The judgment of the Court of Justice of the European Union of 5 March 2026 in joined cases C-409/24, C-410/24 and C-411/24 concerned the permissibility of national tax rules that limit the application of a reduced VAT rate exclusively to short-term accommodation services in hotels and similar establishments, while excluding additional services such as parking, breakfast, Wi-Fi access or the use of recreational facilities from that rate.
The referring court from Germany raised doubts as to whether the national mechanism separating the taxation of such services was compatible with Article 98 of the VAT Directive, which allows the selective application of reduced rates to categories of services listed in Annex III of the Directive. In particular, the issue concerned situations in which certain services – although economically ancillary to accommodation – must be excluded from the reduced rate under national law if they do not serve the accommodation service directly.
The Court confirmed that Member States have the right to introduce rules selectively applying a reduced VAT rate only to clearly defined elements of a broader category of services, even if, from the customer’s perspective, they constitute a single composite supply. This entitlement arises from the structure of Article 98 of the VAT Directive, which allows a departure from the standard rate but, as an exception, must be interpreted strictly. The CJEU indicated that the selective application of a reduced rate requires the fulfilment of two conditions: first, the identification in national law of specific and distinct aspects of a given category of services to which the reduced rate applies; second, compliance with the principle of fiscal neutrality, which requires that similar services – from the perspective of the average consumer – be treated in the same way.
In the case at hand, the Court held that the German regulations satisfied both conditions. First, the national legislator clearly and precisely defined which services fall within the scope of “short-term accommodation” benefiting from the reduced rate (e.g. furnishings, bedding, cleaning, basic room equipment) and which services are not directly related to accommodation and should therefore be subject to the standard VAT rate. This distinction was further clarified in administrative guidance on the application of VAT, which specified both categories of services. The CJEU considered such differentiation to meet the requirement of identifying “specific and distinct” aspects, since the German legislator objectively and predictably distinguished between services eligible for the reduced rate and those subject to the standard rate.
The second condition concerned the compatibility of the mechanism separating the services with the principle of fiscal neutrality. The Court indicated that, in order to assess this, it is crucial to determine whether the additional services – such as parking, breakfast, access to fitness facilities or Wi-Fi – are comparable to services provided independently by other businesses and whether, from the perspective of the average consumer, they are interchangeable. If the same services, when provided outside a hotel by independent operators, are subject to the standard VAT rate, applying a reduced rate to them as part of a hotel stay would infringe the principle of fiscal neutrality. The CJEU concluded that the German rules comply with this principle because they require the application of the standard rate to services which, although ancillary to accommodation, are also commonly offered as standalone services on the market.
The judgment also includes important considerations regarding the relationship between the concept of a composite supply and the possibility of selectively applying reduced VAT rates. The Court clearly stated that the analysis of supplies from the perspective of the average consumer – typically used to determine whether a supply constitutes a single composite service – does not apply where a Member State exercises its power to identify and selectively tax certain services. This means that even if, from an economic perspective, breakfast or parking constitutes part of a single accommodation service, the legislator may, in accordance with the VAT Directive, treat them separately for the purposes of determining the applicable VAT rate. The CJEU emphasised that this constitutes an exception resulting from the structure of Article 98 of the Directive, which grants Member States discretion in selectively applying reduced rates, provided that objective criteria are used and the principle of fiscal neutrality is respected.
The judgment also analyses the limits of the discretion granted to Member States in shaping VAT preferences. The CJEU pointed out that the possibility of selectively applying reduced rates is not unlimited – it must be exercised in a manner that does not undermine the coherence of the VAT system and does not lead to arbitrary differentiation between similar services. The more extensive the national catalogue of services excluded from the reduced rate, the more important it becomes to demonstrate that such differentiation is based on genuine and objective differences in the nature of the services. The judgment therefore also serves as interpretative guidance for future legislative measures adopted by Member States.
Consequently, the CJEU held that the VAT Directive does not preclude national legislation such as that in force in Germany, which excludes services not directly related to accommodation from the application of the reduced VAT rate, even if they constitute ancillary elements of that service and are included in a single flat price for the stay. However, the legality of such regulations depends on a precise definition of the services covered by the preferential rate and on ensuring compliance with the principle of fiscal neutrality, so that similar services are taxed in the same manner – regardless of whether they are offered by a hotel or by an independent provider.