Effective January 1, 2025, the European Union (EU) will implement significant reforms to the Value Added Tax (VAT) exemption scheme for small and medium-sized enterprises (SMEs). These changes aim to simplify VAT compliance and foster cross-border trade within the EU.

Current VAT Exemption Framework:

Presently, EU Member States have the discretion to set their own national turnover thresholds for VAT exemptions applicable to SMEs. These exemptions allow qualifying businesses to sell goods and services without charging VAT, thereby reducing administrative burdens. However, the existing framework primarily benefits domestic SMEs, as the exemptions are generally confined to the Member State where the business is established.

Key Reforms Effective January 1, 2025:

1. Harmonized National Thresholds:

o Member States may set national annual turnover thresholds for VAT exemption up to a maximum of €85,000 or the equivalent in national currency. This standardization aims to create a more consistent environment for SMEs operating within the EU.

2. Introduction of a Cross-Border VAT Exemption Scheme:

  • Eligibility Criteria:
    ▪ SMEs with a total annual turnover not exceeding €100,000 across all EU

Member States can apply for VAT exemption in Member States where they are not established. This provision enables SMEs to benefit from VAT exemptions similar to those available to domestic businesses.

  • Conditions:
    ▪ The SME must not surpass the national threshold of the Member State where it seeks exemption.
    ▪ The SME must comply with the administrative procedures outlined below.

Administrative Procedures for SMEs:

• Prior Notification:
SMEs intending to utilize the cross-border exemption must notify their home tax authority, specifying the Member States where they wish to apply the exemption and providing projected turnover figures for each.

  • Identification Number:
    Upon notification, the home tax authority will issue a unique identification
    number with an “EX” suffix (e.g., BE 0123.456.789 EX). This number will be used for VAT-exempt transactions across the specified Member States.
  • Quarterly Reporting:
    SMEs are required to submit quarterly reports to their home tax authority,

detailing the total value of supplies made in each Member State where the exemption is applied.This ensures transparency and compliance with the scheme’s regulations.

Additional Considerations:

  • Right to Deduct VAT:
    SMEs opting for the VAT exemption will forfeit the right to deduct input VAT on
    purchases related to exempt supplies.This trade-off should be carefully evaluated when deciding whether to apply for the exemption.
  • Non-EU Enterprises:
    The SME scheme is not available to businesses established outside the EU. Non-EU enterprises with fixed establishments within the EU are also excluded from applying the scheme.

These reforms are designed to level the playing field for SMEs, facilitating cross-border trade and reducing compliance costs. SMEs are encouraged to assess their eligibility and consider the administrative requirements to fully benefit from the updated VAT exemption scheme.