Proposal for a Council Directive amending Directive 77/388/EC by reason of the accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia
Date: 2004-04-21
Institutions: European Commission
Subjects: accession to the European Union, basis of tax assessment, provision of services, tax exemption

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 21.04.2004 
COM(2004)295 final 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 77/388/EC by reason of the accession of the Czech Republic, 
Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia 

(presented by the Commission) 

EN 

   EN 

 
 
 
  
EXPLANATORY MEMORANDUM 

1. 

INTRODUCTION AND BACKGROUND 

On 22 October 1999, as part of its implementation of the recommendations of the European 
Council of 11 and 12 December 1998, and in particular the “Vienna Strategy for Europe”, the 
Council  adopted  Directive  1999/85/EC1  amending  Directive  77/388/EEC2  (the  6th  VAT 
Directive) as regards the possibility of applying on an experimental basis a reduced VAT rate 
on  labour-intensive  services.  Its  purpose  is  to  allow  Member  States  that  so  wish  to  test  the 
impact  of  a  targeted  reduction  of  VAT  on  these  services  in  terms  of  job  creation  and  a 
reduction of the underground economy. 

Member  States  wishing  to  introduce  the  measure  had  to  inform  the  Commission  before 
1 November 1999.3 

Article 28(6) of the 6th VAT Directive authorised the experimental application of a reduced 
rate  of  VAT  on  labour-intensive  services  up  to  31  December  2002.  The  period  was  then 
extended to 31 December 2003 by Directive 2002/93/EC4 of 3 December 2002 to allow for 
thorough evaluation of the results of the experiment. 

On the basis of the assessment reports submitted by the Member States that have applied the 
reduced rate, the Commission submitted a global evaluation report5 on the experiment to the 
European Parliament and the Council. The evaluation report on the experimental application 
of  reduced  rates  for  labour-intensive  services  adopted  by  the  Commission  on  2  June  2003 
concluded  that  it  was  impossible  to  identify  with  any  certainty  any  beneficial  impact  on 
employment or a reduction in the black economy as a result of reducing VAT rates under this 
experiment.  Compared  with  measures  which  directly  target  labour  costs,  the  impact  of  a 
reduction  in  VAT  rates  on  employment  always  has  a  higher  budgetary  cost  for  each  job 
created.  However,  the  measure  did  not  appear  to  jeopardise  the  smooth  functioning  of  the 
internal market. 

On  23  July  2003  the  Commission  adopted  a  proposal  for  a  Directive  introducing  a  general 
review  of  reduced  rates  of  VAT6  with  a  view  to  simplifying  and  rationalising  them.  The 
proposal takes account of the conclusions of the evaluation report and fits into the framework 
defined  in  the  Commission's  Communication  on  a  strategy  to  improve  the  operation  of  the 
VAT system within the context of the internal market.7  

1  
2 

3 

4 
5 
6 
7 

OJ L 277, 28.10.1999, p.34. 
OJ  L  145,  13.6.1977,  p.  1  –  Directive  last  amended  by  Directive  2000/15/EC  of  10  February  2004, 
OJ L 52, 21.2.2004, p. 61. 
The  applications  submitted  were  the  subject  of  Council  Decision  2001/185/EC  of  28  February  2000: 
OJ L 59, 4.3.2000, p. 10. 
OJ L 331, 7.12.2002, p. 27. 
COM(2003) 309 final, 2.6.2003. 
COM(2003) 397 final, 23.7.2003. 
COM(2000) 348 final, 7.6.2000. COM(2003)614 final, 20.10.2003. 

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Since the Council has not yet been able to reach an unanimous decision to adopt the proposed 
Directive, in order to avoid legal uncertainty from 1 January 2004 and give the Council time 
to  take  a  decision  on  the  general  proposal  regarding  reduced  rates  of  VAT,  the  first 
subparagraph of Article 28(6) of Directive 77/388/EEC and the first paragraph of Article 1 of 
Decision 2000/185/EC should be amended to extend the validity of the authorisation by two 
years up to 31 December 2005.8This would allow the nine Member States currently applying 
a reduced rate of VAT on labour-intensive services to continue to do so for another two years 
under the same conditions, without changing or extending the scope of the experiment.  

2. 

CONSULTATION OF THE ACCEDING COUNTRIES 

In  the  period  preceding  enlargement,  an  information  and  consultation  procedure  for  the  10 
acceding countries was introduced for the adoption of certain Council decisions that could be 
considered new Community acquis. 

When  the  extension  of  the  experimental  application  of  reduced  rates  for  labour-intensive 
services was adopted, some accession countries expressed their concern at the fact that they 
could not request a similar authorisation to apply reduced rates to the services in question in 
the same conditions as the current Member States, since as the experiment was due to end on 
31 December 2003, Annex K to the Sixth VAT Directive was to disappear definitively before 
1 May 2004 (the date of accession to the Community). 

Article  57  of  the  Act  concerning  the  conditions  of  accession  for  the  10  countries  and  the 
adjustments to the treaties on which the EU is founded 9 provides that: 

" 1.  Where  acts  of  the  institutions  prior  to  accession  require  adaptation  by  reason  of 
accession,  and  the  necessary  adaptations  have  not  been  provided  for  in  this  Act  or  its 
Annexes,  those  adaptations  shall  be  made  in  accordance  with  the  procedure  laid  down  in 
paragraph 2. These adaptations shall enter into force as from accession. 

The Council, acting by a qualified majority on a proposal from the Commission, or the 
2. 
Commission, according to which of these two institutions adopted the original acts, shall to 
this end draw up the necessary texts."  

Following the extension of Annex K to 31 December 2005, the Czech Republic and Poland 
expressed their wish to apply reduced rates to certain labour-intensive services. 

3. 

OPINION OF COMMISSION DEPARTMENTS 

Council  Directive  2004/15/EC  was  adopted  on  10  February  2004.10  It  entered  into  force  on 
the day of its adoption and is applicable as of 1 January 2004. 

At  the  time  of  the  pre-accession  negotiations  the  possibility  of  applying  reduced  rates  to 
labour-intensive services was not considered relevant, since the experiment was due to end on 
31  December  2003  (i.e.  before  EU  enlargement)  and  so  no  specific  measure  needed  to  be 
considered for the acceding countries. 

8 
9 
10 

Directive 2004/15/EC of 10 February 2004, OJ L 52, 21.2.2004, p. 61. 
OJ L 236, 23.9.2003. 
OJ L 52, 21.2.2004. 

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The extension of the measure constitutes a new element calling for a review of the situation, 
since it is a new acquis that could not be taken into account previously. 

The  Commission  considers  that  the  same  possibility  should  be  offered  to  the  new  Member 
States. Otherwise labour-intensive services currently subject to the reduced rate would have to 
go  from  the  reduced  rate  to  the  normal  rate,  which  would  not  be  the  case  in  the  current 
Member  States  since  they  can  benefit  from  the  extension  up  to  31  December  2005,  as 
provided for by the Directive of 10 February 2004. 

Consequently the acceding countries who have expressed the wish may, as was the case for 
the  current  Member  States,  opt  for  the  application  of  a  reduced  rate  on  labour-intensive 
services listed in Annex K. All the current Member States had the opportunity to take part in 
the experiment if they applied before 1 November 1999. 

The Commission is therefore presenting a proposal for a directive, on the basis of Article 57 
of the Accession Treaty, amending Directive 77/388/EEC with a view to authorising acceding 
countries who have so requested to apply a reduced rate to certain services listed in Annex K, 
provided  they  comply  with  the  limits  and  conditions  laid  down  in  Directive  1999/85/EC  of 
22 October 1999 when the experiment was launched. 

COMMENTS ON THE ARTICLES 

Article 1 

This article adds a new paragraph 7 to Article 28 introducing an authorisation procedure by 
the Council, acting unanimously, for the new Member States that wish to apply a reduced rate 
to labour-intensive services. 

Articles 2 to 4 

These Articles provide for entry into force and application. 

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Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 77/388/EC by reason of the accession of the Czech Republic, 
Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and Slovakia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  of  Accession  of  the  Czech  Republic,  Estonia,  Cyprus,  Latvia, 
Lithuania,  Hungary,  Malta,  Poland,  Slovenia  and  Slovakia,  and  in  particular  Article  2(3) 
thereof, 

Having  regard  to  the  Act  of  Accession  of  the  Czech  Republic,  Estonia,  Cyprus,  Latvia, 
Lithuania,  Hungary,  Malta,  Poland,  Slovenia  and  Slovakia  and  in  particular  Article  57(1) 
thereof, 

Having regard to the proposal from the Commission,11 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Article 28(6) of Council Directive 77/388/EC of 17 May 1977 on the harmonisation of 
the  laws  of  the  Member  States  relating  to  turnover  taxes  -  common  system  of  value 
added tax: uniform basis of assessment,12
 as amended by Directive 2004/15/EC, allows 
the reduced rates provided for in the third subparagraph of Article 12(3)(a) also to be 
applied to the labour-intensive services listed in the categories set out in Annex K to 
that  Directive  for  a  maximum  period  of  six  years,  from  1  January  2000  to 
31 December 2005. 

Council  Decision  2000/185/EC  of  28  February  2000  authorising  Member  States  to 
apply a reduced rate of VAT on certain labour-intensive services in accordance with 
the  procedure  provided  for  in  Article  28(6)  of  Directive  77/388/EEC,13  as  last 
amended  by  Decision  2004/161/EC,14  authorised  certain  Member  States  to  apply  a 
reduced rate of VAT on labour-intensive services up to 31 December 2005. 

The  new  Member  States  who  have  expressed  the  wish  to  do  so  should  be  given  the 
possibility  of  applying  a  reduced  rate  to  certain  labour-intensive  services  provided 
they comply with the limits and conditions laid down in Directive 77/388/EEC. 

The necessary amendment to Directive 77/388/EEC must be adopted before accession 
so that it enters into force at accession. 

(5) 

Directive 77/388/EC should be amended accordingly, 

11 
12 
13 
14 

OJ C, , p. . 
OJ L 145, 13.6.1977, p. 1. Directive last amended by Directive 2004/15/EC (OJ L 52, 21.2.2004, p. 61). 
OJ L 59, 4.3.2000, p. 10. 
OJ L 52, 21.2.2004, p. 62. 

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HAS ADOPTED THIS DIRECTIVE: 

Article 1 

In Article 28 of Directive 77/388/EEC, the following paragraph 7 is added: 

“7. Should the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, 
Slovenia  and  Slovakia  wish  to  introduce  as  of  1  May  2004  the  measure  provided  for  in 
paragraph 6, they shall inform the Commission thereof before 1 May 2004 and communicate 
to  it  before  that  date  all  relevant  information,  in  particular  that  referred  to  in  the  fourth 
subparagraph of paragraph 6.” 

Article 2 

The Member States concerned shall bring into force the laws, regulations and administrative 
provisions necessary to comply with this Directive by 1 May 2004 [at the latest]. They shall 
forthwith inform the Commission thereof.  

When Member States adopt these measures, they shall contain a reference to this Directive or 
shall  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official  publication. 
Member States shall determine how such reference is to be made. 

Article 3 

This Directive shall enter into force subject to, and as from the date of, the entry into force of 
the Treaty of Accession of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, 
Malta, Poland, Slovenia and Slovakia. 

Article 4 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the Council 
The President 

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