Germany: Proposed VAT Reform: Major Changes Planned from 2027
Reports indicate that in Germany, the political parties forming the governing coalition have reached an agreement on a wide-ranging overhaul of the German VAT system. The proposal, commonly referred to as the “21–10–0 model,” would reshape the existing VAT rate structure by combining higher tax rates with targeted consumer relief. While the reform is designed to increase public revenue, it also seeks to ease the financial burden on households through the introduction of a zero-rate VAT treatment for food products. If implemented as currently envisaged, the new rules would take effect on 1 January 2027 and would represent one of the most significant VAT reforms in Germany in recent decades.
New VAT Rate Structure
The planned reform would raise the standard VAT rate from 19% to 21%. At the same time, the reduced rate would increase from 7% to 10%. To offset some of the impact on consumers, food products would generally become subject to a 0% VAT rate.
Government estimates suggest that increasing the standard rate could generate approximately €30 billion in additional annual tax revenue. A further €3 billion is expected from the increase in the reduced rate. However, applying a zero rate to food products would reduce tax receipts by roughly €17 billion each year. Overall, the reform is projected to produce a net gain of around €16 billion annually, which is expected to support planned income tax reductions.
VAT Law Implications
From a VAT perspective, one of the most notable elements of the proposal is the introduction of another category of supplies eligible for a zero VAT rate. Following the earlier implementation of a 0% rate for certain photovoltaic installations, Germany would again be making use of the flexibility available under European VAT legislation.
Under Article 98(2) of the EU VAT Directive, read together with Annex III, Member States may apply a zero rate to specific categories of goods and services. Food products, including most beverages but excluding alcoholic drinks, fall within the categories for which such treatment may be permitted. EU rules also allow Member States to define the scope of the relief according to policy objectives, including social considerations or the classification of essential goods.
Scope of the Zero Rate
At present, it remains unclear how broadly the German legislature intends to define “food products” for the purposes of the new zero rate. The precise boundaries of the measure will therefore be an important aspect of the forthcoming legislation.
It is also important to distinguish a zero VAT rate from a VAT exemption. Transactions taxed at 0% remain fully taxable supplies and therefore continue to give rise to a right of input VAT deduction. Businesses making such supplies would not charge VAT on their sales, but they would generally retain the ability to recover VAT incurred on related purchases and expenses.