How EU tax policy works

What is taxation?

Taxation plays a pivotal role in upholding a country’s social cohesion and sovereignty, and acts as the financial backbone for effective governance.

Public revenues are the main source for financing essential public functions such as education, healthcare, welfare, safety, research, and public infrastructure systems.

Tax revenues also empower countries to finance key decisions that shape both the economy and society.

In the EU, nearly 90% of the revenue available to national governments comes from taxes. This underscores the importance of ensuring that tax systems within member states are capable of generating the necessary revenues. If tax revenue is insufficient, the country may have to resort to borrowing, leading to future debt obligations.

Types of taxation in the EU

The EU cannot and does not impose taxes on citizens or companies. That responsibility lies solely with the individual member states.

This means that the amount of taxes Europeans pay is determined by their own national governments.

Taxes fall into two main categories: direct and indirect taxes.

Direct taxation

personal income tax
corporate (company) profit tax

Indirect taxation

Value Added Tax (VAT)
excise duties on alcohol, tobacco and energy

Direct taxation

Direct taxes are imposed upon a person or a company (business). These include, for instance, income tax, corporate profit tax and property tax.

EU legislation in this area is limited to aligning (harmonising) specific aspects of member states’ laws. This can only be done to the extent necessary to improve the functioning of the EU’s single market and to address common cross-border challenges such as tax evasion or aggressive tax planning.

Indirect taxation

Indirect taxes are imposed upon a transaction. Examples of such taxes are the value added tax (VAT) on the sale of goods and services or excise duties on alcohol, tobacco products and energy. In these cases the consumer pays the tax as part of the purchase price, and the seller transfers the amount of tax due to the authorities.

EU legislation in this area often involves harmonising national laws. Where tax rules for the sale of goods and services differ greatly across the EU, this can distort competition between businesses and make cross-border trade more difficult.

Why is an EU tax policy needed?

Taxes play a crucial role in shaping the price of goods and services, and they also influence the behaviour of investors and consumers. As a result, tax policy can incentivise productivity, enhancing investment and innovation.

EU economies are facing the impact of major global shifts, such as demographic change, digitalisation and globalisation, as well as the effects of climate change, the post-Covid recovery and the consequences of Russia's invasion of Ukraine.

These challenges affect the resilience of tax systems, thus creating a growing need for alignment with ongoing and future economic developments.

EU-level involvement is necessary to ensure that tax rules and policies are compatible with the functioning of the EU single market. This alignment is crucial to fully achieve the potential of the single market, benefiting over 400 million EU citizens and millions of businesses.

The EU’s objectives for taxation

Ensure fairness

Some taxation measures can create spill-over effects for other member states or can inadvertently raise barriers to cross-border commerce. In order to prevent this, certain tax rules within the EU are harmonised (e.g. in the area of VAT), which leads to a more seamless internal market, thereby fostering economic growth and facilitating smoother cross-border transactions.

Support sustainable growth and enhance competitiveness

Some tax policy measures are aligned to supporting the broader economic goals of the EU, addressing challenges such as demographic change, digitalisation, globalisation and the impacts of climate breakdown, while promoting economic cohesion, reducing disparities, and facilitating smoother cross-border transactions and investment.

Generate revenue for the EU budget

Certain taxes, such as VAT, are a source of revenue for the EU budget. A percentage of what member states collect is transferred to the EU budget as an 'own resource'.

Financing the EU budget

The EU’s recent actions on taxation

The EU is working on legislation in the area of taxation in order to support competitiveness and growth, streamline business operations across the EU, reduce compliance costs, improve tax procedures and fight tax fraud.

These legislative efforts aim to create a fairer and more efficient tax environment, including:

avoiding the double taxation of cross-border investment
reducing costs for cross-border businesses
combatting tax avoidance
taxation in the digital era
modernising the VAT system
enhancing administrative cooperation between members state

Avoiding double taxation of cross-border investment

When an EU resident invest in securities in another member state, the payments received in return are subject to a withholding tax in the member state of residence, as well as in the member state of the investment.

To avoid double taxation, the non-resident investor is subsequently required to submit a refund claim for the excess tax withheld by the source country. These refund procedures are typically burdensome, time-consuming, and costly.

To address this, on 10 December 2024 the Council adopted a directive on the faster and safer relief of excess withholding taxes, known as FASTER.

The new rules will:

introduce two fast-track procedures complementing the existing standard refund procedure: a 'relief at source' procedure and a 'quick refund' system, which will make the relief process faster and harmonise it across the EU
introduce a common EU digital tax residence certificate (eTRC) that tax-paying investors will be able to use in order to benefit from the fast-track procedures for obtaining relief from withholding taxes
set a standardised reporting obligation for financial intermediaries (such as banks or investment platforms), which will make it easier for national tax authorities to detect potential tax fraud or abuse

Taxation: Council adopts new rules for withholding tax procedures (FASTER) (press release, 10 December 2024)

Reducing costs for cross-border businesses

Despite the closely integrated EU single market, businesses still face taxation obstacles, as they must comply with 27 different national corporate tax systems. This leads to high costs and uncertainty for cross-border businesses.

In September 2023 the Commission proposed the business in Europe: framework for income taxation (BEFIT) initiative to reduce tax compliance costs for cross-border businesses. The proposal includes:

a common set of rules for calculating the tax base for companies that are part of the same group
one single aggregated tax base for all members of the group
the BEFIT group’s share of the aggregated tax base will be calculated on the basis of the average of the taxable results from the previous three fiscal years

These rules would apply to large groups operating in the EU, with an option for medium-sized companies to opt in. A business is considered to be part of a large group if it has a combined annual revenue of at least €750 million, and the parent company holds at least 75% ownership.

Business in Europe: framework for income taxation (European Commission)

Combatting tax avoidance

Tax avoidance costs member states billions of euros every year. Globalisation and technological progress have significantly facilitated these activities.

The EU has played a key role in helping member states coordinate tax regulations to ensure a level playing field. The Code of Conduct (business taxation) is the flagship instrument, promoting fair tax competition, both within the EU and globally.

Given the global nature of unfair tax competition, the EU promotes good tax governance and combats tax evasion and avoidance internationally. The Council regularly publishes the EU list of non-cooperative jurisdictions, which includes jurisdictions that have failed to meet tax good governance criteria or have refused to comply with those criteria.

Taxation in the digital era

Digital taxation is a relatively new component of tax policy and reflects the need to address the challenges arising from the growing digital economy.

The digital economy has brought many benefits to citizens and companies. At the same time, however, novel business models and the increase in certain digital activities has exerted pressure on the traditional rules of national taxation systems.

As a result, tax rules must be adapted to bring them into the digital age. All sectors of the economy should pay their fair share of taxes and contribute to the functioning of society.

These issues have been among the Council’s top priorities since 2017.

Digital taxation

Modernising the VAT system

VAT in the digital age

Value-added tax (VAT) is a key source of revenue for EU member states, helping to fund essential public services such as education, healthcare and public transport. Nevertheless, significant amounts of VAT revenue are still lost due to fraud, maladministration, bankruptcies, insolvencies, and other factors.

To modernise the current VAT system and bring it into the digital age, the Council adopted the VAT in the digital age package on 11 March 2025. The new rules aim to combat VAT fraud, support businesses, and drive digitalisation across the EU.

The package includes measures to improve and expand the scope of the existing 'one-stop shops', allowing more businesses to meet their VAT obligations on a single online portal in a single language.

In addition, online platforms for passenger transport and short-term accommodation rentals will be required to collect and remit VAT to tax authorities in cases where individual service providers are exempt.

The package also introduces fully digital reporting obligations based on e-invoicing, aiming to make VAT reporting for cross-border businesses in the EU entirely digital by 2030.

Electronic VAT exemption certificate

As part of its efforts to modernise the VAT system, on 18 February 2025 the Council adopted new rules introducing an electronic tax certificate for VAT exemptions.

Paper certificates, used when goods are exempt from VAT, will be replaced by an electronic form. The digital certificate will simplify and streamline the process when such goods are imported for embassies, international organisations, or armed forces.

The new measures will come into force on 1 July 2031 with a further transition period of one year, during which member states will be able to use both electronic and paper forms.

Taxation: Council adopts new electronic VAT exemption certificate to replace paper forms (press release, 18 February 2025)

Enhancing administrative cooperation between member states

In the EU, taxpayers may need to declare in their country of residence all income earned globally. While tax authorities can track national income through measures like withholding taxes or national reporting, ensuring that taxpayers declare their foreign income is more challenging.

Under the directive on administrative cooperation (DAC), EU member states help to prevent tax evasion by exchanging tax-relevant information automatically, spontaneously and upon request. This makes it harder for individuals and businesses to conceal their assets or income from tax authorities. In force since 2014, the DAC plays a crucial role in promoting tax transparency and fostering cooperation between EU member states.

In 2023, the Council extended the DAC's scope and added rules on the reporting and automatic exchange of information on revenues from transactions in crypto-assets and on advance tax rulings for the wealthiest (high-net-worth) individuals.

In 2025, the Council adopted a directive (DAC9) amending the existing DAC in order to enhance cooperation and information exchange on minimum effective corporate taxation. The new directive will help multinational and large domestic companies to meet their tax reporting duties under the G20/OECD global agreement.

Member states will have to implement the new rules by 31 December 2025.

Council adopts rules to extend cooperation and information exchange between tax authorities to minimum effective corporate taxation (press release, 14 April 2025)

The Council as sole EU legislator

Tax legislation at the EU level is adopted by the Council, which acts as the sole legislator, as set out in the European Union treaties. The European Parliament is consulted, but has no legislative power in this area. This is called a special legislative procedure.

Directives or regulations are adopted through unanimous votes in the Council. No vote 'against' may be cast if legislation in this area is to be adopted by the Council.

The legislative process begins with the European Commission’s proposal for new EU tax legislation or modifications to existing laws.

Special legislative procedures