The European idea of foreign VAT recovery is based on a simple premise which states: A legal entity that does not conduct taxable business transactions in a specific country in the European Union and the region – should not contribute to the national budget of that country.
The legal basis for reclaiming foreign VAT in EU member states is Directive 8. It has been in effect since 1982.
Subsequently in 1997, the EU adopted Directive 13 which promotes the right to VAT recovery from EU member states of legal entities registered outside the EU. This directive has been in effect since 1998.
As a result, Directive 13 serves as the legal basis for VAT recovery for Bosnian and Herzegovinian legal entities from EU countries.
Both Directives are integral parts of national VAT legislation. EU member states have the right to choose whether they will apply Directive 13 unconditionally or limit its application under the terms of ‘bilateral reciprocity.’ The majority of EU countries apply Directive 13 with no conditions.
Using their right to condition Directive 13, certain countries such as Spain, Slovenia, Croatia, Germany, Hungary, the Czech Republic, Poland, Romania, Bulgaria and Greece, apply Directive 13 with the mandatory terms of reciprocity.