The goal of the reduced VAT rate for food is to reduce the vulnerability of low-income households and families to food prices, which tend to take up a larger share of their overall spending. VAT was enacted in Luxembourg in 1979. The current standard VAT rate is 17%, and a reduced VAT rate of 3% exists for food and non-alcoholic beverages, as well as some other goods and services. Low-income households are the primary beneficiaries of the subsidy, but all income level households benefit as well as national and international food suppliers. Other countries with similar subsidies include the Netherlands.
The budget impact of the reduced VAT rate was EUR 256 million in 2020. If the subsidy were to be removed, food prices would rise by 14%, and demand would decrease by 7.5%. The decrease in demand would be in monetary value and not necessarily in volume. The changes in demand would vary for different food categories because consumers may shift to cheaper or lower quality foods if the subsidy were removed.
The removal of this subsidy and declining food demand would decrease food production, which would have a positive impact on the environment. A decrease in food production could lead to lower emissions, lower energy demands, less land used in production and potentially a reduction in food waste. Removal of this subsidy could result in a decrease of 135 kt CO2 eq.
The reduced VAT rate for food was shaped by the Modified Law of 12 February 1979 and the VAT Directive. Luxembourg implemented a farm-to-fork initiative that encourages the traceability of food throughout the supply chain. There are currently no plans to reform this subsidy. Future reforms could include the introduction of the standard VAT rate of 17% for all foodstuffs, but a financial compensation strategy for low-income households would also need to be established. Other reform options are introducing a VAT based on the level of environmental impact a product has or applying the standard VAT rate of 17% to “luxury” food items and excluding staple food items from this standard VAT rate.
More information on the reduced VAT rate for food and other candidates for reform in Luxembourg and other Member States can be found in the country case studies and factsheets compilation.