New Regulations on the Cross-Border VAT Exemption for Small Businesses, effective from 1 January 2025

The Special Scheme for Small Enterprises (SME Scheme) for VAT Exemption within the European Union will be implemented on 1 January 2025. This system simplifies the administration of VAT exemption for small businesses within the EU, benefiting both taxpayers and tax authorities.

Before 1 January 2025, small businesses could only operate as taxpayers with individual exemption in the Member State where they were established a seat for economic purposes. This meant that in any other Member State where they supplied goods or services, they were required to register for VAT and comply with VAT obligations, such as submitting VAT returns and paying VAT (unless, for example, the national regulations placed this responsibility on the buyer or the recipient of the service).

From 1 January 2025, a taxpayer with a business establishment in the European Union – under certain conditions – can opt for individual exemption in a Member State other than the one of establishment. To do so, the taxpayer only needs to register in the Member State of the establishment.

In accordance with the new regulation effective from 1 January 2025:

  • On the one hand, a taxable person with a business establishment in the domestic territory may, with respect to transactions performed in another Member State of the Community where they do not have a business establishment, choose to operate as an exempt taxable person, provided that the Member State in question grants exemption to small businesses.
  • On the other hand, a taxable person with a business establishment in another Member State of the Community may opt for individual exemption with respect to activities carried out in the domestic territory, even if they do not have a business establishment in the domestic territory.

In both instances it is a requirement:

  • that the taxable person's annual turnover does not exceed the national threshold value set by the relevant Member State and
  • that their total annual turnover within the European Union does not exceed €100,000.[1]

It is not a requirement:

  • to the taxable person to apply VAT exemption in the Member State where they have a business establishment.

As a result of the legislative amendment, a taxable person with business establishment outside the Community shall not be entitled to opt for individual exemption either in the domestic territory or in any other Member State of the Community, even if they have a permanent establishment or habitual residence within the Community.

The option to opt for cross-border individual exemption is optional and can be applied in one or more Member States. In this regard, the specific VAT rules may be applied as follows:

  • solely in the Member State of establishment;
  • solely in the Member State(s) other than the Member State of establishment;
  • in both the Member State of establishment and in any other Member State(s) selected by the taxpayer.

Further details and information regarding the SME scheme are available on the NTCA website under the SME section.

Legal background:

The legal basis for the SME scheme under EU law is provided by Council Directive 2020/285/EU and Commission Implementing Regulation 2021/2007/EU. The former amends Article 2 of Chapter 1, Title XII of the VAT Directive concerning small businesses, while the latter defines the scope of the data that taxpayers must report to their Member State of establishment and that must be transmitted between Member States, as well as the procedure for data transmission.

The Community rules concerning the SME scheme are transposed into domestic law by the VAT Act as follows: Provisions applicable to domestic taxpayers are set out in Sections 195/A to 195/F, effective from 1 January 2025, while provisions concerning taxpayers with a business establishment or residence in another Member State of the European Union are contained in Sections 195/G to 195/K.

According to the amendment to the special VAT (Value Added Tax) rules for small businesses[2], if Member States introduce regulations that are in line with the individual exemption for small businesses, they must make this applicable from 1 January 2025, to taxpayers established within the Union, or, in the absence of an establishment, to those with their residence in the Community, under the same conditions as those provided to taxpayers established in their own territory.[3]

Accordingly, Chapter XIII (Individual Exemption for Small Enterprises) of the VAT Act has been supplemented with the following subchapters and rules, effective from 1 January 2025:

  1. The national rules regarding the application of individual exemption by taxpayers established in the domestic territory (the regulation is essentially the same as the rules in effect before 1 January 2025, with the amendment providing clarifications and additions to certain elements);
  1. The rules regarding the option for individual exemption by taxpayers established domestically for transactions in another Member State of the European Union.
  1. The rules regarding the application of individual exemption by taxpayers established in another Member State of the European Union for transactions within the domestic territory.

Council Directive 2006/112/EC on the common system of value added tax (hereinafter: VAT Directive), Article 284(2); Section 195/A (3) and Section 195/G(3) of Act CXXVII of 2007 on Value Added Tax (hereinafter: VAT Act).

[2] Council Directive (EU) 2020/285 of February 18, 2020, amending Directive 2006/112/EC on the common system of value added tax with regard to the special provisions for small businesses, and amending Regulation (EU) 904/2010 concerning administrative cooperation and information exchange for the proper application of the special provisions for small businesses.

[3] Article 284(1)-(2) of the VAT Act