The introduction of the SME (Small and Medium Enterprises) procedure in January 2025 represents a significant change in the VAT settlement system within the European Union. This mechanism was designed with small and medium-sized enterprises (SMEs) engaged in cross-border activities in mind. The objective is to simplify administrative and tax obligations for entities with relatively low turnover. The SME procedure establishes uniform regulations applicable across the EU, marking a step toward harmonizing tax law in member states.
SME Procedure What is the SME procedure?
The SME procedure is a special VAT exemption mechanism that allows businesses to use a single, unified procedure across the EU. Its primary goal is to reduce administrative burdens and support the economic activities of small businesses. Previously, companies exceeding exemption thresholds in other member states had to register for VAT in each of those countries. The SME procedure eliminates this requirement, provided the entrepreneur meets specific criteria.
Key Principles of the SME Procedure
- Annual turnover threshold: To qualify for the SME procedure, a business must not exceed a turnover of €100,000, excluding VAT, across the entire EU in both the current and previous tax years. This threshold applies to total turnover rather than individual member states.
- Obtaining an EX identification number: Taxpayers must register in their home country to obtain a European EX number, which is required to benefit from the exemption.
- Type of business activity: The exemption does not cover certain transactions, such as electronic services provided to consumers (e.g., digital content, applications) or the supply of goods subject to the reverse charge mechanism.
Who Can Benefit from the SME Procedure?
The SME procedure is intended for micro, small, and medium-sized enterprises operating in EU markets. These typically include e-commerce businesses, service providers offering remote services, or small-scale manufacturers conducting business in other EU states.
It is important to note that the SME procedure applies exclusively to business-to-consumer (B2C) transactions. Business-to-business (B2B) transactions, which fall under the reverse charge mechanism, are not covered. Entrepreneurs must also be aware that if they exceed the turnover threshold, they will be required to register for VAT in the country where the threshold was exceeded and comply with local tax regulations.
What Changes Does the SME Procedure Introduce?
Previously, entrepreneurs engaged in cross-border activities had to register for VAT in each EU country where they operated. The SME procedure replaces these requirements with a single turnover threshold and a unified reporting procedure.
Using the SME Procedure
- Quarterly reports: Entrepreneurs using the SME procedure must submit quarterly reports on their turnover in different member states. These declarations must be submitted by the end of the month following the end of the relevant quarter.
- Turnover monitoring threshold: Exceeding the annual turnover threshold of €100,000 necessitates VAT registration in the respective country and compliance with its tax regulations.
- Notifications: If the threshold is exceeded, the entrepreneur must notify the tax authorities within 15 business days.
- Elimination of multiple VAT registrations: Entrepreneurs meeting the SME procedure requirements do not need to register for VAT in each country where they operate.
Benefits of the SME Procedure
The introduction of the SME procedure offers several advantages for businesses, including:
- Reduced administrative burdens: Companies can avoid VAT registration in each EU country, saving time and costs associated with tax documentation.
- Harmonized regulations: A uniform turnover threshold across the EU enhances transparency and simplifies exemption qualification monitoring.
- Support for small business growth: With lower administrative burdens, small enterprises can more easily expand their operations in international markets.
Exemptions and Limitations of the SME Procedure
Although the SME procedure offers numerous benefits, it also has certain limitations and risks, including:
- Risk of exceeding the threshold: Entrepreneurs must continuously monitor their turnover, as surpassing the €100,000 limit results in the loss of exemption and a VAT registration obligation in the respective country.
- Specific exemptions: The SME procedure does not cover B2B transactions, supplies subject to the reverse charge mechanism, or electronic services.
- Consequences of non-compliance: Failure to adhere to the rules, such as not reporting an exceeded threshold, may result in financial penalties and loss of exemption status.
The SME Procedure and Other VAT Systems
The SME procedure operates alongside other VAT settlement mechanisms, such as VAT OSS (One Stop Shop). VAT OSS allows VAT settlement in a single member state for transactions conducted in other EU countries but requires full VAT registration. Compared to VAT OSS, the SME procedure is simpler and exclusively designed for small businesses that qualify for VAT exemption.
How to Prepare for the Implementation of the SME Procedure?
Entrepreneurs planning to use the SME procedure should:
- Conduct a detailed analysis of their turnover to determine if they meet the €100,000 threshold criteria.
- Register with the appropriate tax authorities and obtain an EX identification number.
- Prepare accounting systems for quarterly turnover reporting in accordance with the procedure’s requirements.
The Ministry of Finance and other tax institutions organize webinars and publish informational materials to help businesses understand the new regulations and prepare for their implementation.
Conclusion
The SME procedure is a significant reform aimed at simplifying VAT settlement for small and medium-sized enterprises operating within the EU. It enables VAT exemption across the Union, reducing costs and administrative burdens for businesses with low turnover. At the same time, it requires entrepreneurs to carefully monitor and report their turnover.
By utilizing the SME procedure, small businesses will gain new growth opportunities, allowing entrepreneurs to focus on their core operations rather than tax formalities. However, to fully benefit from the new regulations, proper preparation is essential.
