Green VAT: EU consultation opens on VAT and the circular economy

On 10 September 2026, the European Commission launched a public consultation on how EU VAT rules could be put to work for the circular economy. The Green VAT initiative – also called Circular VAT – focuses on three areas: the VAT treatment of second-hand, refurbished and remanufactured goods; the tax gap between destroying and donating unsold but usable products; and VAT deduction rules for business passenger cars. Feedback can be submitted until 4 November 2026, which leaves barely two weeks.

In short: The Green VAT initiative aims to stop an EU VAT Directive designed decades ago for a linear economy from rewarding the purchase of new goods and the destruction of surplus stock. The Commission plans a legislative proposal for the second quarter of 2027, and the public consultation runs until 4 November 2026.

What is the Commission examining, and why now?

The initiative is led by the Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD). According to the Call for Evidence published on 9 September, the evaluation and the impact assessment run in parallel. The expected outcome is a legislative proposal for a targeted amendment of the VAT Directive (Directive 2006/112/EC) in the second quarter of 2027.

The political starting point is the Clean Industrial Deal, in which the Commission named circularity as a key enabler of a competitive, decarbonised European economy and announced a future “green VAT initiative”. The second reference point is the Circular Economy Act, scheduled for adoption in late 2026, which is meant to strengthen the single market for secondary raw materials. Industry warned in spring that this will not work without tax corrections: an open letter from 12 global companies explicitly called for an end to the cascading taxation that hits second-hand goods on resale.

The technical basis is an external study completed in February 2026 (Challenges of VAT beyond VAT in the Digital Age), on which DG TAXUD built three pillars of action. The stakes are high: according to the document, VAT accounted for 7.1% of EU GDP and 15.5% of total government tax revenue in 2024. Any amendment therefore touches one of the most important revenue streams of national budgets.

The three pillars of Green VAT

The Commission identifies two core problems: tax-driven distortions that make linear choices economically rational, and the uncertainty, complexity and fragmentation of the current rules across Member States.

Second-hand, refurbished and remanufactured goods

When a business buys a new machine tool or laptop, it can deduct the full VAT on the invoice. When it buys the same item second-hand from a reseller applying the margin scheme, the VAT embedded in the price cannot be deducted – it was built into the price at the first sale and stays locked in the chain. The result: the tax system favours new products made from virgin materials over refurbished or remanufactured alternatives.

According to the Call for Evidence, the current rules also rely on an outdated definition of “second-hand goods”, are applied inconsistently across the EU, and require margin calculation and reporting for each individual resale, which places a disproportionate administrative burden on SMEs in particular.

Meanwhile, the market is growing fast. The document estimates that remanufacturing alone could create 500,000 new jobs and grow by EUR 69 billion by 2030, that online recommerce in the EU is worth around EUR 94 billion with projected annual growth above 15%, and that nearly 87% of EU consumers have bought or sold second-hand goods. Why reuse ranks above recycling in the waste hierarchy is something we analysed in detail in connection with the ReSTRAND Vintage Market.

Options under examination include harmonising the margin scheme and making it mandatory and applicable on a general rather than per-sale basis, updating definitions, harmonising and digitalising record-keeping and reporting, and introducing rules that remove the distortion against reuse, refurbishment and remanufacturing.

Donation versus destruction

The second pillar targets the most counter-intuitive situation: under current VAT rules, destroying an unsold but perfectly usable product is often cheaper than donating it. Input VAT on destroyed goods remains deductible, while a free transfer typically triggers a VAT liability or an adjustment of the VAT already deducted. The Call for Evidence notes that business models relying on surplus production make this worse.

This runs counter to the Ecodesign for Sustainable Products Regulation (ESPR), which entered into force in 2024 and whose first tangible measure – a ban on destroying unsold clothes and shoes – has applied to large companies since 19 July 2026. The European Environment Agency estimates that between 264,000 and 594,000 tonnes of textiles are destroyed in the EU every year without ever being used. On the food side, research from the University of Copenhagen shows that donating surplus food can pay off financially – removing the tax obstacle would reinforce that logic.

The range of possible solutions is wide: from removing the right to deduct VAT on viable goods that are intentionally destroyed, through expanding and harmonising the “small gifts” exception, to harmonised EU-wide VAT relief for donations to officially recognised charities.

Business passenger cars

The third pillar is linked to greening corporate fleets. According to the Call for Evidence, VAT deduction rules for passenger cars are outdated and highly fragmented, offering few incentives to choose less-polluting vehicles. The packages under consideration centre on full VAT deduction for the purchase and leasing of zero-emission cars used for taxable activities, with deductions prohibited for all other cars – either on a mandatory basis or at Member States’ discretion.

This pillar ties in with the Commission’s 2025 Communication on decarbonising corporate fleets and the planned Recommendation on demand-side incentives announced in the automotive industrial action plan. Strictly speaking it is an emissions issue rather than a circularity one, which may make it the most politically contested element of the package.

What could this mean for Hungary?

Hungary’s standard VAT rate is 27%, the highest in the EU. The higher the rate, the bigger the distortion when VAT locked into the chain – or differences in deductibility – decide whether a company buys a new or a refurbished machine, or whether it throws away or gives away its surplus. In the Hungarian market, improving VAT neutrality could therefore have a proportionally greater effect than in lower-rate Member States.

For company cars, the change could be dramatic: current Hungarian rules, as a general principle, do not allow VAT on the purchase of a passenger car to be deducted. If the EU proposal mandated full deductibility for zero-emission cars, it could become one of the strongest drivers of fleet decisions in Hungary – but if it is left to national discretion, things may well stay as they are.

The donation pillar directly affects reuse centres, charities and food banks. Harmonised VAT relief tied to recognised organisations could give donating retailers and manufacturers the legal certainty they often lack today. On the repair and refurbishment side, community models such as Miskolc’s MÚK reuse centre and its MaKuckó furniture repair workshop – where discarded items are repaired and returned to use – stand to benefit.

Critical points and open questions

The direction is clearly right, but the details carry risks. First, the fiscal impact: every new deduction right or exemption means lost revenue, and Member States will accept this only if the sustainability benefit can be demonstrated. VAT matters also require unanimity in the Council, so a single Member State can block the proposal.

Second, fraud risk. Extending the margin scheme and making it mandatory could open new avenues for abuse if the concepts of “second-hand” and “refurbished” are not defined precisely enough. Digital record-keeping is therefore not an administrative add-on but a precondition for the system to work.

Third, the definition of “viable goods”. If removing the deduction after destruction becomes the main tool, it must be clear what counts as a viable product and how this fits with the ESPR’s existing derogations (safety, damage, counterfeiting, rejection by charities).

Finally, fragmentation: if national discretion remains the rule for company cars or donations, the initiative may preserve exactly the fragmentation it sets out to remove. The impact assessment’s baseline is the status quo, but the Commission may also consider alternative options that emerge from the consultation.

How to take part in the consultation

The public consultation is available on the Commission’s “Have your say” portal for eight weeks, until 4 November 2026. The questionnaire can be completed in the Commission’s working languages (English, French and German), and position papers are also welcome. The target audience is deliberately broad: in addition to the general public, the Commission seeks views from business federations, SMEs, trade associations, tax and customs authorities, academics, practitioners and tax advisers.

The consultation complements targeted consultations already carried out during the study (interviews, VAT expert groups, workshops), which mainly gathered the views of national authorities and businesses. That is why the practical experience of waste managers, reuse centres, repairers, second-hand retailers and charities could be particularly valuable. The evaluation and impact assessment run from Q3 2026 to Q1 2027, and a summary report on the results will be published.

Conclusion

VAT is one of the longest-known yet most persistently postponed obstacles in the circular economy debate. This initiative is the first time the EU has stated plainly that current rules actively reward linear choices: new over refurbished, destruction over donation. Whether the final proposal delivers genuine VAT neutrality or another compromise riddled with national options will depend partly on how many practitioners speak up by 4 November.

Frequently asked questions about Green VAT

What is the Green VAT initiative?

Green VAT is the European Commission’s planned VAT reform to remove the tax disadvantages faced by activities that support the circular economy. It covers three areas: second-hand, refurbished and remanufactured goods; the gap between destroying and donating unsold products; and VAT deduction for business passenger cars. A legislative proposal is expected in the second quarter of 2027.

How long can you respond to the Green VAT consultation?

The public consultation runs until 4 November 2026 on the Commission’s “Have your say” portal. The questionnaire is available in English, French and German, and position papers are also welcome. Besides the general public, the Commission seeks views from businesses, trade associations, tax authorities, academics, practitioners and tax advisers.

Why is destroying a product currently cheaper than donating it?

Because under current VAT rules, input VAT on goods that are destroyed remains deductible, while a free transfer typically triggers a VAT liability or an adjustment of VAT already deducted. This contradicts the aims of the Ecodesign Regulation, so the Commission is examining removing the deduction, widening the small gifts exception and introducing VAT relief for donations.

How could the VAT treatment of second-hand goods change?

The Commission is examining harmonising the margin scheme and making it mandatory, applied on a general rather than per-sale basis. It would also update the definition of second-hand goods, harmonise and digitalise record-keeping, and remove the distortion that lets a business deduct VAT on a new product but not the VAT embedded in a refurbished or remanufactured one.

What would Green VAT mean for company cars?

Under the packages being considered, full VAT deduction would apply to the purchase and leasing of zero-emission passenger cars used for taxable activities, while deductions would be prohibited for all other cars. This could be introduced on a mandatory basis or at Member States’ discretion. In Hungary, where car VAT is generally not deductible today, the change could be significant.

When is the Green VAT legislative proposal expected?

According to the Commission’s indicative planning, in the second quarter of 2027. Before that, the evaluation and impact assessment run in parallel from Q3 2026 to Q1 2027, drawing on the consultation results and an external study completed in February 2026. The Call for Evidence notes that both content and timing may still change.

🔗 Official sources and references: 👉

• European Commission, DG TAXUD: Call for Evidence for an Evaluation and Impact Assessment run in parallel – VAT and the circular economy, Ref. Ares(2026)8589104, 9 September 2026
• European Commission, “Have your say” portal: VAT and the circular economy
• KPMG Tax News Flash: EU: Public consultation on alignment of VAT rules with circular economy (11 September 2026)
• European Environment Agency (EEA): The destruction of returned and unsold textiles in Europe’s circular economy

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