EU rules that apply as from 1 January 2025 aim to simplify and harmonise procedures and reduce the administrative burden on small and medium-sized enterprises (SMEs) conducting VATable activities throughout the EU. An important measure is the SME exemption scheme, which exempts eligible SMEs from VAT registration in other EU member states and offers a considerable amount of flexibility to these businesses.
The SME exemption scheme was introduced based on Council Directive (EU) 2020/285 of 18 February 2020, and implemented in Poland by the Act of 8 November 2024 on amending the Value Added Tax Act. As from 2025, these rules allow qualifying small businesses to elect to benefit from a VAT exemption in member states other than their state of establishment.
Under the old rules, VAT exemptions for SMEs were strictly domestic so that businesses as a rule had to register for VAT in each EU member state in which they engaged in VATable transactions. The revised scheme allows SMEs to apply the VAT exemption in other EU member states provided the requirements are met. It should be noted, however, that if a SME takes advantage of the VAT exemption, it loses the right to deduct input VAT on purchases related to exempt supplies.
To apply the SME procedure, a business must meet the following requirements:
The SME scheme and the VAT OSS (one-stop shop) system are mutually exclusive in the same member state, as the OSS relates to registration for VAT, whereas the SME scheme refers to an exemption from VAT. The OSS allows traders to account for VAT on B2C transactions in a single EU member state rather than having to separately register for VAT in each state where sales are transacted.
However, the SME scheme and OSS can co-exist. A qualifying business can simultaneously apply the SME scheme (i.e., VAT exemption) in some member states, while applying OSS in others (VAT registration). This is significant when the exemption thresholds are exceeded in different member states. For example, a company may be exempt from VAT in Germany and France under the SME scheme but at the same time can apply the OSS in the Czech Republic. The SME scheme is flexible and can be adapted to a company’s specific needs but it is not possible to apply both the SME and OSS schemes simultaneously in the same jurisdiction.
Taxpayers wishing to benefit from the VAT exemption for SMEs must comply with three key reporting obligations:
Application of the SME procedure involves restrictions and has consequences. The most important is losing the ability to deduct VAT on goods and services used as part of exempt supplies, meaning that a business cannot deduct input VAT on purchase invoices related to exempt sales in other member states. In addition, when opting out of the SME exemption, the effective date is strictly defined and depends on when the opt-out request is submitted. The SME must carefully analyse whether the benefits of the exemption outweigh the related restrictions. An opt-out becomes effective as of the first day of the month of the quarter following the quarter the opt-out request was submitted if submitted in the first or second quarter, or the first day of the second month of the following quarter if submitted in the last month of the quarter.
Implementation of the SME procedure is advantageous but also can present challenges that require specialised knowledge. The key areas where expert support may be beneficial include assessing eligibility for the exemption subject to the specifics of different member states, analysing profitability in the context of losing eligibility to deduct VAT, preparing the required registration documents, and complying with the quarterly reporting obligations and monitoring limits. Professional support is also useful when making a decision to opt out of the SME exemption and when preparing a strategy for when the turnover limits are exceeded.
Emilia Wolnowska
BDO in Poland
The SME exemption scheme was introduced based on Council Directive (EU) 2020/285 of 18 February 2020, and implemented in Poland by the Act of 8 November 2024 on amending the Value Added Tax Act. As from 2025, these rules allow qualifying small businesses to elect to benefit from a VAT exemption in member states other than their state of establishment.
Under the old rules, VAT exemptions for SMEs were strictly domestic so that businesses as a rule had to register for VAT in each EU member state in which they engaged in VATable transactions. The revised scheme allows SMEs to apply the VAT exemption in other EU member states provided the requirements are met. It should be noted, however, that if a SME takes advantage of the VAT exemption, it loses the right to deduct input VAT on purchases related to exempt supplies.
Requirements to Benefit from the VAT Exemption
To apply the SME procedure, a business must meet the following requirements:
- The annual turnover thresholds must not be exceeded. A VAT exemption for domestic sales is available if the SME’s annual turnover does not exceed PLN 200,000 in Poland. A VAT exemption on cross-border sales is available if the SME’s total turnover EU-wide turnover does not exceed EUR 100,000 in the previous calendar year and its turnover does not exceed the VAT threshold in any specific member state where it operates. It should be noted that some member states require disclosure of the taxpayer’s turnover for two years preceding the “prior notification” (explained below).
- The SME must register, submit a prior notification and comply with reporting requirements (see below).
- The SME must not conduct activities in sectors that are excluded from the VAT exemption in an EU member state.
- The EU member state in which the company wants to apply the exemption must have implemented the SME procedure (not all member states have done so).
- Values expressed in foreign currencies must be translated into PLN using the exchange rate published by the European Central Bank on the first day of the tax year.
- The scheme is available only to EU-established SMEs, i.e., non-EU small enterprises are not eligible for the SME scheme (e.g., SMEs in the UK).
New SME Scheme and OSS
The SME scheme and the VAT OSS (one-stop shop) system are mutually exclusive in the same member state, as the OSS relates to registration for VAT, whereas the SME scheme refers to an exemption from VAT. The OSS allows traders to account for VAT on B2C transactions in a single EU member state rather than having to separately register for VAT in each state where sales are transacted.However, the SME scheme and OSS can co-exist. A qualifying business can simultaneously apply the SME scheme (i.e., VAT exemption) in some member states, while applying OSS in others (VAT registration). This is significant when the exemption thresholds are exceeded in different member states. For example, a company may be exempt from VAT in Germany and France under the SME scheme but at the same time can apply the OSS in the Czech Republic. The SME scheme is flexible and can be adapted to a company’s specific needs but it is not possible to apply both the SME and OSS schemes simultaneously in the same jurisdiction.
Reporting Obligations
Taxpayers wishing to benefit from the VAT exemption for SMEs must comply with three key reporting obligations:
- Proper registration and notification: The business must submit a prior notification to the Head of the Second Tax Office Warszawa--Śródmieście (for Poland). The notification must list all the states in which the business intends to apply the exemption and provide EU annual turnover information. The notification document must be submitted electronically through the e-Tax Office system and must be updated if there are any changes to the company’s operations. This is a fundamental component of the procedure that is a condition of eligibility for the exemption. The tax office has 35 working days to make a decision after the prior notification is received, extendable if an additional verification is required.
- Submit quarterly data: Traders registered for the SME procedure must submit reports within one month of the end of each quarter (e.g., in Poland, traders submit quarterly SME_IK information). The report must indicate the value of EUR quarterly turnover in each member state, including the value of sales in the state of establishment. The information filing deadline cannot be exceeded and cannot be extended even if it falls on a holiday. Errors require the submission of a correction. Failure to fulfil this obligation can result in a loss of eligibility for the SME exemption. If the EX number was assigned in a quarter following the submission of the prior notification, the trader must submit quarterly information for the quarter in which the notification was submitted, as well as for the subsequent quarters preceding the assignment of the EX number.
- Continuously monitor turnover limits: Traders must track both the overall EU limit (EUR 100,000) and the threshold in the relevant member state. If the EU limit is exceeded, the company will have 15 working days to submit special quarterly information for the period from the start of the quarter to the day the threshold was exceeded. Exceeding any of the thresholds results in forfeiting eligibility for the exemption; in the case of the EU limit, the SME will lose eligibility throughout the entire EU, and if a member state threshold is exceeded, it will lose eligibility in that member state (but in the latter case, the SME may consider registering for VAT locally or applying the OSS procedure).
Legal Consequences of the SME Procedure
Application of the SME procedure involves restrictions and has consequences. The most important is losing the ability to deduct VAT on goods and services used as part of exempt supplies, meaning that a business cannot deduct input VAT on purchase invoices related to exempt sales in other member states. In addition, when opting out of the SME exemption, the effective date is strictly defined and depends on when the opt-out request is submitted. The SME must carefully analyse whether the benefits of the exemption outweigh the related restrictions. An opt-out becomes effective as of the first day of the month of the quarter following the quarter the opt-out request was submitted if submitted in the first or second quarter, or the first day of the second month of the following quarter if submitted in the last month of the quarter.
BDO Insight
Implementation of the SME procedure is advantageous but also can present challenges that require specialised knowledge. The key areas where expert support may be beneficial include assessing eligibility for the exemption subject to the specifics of different member states, analysing profitability in the context of losing eligibility to deduct VAT, preparing the required registration documents, and complying with the quarterly reporting obligations and monitoring limits. Professional support is also useful when making a decision to opt out of the SME exemption and when preparing a strategy for when the turnover limits are exceeded.Emilia Wolnowska
BDO in Poland