6.6.3 Exemptions

A difference in VAT treatment exists between supplies that are exempt ‘without credit’ and supplies that are exempt ‘with credit’. Supplies that are VAT exempt without credit are the supplies included in Articles 132-136 and 371, 375, 376, 377, 378(2), 379(2) and 380 to 390c of the EU VAT Directive. Examples are the provision of medical care,1 educational services2 and the supply of services and goods closely related to welfare and social security work.3

Under Article 168 of the EU VAT Directive, VAT can be deducted in so far as the goods and services are used for the purposes of the taxed transactions of a taxable person. This means that that VAT cannot be deducted if it was paid for goods or services in so far as they are used for VAT exempt purposes. An exception to this rule is included in Article 169(b) and (c) of the EU VAT Directive, which allows deduction of VAT paid for goods and services that are used for transactions which are exempt pursuant to Articles 138, 142, 144, 146 to 149, 151, 152, 153,156, 157(1)(b), 158 to 161 or 164 of the EU VAT Directive, or which are VAT exempt pursuant to points (a) to (f) of Article 135(1), where the customer is established outside the Community or where those transactions relate directly to goods to be exported out of the Community. These transactions are VAT exempt ‘with credit’ meaning that even though they are VAT exempt, performing these transactions does not disallow VAT deduction. Other supplies that are VAT exempt with credit are included in Articles 138-164 of the EU VAT Directive.

As a general rule, as formulated by the CJEU, the terms used to specify the exemptions in the EU VAT Directive are to be interpreted strictly since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person.4

Below, I will make a distinction between the possible application of an exemption to free supplies without credit and with credit.