A circular VAT framework that rewards recycling and restores fair competition

FEAD, the European Waste Management Association, welcomes the Commission’s initiative to modernise VAT rules to support the transition towards a circular economy. Nevertheless, FEAD deeply regrets the narrow framework proposed and sees this as a missed opportunity to drive real change and to improve competition in the waste management market.

The call for evidence does not foresee any VAT measure to support recycling[1], despite Europe’s ambition of being world leader in circularity. Today, recycled materials compete with virgin materials whose price does not reflect their environmental cost. While the upcoming Circular Economy Act (CEA) is intended to strengthen the single market for secondary raw materials, the current VAT framework can still financially favour the use of primary raw materials. We believe that aligning the VAT Directive more closely with the CEA ambition would be a highly constructive way to help make these environmental targets more economically viable through supportive pricing mechanisms.

FEAD therefore proposes two complementary levers. The first acts on the waste management services: waste must be collected, sorted and recycled at a competitive cost and under fair market conditions. The second acts on the demand side: businesses and consumers must be encouraged to choose recycled materials and products with recycled content over virgin ones. Both levers should therefore be addressed together, so that the VAT framework supports the circular economy from waste collection to the final product.

In addition to the above, FEAD advocates for reused spare parts recovered from End-of-Life Vehicles (ELVs) to be explicitly covered under the regime foreseen in the call for evidence for second-hand and remanufactured goods.

1. VAT on waste management services

A. Harmonised and mandatory reduced VAT rates for all waste management activities

Annex III, point 18 of the VAT Directive (Council Directive 2006/112/EC) already allows Member States to apply reduced rates to waste services, but national application can vary in rates and scope. FEAD calls for a harmonised, mandatory reduced rate covering the collection, sorting, preparation for re-use, recycling, recovery and treatment of all waste streams. Equal treatment of private and public operators, as set out under point (b) below, is a precondition: the reduced rate must apply equally to all providers.

B. Equal VAT treatment of private and public waste management operators

The current EU VAT framework does not ensure a level playing field between public and private waste management operators, because bodies governed by public law providing waste services are not treated as taxable persons under Article 13 and Annex I of the VAT Directive.

This exemption of public waste management companies from VAT in some EU Member States – combined with the exclusion of in-house awards and horizontal cooperation by public contracting authorities from the scope of public procurement law – creates a significant competitive disadvantage for private waste management companies and leads to shrinking markets for private companies, limiting their overall economic power and investment capacity.

Moreover, public bodies engaging as public authorities cannot recover input VAT: when a municipality buys vehicles or sorting equipment, the VAT is a final cost, whereas hiring additional staff involves no VAT at all. As a result, it is cheaper for municipalities to hire more staff than to invest in modern collection and sorting technology. In Member States without a VAT compensation scheme, this holds back the investment needed to raise recycling rates and makes contracting private operators, who must charge VAT, more expensive. This runs directly counter to the goals of the circular economy.

To this end, FEAD advocates for revising the VAT Directive (Council Directive 2006/112/EC) to include waste management activities in Annex I to ensure that bodies governed by public law are regarded as taxable persons when they carry out these activities.

Fair competition in the waste management market is essential to achieve the Clean Industrial Deal´s aims to position the EU as the global leader in the circular economy by 2030, as this goal demands significant investments. At the moment, this ambition is undermined by the increasing dominance of waste management markets by public entities. The absence of competitive tendering combined with the exemption of public waste management companies from VAT in some EU Member States, shuts out private operators, depriving them of the market visibility and stability needed to justify long-term investments. To unlock the full potential of the circular economy, procurement and VAT rules must be reformed, reverting current dynamics and opening waste management markets to competition, ensuring contracts are awarded based on quality, efficiency and innovation, and thus enabling a strong private waste management industry ready to invest.

Example: A municipality that cannot recover VAT would in theory pay EUR 121 for a EUR 100 service provided by a private operator at a standard rate of 21%, compared with EUR 100 for the same service provided in-house by a public body outside the scope of VAT. Because the public body cannot recover the VAT on its own purchases, such as vehicles and fuel, the actual price gap is lower, typically around 12% rather than 21%. But this remains a significant and unjustified advantage, which would disappear if both operators were taxable at the same reduced rate of 6%.

2. VAT on recycled materials and products with recycled content, including for biowaste derived fertilising products

A. For consumers and entities that cannot recover VAT: harmonised and mandatory reduced VAT rates for products containing a minimum share of recycled content, and for compost and digestate

For final consumers and other buyers that cannot recover VAT, such as public authorities in public procurement, the VAT rate directly affects the price paid. FEAD calls for a new entry in Annex III VAT Directive establishing a harmonised reduced rate, applicable in all Member States, for products containing a verified minimum share of recycled content as well as for compost and digestate derived from separately collected bio-waste.

The minimum shares of recycled content should be set at EU level, by product group where appropriate, and verified on the basis of harmonised standards. This would respond to the 2020 circular economy action plan, which recommended enabling Member States to use VAT rates to promote circular economy activities, as well as to the requests from Czechia in 2023and Italy on 12 October 2026[2]. Both delegations have supported lower VAT rates for products with recycled content.

Eligibility should be based on product-specific minimum recycled-content thresholds. These thresholds should:

• be sufficiently ambitious to avoid rewarding merely symbolic quantities of recycled material;
• be established at EU level and verified through harmonised standards;
• apply to recycled content originating from waste collected and fully processed in Europe;
• be based on reliable chain-of-custody and mass-balance rules, where relevant;
• be periodically reviewed as markets and recycling technologies develop.

The impact assessment should examine how it can be ensured that the reduced VAT is also effectively reflected in the final prices.

Example: A product priced at EUR 10 before VAT would cost the consumer EUR 10.60 at a reduced rate of 6% instead of EUR 12.10 at a standard rate of 21% if it contains the required share of recycled content, a clear price signal that would increase demand for recycled materials along the value chain.

B. For businesses and entities that can recover VAT: a flat-rate VAT credit for recycled materials and biowaste derived fertilising products

The Commission rightly recognises in the call for evidence that the current rules favour new inputs over reused, refurbished and remanufactured goods. The same distortion affects recycled materials, which compete directly with virgin raw materials. The Commission must therefore also come forward with an additional solution for recycled materials. As a margin scheme may be ill-suited to recycling, FEAD calls for a dedicated corrective mechanism applied consistently across the EU: a flat-rate VAT credit for taxable persons acquiring recycled materials or products containing a minimum share of recycled content or acquiring biowaste derived fertilising products.

The credit could be set as a percentage of the purchase price of the recycled materials, of the biowaste derived fertilising products or, of the share of the purchase price corresponding to their recycled content, differentiated by material stream, reviewed periodically, and granted only once for the same recycled content along the value chain.

In the case of recycled content shares, eligibility requirements should align with the core principles set out above: sufficiently ambitious, harmonised and verified European recycled content, based on reliable chain-of-custody and mass-balance rules, where relevant.

Example: A manufacturer buying recycled plastic at EUR 1 100 per tonne instead of virgin plastic at EUR 1 000 would, as today, deduct the VAT invoiced by its supplier. With a 10% flat-rate credit for the recycled plastic, it would additionally deduct EUR 110 from the VAT it owes, i.e. it would pay less VAT to the tax authorities (10% of the purchase price in this case, to be defined e.g. by material stream). This would bring the effective cost of the recycled material to EUR 990 and making it the more competitive choice.

In the case of a product containing recycled materials, for example, packaging bought for EUR 100 with 30% recycled plastic content by weight would give a credit base according to the percentage of recycled content, in this case of EUR 30.

[1] Recycling and recycled content is to be understood as including the recovery of organic materials from biowaste and the derived fertilising products, i.e. compost and digestates.

[2] https://data.consilium.europa.eu/doc/document/ST-10397-2023-INIT/en/pdf and https://data.consilium.europa.eu/doc/document/ST-14077-2026-INIT/en/pdf

FEAD, the European Waste Management Association, represents the entire waste management value chain, from collection and sorting to recycling, energy recovery, and final disposal. It brings together the private waste and resource management industry across Europe through its 21 national member associations, which collectively represent over 3,000 companies. Together, the sector provides more than 500,000 local jobs and fuels €5 billion in investments into the economy every year. For more information, please contact: info@fead.be