaction Carried out in

Supply of goods or services

(Article 160(1)(b) VAT Directive)

The locations specified in Case 1B where the situations still applies in the EU country concerned

Special rules for retail goods

Goods that are not subject to excise duty and are intended for supply at the retail stage may not normally be placed in tax and other warehouses that are not customs warehouses.

(Article 157(2) VAT Directive)

However, an exception is made to this rule in certain cases where the goods are intended for export. See Optional exemptions linked to export.

Goods subject to temporary importation or in transit

EU countries may choose to exempt the following:

Case 4

Type of transaction Condition of goods

Supply of goods and related services
(Article 161 VAT Directive)

A: not in free circulation entering the EU:

  • under temporary importation arrangements providing for total exemption from import duty or
  • under external transit arrangements

or

B: in free circulation entering the EU from a third territory forming part of the customs territory of the European Union

Parity for intra-EU acquisitions

If EU countries choose to exempt any of the transactions in Cases 1 to 4, they must also make sure that intra-EU acquisitions of goods intended for placing in a tax warehouse or other similar warehouse are given the same treatment as a supply of goods carried out within their territory under the same conditions.

(Article 162 VAT Directive) 

Optional exemptions linked to export

  • Acquisitions and imports with a view to export
  • Special rules for export retail goods
  • Limited exemption for acquisitions and imports with a view to export

EU countries may choose to exempt certain intra-EU acquisitions and imports of goods where those goods are obtained for the purpose of exporting them, with or without prior processing.

The exemption covers the following transactions:

Case 1

Type of transaction Goods intended for

A: Intra-EU acquisition of goods made by a business

B: Imports for and supplies of goods to a business

Export from the EU as they are or after processing

Case 2

Type of transaction Linked to
Supply of services to a business Its export business

Limit to the exemption

The total amount of any Case 1 or Case 2 exemption must not exceed the value of exports carried out by the business concerned in the previous 12 months.

Condition for granting the exemption

Member States must consult the VAT Committee before introducing this exemption.

Mandatory further exemption

Where EU countries apply this exemption, they must also (again after consulting the VAT Committee) apply it to intra-EU supplies carried out by the business, but to a value not exceeding the previous 12 months’ intra-EU supplies carried out by it.

(Article 164 VAT Directive)

Special rules for export retail goods

Rule 1

Goods that are not subject to excise duty and are intended for supply at the retail stage may not normally be placed in tax and other warehouses that are not customs warehouses.

However, an exception is made to Rule 1 in the following circumstances:

Exception 1

Goods intended for

In order to be

Conditional on

Tax-free shops inside airports or ports

Carried in the personal luggage of travellers:

  • Taking flights or
  • Sea crossings

to third territories or countries outside the EU

Being exempt as a supply:

  • of goods dispatched or transported to a destination outside the EU
  • by a customer not established in the EU

Excluding: goods transported by the customer himself for equipping, fuelling and provisioning leisure boats and private aircraft or any other means of private transport. (Article 158(1)(a) VAT Directive)

Exception 2

Goods intended for

In order to be

Conditional on

Businesses

Supplied to travellers on board

  • An aircraft or
  • A ship

in the course of a flight or sea crossing

The place of arrival must be situated outside the EU

(Article 158(1)(b) VAT Directive)

Exception 3

Goods intended for

In order to be

Conditional on

Businesses

Supplied to or for diplomatic representations or international bodies etc

That supply being an exempt supply
(see Exemptions for international bodies, embassies etc )

(Article 158(1)(c) VAT Directive)

All exemptions referred to in this page are exemptions with the right to deduct. They must not be confused with the mandatory exemption for export transactions (see Exemptions on exportation ).