Käibemaks ELis

What is VAT?

Value added tax (VAT) is a consumption tax that applies to most goods and services.

It is classified as an indirect tax, meaning that while it is paid by consumers, it is collected and remitted to the tax authorities by businesses. For example, when a consumer buys a book in a bookshop, the bookshop includes VAT in the price paid, and subsequently remits this tax to the government.

Businesses also pay this tax on their own purchases, but they can deduct it from the VAT they have to pay to the tax authorities.

Why VAT matters

Source of revenue

VAT is one of the most important sources of revenue for member states, as it contributes  to the financing of public services such as education, healthcare, libraries and public transport.

Every year, EU member states raise over €1 000 billion in VAT revenue. In 2024, VAT represented 7.1% of the EU’s GDP, and made up 15.5% of total government tax revenue.

Financing the EU budget

VAT is not only a vital revenue source for member states but also plays a crucial role in funding EU initiatives.

A portion of each member state's VAT revenue forms part of the EU's 'own resources' – one of the funding sources for the EU budget. Specifically, a standard rate of 0.3% is applied to each member state's VAT base. To ensure fairness, this contribution is capped at 50% of the country's gross national income (GNI).

VAT revenue accounts for around 10% of the EU's own resource revenue. 

Combatting VAT fraud and avoidance 

Because of the negative impact of VAT losses on governments’ ability to finance essential public goods and services, they remain a significant challenge in the EU.

In 2023, EU member states lost approximately €128 billion in VAT revenue, contributing to the VAT gap — the difference between expected and actual VAT collections. 

The sources of this gap are primarily linked to fraud, evasion and avoidance, but also include corporate insolvency, bankruptcy and administrative errors.

• Maksustamise vältimise vastane võitlus ELis
• VAT gap report 2025 (European Commission)

EU legal framework for VAT

The EU does not impose taxes; taxes are imposed by each member state. However, the EU has created a harmonised system across member states to ensure the smooth functioning of the single market.

The legal framework for VAT in the EU includes:

• Article 113 of the Treaty on the Functioning of the EU
• the VAT directive, covering the entire EU VAT system
• the VAT regulation, covering administrative cooperation and the fight against fraud
• the VAT in the digital age package
• the VAT e-commerce sales

Article 113 of the Treaty on the Functioning of the EU

The legal basis for harmonising indirect taxes such as VAT across the EU is established in Article 113 of the Treaty on the Functioning of the EU (TFEU). It requires the unanimous agreement of all member states and consultation with the European Parliament for new rules to be adopted.

The VAT directive

The EU has put in place a framework for administrative cooperation to help member states tackle cross-border VAT fraud and ensure effective tax enforcement.

This framework enables national tax authorities to exchange information, carry out joint audits and support each other in enforcing VAT rules. By facilitating cooperation across borders, it helps detect and prevent fraud schemes such as missing trader intra-community fraud (also known as carousel fraud), which exploit differences between national systems.

A key instrument in this area is Council Regulation (EU) No 904/2010, which sets out the rules for cooperation and information exchange between member states.

At EU level, specialised bodies complement these efforts:

• the European Anti-Fraud Office investigates fraud affecting the EU’s financial interests
• the European Public Prosecutor's Office prosecutes serious cross-border VAT fraud cases
• the Eurofisc network enables swift information-sharing between national authorities on suspicious activities

The European Commission proposed new rules in November 2025 to enhance cooperation between member states, national authorities, EPPO and OLAF, furthering efforts to fight VAT fraud.

On 5 May 2026, the Council reached a provisional agreement on this framework. These new measures aim to provide more direct access to key VAT data at EU level, improving coordination, speeding up investigations and reinforcing the EU’s capacity to detect and combat fraud. Carousel fraud alone is estimated to cost between €12.5 billion and €32.8 billion annually, often involving organised crime groups.

In practical terms, the new legislation will amend the existing rules on administrative cooperation, reinforcing information exchange across the EU. Together, these measures help protect public revenues, safeguard the EU budget and ensure fair taxation across the single market.

The VAT regulation

The VAT regulation gives member states the appropriate tools to cooperate and exchange VAT-related information, making cross-border VAT administration more efficient.

VAT in the digital age package

On 11 March 2025, the Council gave its final approval to a series of measures to modernise, simplify and strengthen the VAT system through digitalisation, while also combatting VAT fraud and avoidance.

The new rules will update the VAT system by introducing:

• a real-time digital reporting system, fully digital by 2033, to ensure timely and accurate VAT data collection
• stricter rules for platform economy operators offering online accommodation rentals and passenger transport services, so as to ensure fair taxation of both traditional and online services
• an extension of the scope of ‘one-stop-shops’ in order to simplify the VAT registration process for businesses operating in every member state

VAT e-commerce sales

On 9 November 2026, the Council agreed on further measures to simplify VAT collection on e-commerce sales into the EU, bringing VAT rules into line with the reformed EU customs framework.

The new rules will:

• extend the Import One Stop Shop (IOSS) to goods of all values, removing the current €150 threshold
• allow the IOSS to cover goods stored in customs warehouses in the EU by non-EU operators
• make non-EU online platforms responsible for collecting and paying VAT on all goods they sell into the EU from 1 July 2028

These measures aim to improve VAT compliance and collection, while reducing administrative burdens for businesses and authorities.

See also