Exception for lower VAT on housing at risk, Germans hesitate

Brussels - The extension of the exemption requested by the Czech Republic for a reduced VAT rate on housing is in jeopardy. The exemption expires at the end of the year, and the European Commission wants to extend it for three years. However, the Germans are hesitant about whether they will support such a proposal. A trusted source told ČTK today after the meeting of national experts in Brussels. Housing prices in the Czech Republic could thus rise more than expected in connection with the reform of public finances at the beginning of next year.
It is almost certain that the VAT rate on housing in the Czech Republic will increase by four percentage points; the increase will come at the beginning of the year due to the reform of public finances. However, if the Czech Republic does not obtain an exemption from the EU, the tax will increase by 14 percent, which could mean an increase of hundreds of thousands or millions of crowns for family homes, for example. The reduced rate would then apply only to social housing, which assumes a maximum of 350 square meters of floor space for houses and a maximum of 120 square meters for apartments.
The Czech Republic and other countries seeking to extend the exemption, such as Poland and Hungary, must convince all 27 EU member states to agree. In tax matters, unanimous consent is required in the union.
According to a source from ČTK, it is still too early to speculate on how the negotiations will ultimately turn out. So far, only the first round of negotiations among national experts has taken place in Brussels. The Germans, in particular, are hesitating with their support for the Commission's proposal, and the extension of exemptions does not particularly appeal to the Danes, who have a uniform tax rate of 25 percent and are not inclined to various exemptions.
The entire issue will likely be decided at the end of the year at a meeting of EU finance ministers. The next round of negotiations among national experts will take place in early October.
According to the European Commissioner for tax matters, László Kovács, the extension of exemptions for new member states is important within the framework of equal treatment of all members of the union. Countries that joined the EU before 1995 have their exemptions guaranteed until 2010, when a new VAT regime for the entire union is supposed to come into effect. In contrast, the validity of exemptions for new member states ends in 2007 or 2008.
Thus, the extension of exemptions would resolve the unfair and unequal situation that would threaten if the opposite approach were taken. "Extending exemptions is a logical step," Kovács said some time ago.
The Commission even had a study prepared by an independent group of economists, Copenhagen Economics, regarding the exemptions. It concludes that reduced VAT rates do not excessively disrupt the internal market of the EU. At the same time, it states that there is no evidence that reduced VAT rates fundamentally support economic growth and employment, thus refuting the basic arguments of proponents of reduced rates. Its main conclusion is that the most advantageous option would be the introduction of a uniform VAT rate.