What is a derogation from the EU VAT Directive?

A derogation is a special measure or instrument that enables EU Member States to deviate from specific provisions of the EU VAT Directive. This is typically done to implement measures or initiatives to simplify tax collection or prevent tax evasion and fraud while ensuring that the overall tax revenue remains unaffected.

Why do EU Member States request derogations from the VAT Directive?

EU member States may request derogations to implement national measures that enhance VAt compliance, reduce tax fraud, or simplify administrative processes. These measures or policies may not align with the general EU VAT rules but address unique domestic challenges. Therefore, the Member States must obtain approval from the European Commission and Council of the European Union to introduce and implement such measures.

What is the legal ground for derogating from the EU VAT Directive?

Article 395 of the EU VAT Directive allows Member States to submit a request to introduce tax measures that differentiate from general rules. Furthermore, Article 395 defines the procedure for receiving approval as well as the time frame within which EU governing bodies must process and assess the request and make their final decision.

How does stakeholder consultation impact the derogation process?

Consulting key stakeholders, such as Tax Authorities and businesses, before submitting a request and presenting the results of such consultation in the formal request is an integral part of the procedure. This provides valuable insights into the proposed measure's impact and ensures that measures are practical, not burdensome, and supported by those most affected.

Can a Member State extend a derogation once the initial period expires?

Yes. A Member State must submit a new request before the initial period ends to extend the derogation previously approved once the period expires. The extension or renewal procedure follows the same steps as the original request, including assessments and approvals by the European Commission and Council of the European Union.

EU VAT Derogation Process for Digital Reporting and E-Invoicing

Q: What is the procedure for requesting a derogation from the EU VAT Directive?

The procedure begins with the EU Member State submitting a formal request to the European Commission, which includes all necessary details, information, objectives, and legal provisions concerning the derogation. Once the European Commission gathers and assesses all information, it forwards the draft of the proposal for implementation to the Council of the European Union for approval. The entire procedure is typically completed within eight months.

The EU VAT Directive is a well-known legislature that forms the backbone of the harmonized VAT tax system across EU Member States. It ensures consistent application and reduces trade barriers within a single market. However, with the changes in economic and technological developments, EU countries are forced to seek more efficient mechanisms for VAT compliance and fraud prevention suitable for their national needs.

One such mechanism or initiative is implementing domestic digital reporting systems, which sometimes deviate from the uniform rules defined by the EU VAT Directive. To fulfill their national needs and implement a domestic reporting system, EU countries must submit a proposal and receive consent from the European Commission. The process to secure derogation from the EU VAT Directive is strictly defined and upholds the integrity of the EU-wide tax system while accommodating national interests.

Legal Framework for Derogation

Article 395 of the EU VAT Directive provides the legal basis for derogation. Under this article, EU Member States may request the European Commission's authorization to introduce a special measure derogating from the EU VAT Directive. The primary objective of such a measure must be to simplify the collection of VAT or to prevent certain forms of tax evasion without affecting the total amount of the tax revenue collected by the Member State.

In practical terms, this legal instrument safeguards the EU tax system. It ensures that national initiatives, even when divergent, align with the broader policies aiming for market fairness and fiscal neutrality on the EU level.

Procedure for Requesting Derogation

The procedure for requesting a derogation from the EU VAT Directive is designed to be structured and transparent. It ensures accountability and coherence within the EU’s tax regime. The procedure initiates when an EU Member State submits a formal request to the European Commission.

The request must include comprehensive documentation explaining and detailing the nature of the proposed measure, the specific provision of the EU VAT Directive from which it derogates, and information on objectives to be achieved by implementing such a measure.

The Member State requesting must demonstrate that the proposed measure is proportionate and necessary and must be backed up with data or analysis when applicable. Moreover, the EU country must consult with affected stakeholders, including businesses and trade associations, to conduct an impact assessment and present the results in the request.

Upon receipt, the European Commission thoroughly evaluates the request. If it concludes that some information is missing, it will notify the Member State within two months. Once the Commission has received all the required information and completed the assessment, it will inform the Member State and forward the request and request to other EU Member States within one month.

Within three months after notifying the Member State requesting the approval for derogation, the Commission drafts the proposal for a Council Implementing Decision, which is then submitted to the Council of the European Union. If the Commission does not approve or object to the derogation, it explains its objections to implementing the requested measures. For a request to take effect, the Council must approve the draft presented by the Commission.

In any case, the process is completed within eight months of the EU country submitting its request to the European Commission.

Germany’s Derogation Request: Key For Mandatory B2B E-invoicing

Germany's request to introduce a special measure derogating from Articles 218 and 232, thus derogating from general EU VAT rules, provides a notable example of how an EU Member State can complete the derogation process to introduce a digital reporting system enhancing VAT compliance.

Germany proposed introducing a mandatory electronic invoicing system for domestic transactions between taxable persons in response to rising VAT frauds and the need for more secure and precise transactional data collection. Germany wanted to implement a compulsory e-invoicing system for B2B transactions.

However, this system deviated from the general invoicing rules defined under the EU VAT Directive, which led Germany to submit a formal request requesting a derogation under Article 395. The main reasons for introducing mandatory B2B e-invoicing are to combat tax fraud and evasion and improve VAT collection. Additionally, the request outlined the potential of such a system to reduce administrative burdens and VAT gaps.

Furthermore, the request included the impact assessment, which resulted from an extensive consultation with key stakeholders, such as the Tax Authority and taxable persons. The conclusion was that mandatory B2B e-invoicing would not represent a burden for businesses and that, in the long term, they would benefit from automating processes, such as accounting, and eliminating costs relating to paper invoices, such as issuing, sending, processing, and storing them.

The European Commission and the Council of the European Union recognized the importance of systematically combating VAT fraud and endorsed the request after deliberately conducting assessments. In its final letter, the Council of the European Union approved the derogation, granting Germany three years, from January 1, 2025, to December 31, 2027, to implement mandatory B2B e-invoicing.

Conclusion

In addition to receiving approval to implement the new measures, EU countries that have already been granted the right to derogate from the EU VAT Directive must also go through the same procedure when they want to continue applying mandatory e-invoicing upon previously received approval. Thus, Italy underwent the same procedure to obtain authorization to apply mandatory e-invoicing since it was authorized to utilize the special measure until December 31, 2024.

Derogation from the EU VAT Directive is vital for EU Member States to tailor VAT measures to their unique economic and market needs without violating or endangering fundamental EU principles. The process may seem rigorous, but it reflects the balance between national autonomy and collective efforts to develop a stable and harmonized EU market and VAT system.

Source: EU VAT Directive, European Commission - VAT Derogations, EU Directive 2006/69/EC, Proposal for Implementing Decision 2023/0193(NLE), Proposal for Implementing Decision 2024/0246 (NLE)