Brussels urges Spain to scrap reduced VAT for hotels and restaurants, citing €7 billion annual cost

The VAT recommendation

The European Commission, in its spring package of country-specific recommendations published on Wednesday, urged Spain to curtail the use of reduced VAT rates, singling out hospitality and accommodation services. The Commission noted that Spain exhibits the largest VAT policy gap in the EU, driven by one of the widest spreads in VAT rates and the greatest disparity in nationally motivated VAT exemptions. Sources cited by LaVanguardia and EL PAÍS estimate the annual revenue loss from the 10% reduced rate (versus the standard 21%) at roughly €7 billion, or 0.4% of GDP.

Among the categories to which preferential VAT rates apply, restaurant and accommodation services stand out for their large budgetary impact, against a very limited redistributive effect.

Revenue structure concerns

Brussels highlighted that revenues from consumption and environmental taxes in Spain remain below the EU average, both as a share of GDP and as a share of total tax revenue. Environmental tax revenues reached 1.6% of GDP in Spain, compared to 2.1% across the EU. Meanwhile, the Commission pointed out that increased revenues from labour taxes accounted for 90% of the rise in Spain's tax burden over the past decade, reflecting a growing reliance on employment taxation. A more restricted use of preferential VAT rates would help simplify the tax system, the Commission added.

Generational spending imbalance

In a parallel recommendation, the Commission called on Spain to rebalance social spending between generations. It noted that more than one in four children were at risk of poverty or social exclusion in 2024, placing Spain among the worst-performing EU member states on this metric. The Commission asked the government to redirect a greater share of public expenditure toward policies benefiting children and young people, particularly in education, housing access and employment.

Spain spends a great deal on items such as pensions, which do not particularly benefit the new generations. We need to think about spending that is more oriented toward the new generations.

Vulnerable groups and regional gaps

The Commission identified single-parent households, large families, the Roma population and children with a migrant background as particularly vulnerable. It also warned of persistent regional disparities in poverty rates and in the impact of social transfers, pointing to unequal coverage and access to aid and services across territories, especially in rural areas. Coordination among social, health and employment services remains limited by fragmented competences and overlapping instruments.

Political context and omissions

ABC noted that this year's report was perceived as partially influenced by political considerations. The document makes no mention of Spain operating without approved budgets for three consecutive years, heading into a fourth. The topic of environmental taxes, reportedly present in earlier drafts, was reduced to a passing reference. ABC linked this to the influence of Commission Vice-President Teresa Ribera, who as Spain's environment minister had resisted calls to raise such levies. The fiscal escape clause allowing certain defence spending to be excluded from fiscal rule calculations kept Spain's cumulative deviation in public spending at 0.4% of GDP rather than 0.7%, just within permitted limits.