Two options have been put forward that would permit a zero rate of tax on sanitary products.
It comes amid the threat of a backbench rebellion following the Budget from Eurosceptic MPs over the tax, currently at the lowest rate allowed by EU law.
Chancellor George Osborne said the government “heard people’s anger over paying the tampon tax loud and clear.”
VAT is currently charged at the reduced rate of 5% on sanitary products – but more than 300,000 people have signed a petition calling for sanitary items to be exempted from tax altogether.
Mr Osborne had pledged to spend the proceeds of the tax on women’s charities.
He said, “We said we’d use the money to benefit women’s charities and we’ve already distributed £17m to good causes across the country.
“At the same time we said we’d fight for agreement to reduce the VAT rate to zero, and tonight all European leaders have welcomed our plan to do just that. We’ve achieved what no British government has even tried to achieve.
“It just shows how Britain can make a case for a reform that will benefit millions as a powerful, confident voice inside a reformed EU.”
At the European Council summit in Brussels, the 28 leaders agreed a statement welcoming “the intention of the Commission to include proposals for increased flexibility for member states with respect to reduced rates of VAT, which will provide the option to member states of VAT zero-rating sanitary products.”