EU VAT Scheme for Small Businesses 2026 – Rules, Exemptions and How It Works
Since 1 January 2025, a new EU VAT framework for small businesses has been in force across European Union member states. Based on Council Directive (EU) 2020/285, the scheme fundamentally changes how small enterprises can manage their VAT obligations when trading across EU borders — reducing administrative burdens and creating a level playing field regardless of where a business is headquartered.
What the SME VAT Scheme Is and Why It Matters
The EU VAT scheme for small businesses — commonly referred to as the SME scheme — allows eligible small enterprises to benefit from VAT exemption not only in their home country but also in other EU member states where they make taxable supplies. Before 2025, VAT exemptions for small businesses were strictly domestic: a small business exempt from VAT in its home country still had to register and charge VAT in every other EU country where it conducted taxable transactions. The SME exemption scheme, implemented based on Council Directive (EU) 2020/285, now allows qualifying small businesses to elect to benefit from a VAT exemption in member states other than their state of establishment.
The scheme is optional — businesses can choose to use it, and can apply it in some EU countries while opting for the standard VAT regime in others.
Eligibility Conditions
To benefit from the cross-border SME scheme, a business must meet two cumulative conditions:
EU-wide turnover threshold: The business must have a total annual turnover of no more than €100,000 across all EU member states combined. If this threshold is exceeded at any point during the year, the business must notify its home tax authority immediately and transition to standard VAT obligations.
National threshold: The business’s turnover in each specific member state where it wishes to apply the exemption must remain below that country’s national annual threshold. The maximum national annual threshold that member states may set is €85,000 (or the equivalent in national currency), though member states may set their threshold lower.
Both conditions must be met simultaneously. Exceeding either threshold in a given country removes the exemption for that country.
Non-EU businesses are excluded. The SME scheme is available only to businesses established within the EU.
How to Apply: The EX Number
To use the cross-border SME scheme, a business must notify its Member State of Establishment (MSEST) — the country where it is registered — before applying the exemption in another EU country. Upon approval, the business receives a unique identification number with the suffix “EX” within 35 working days, which authorises use of the scheme in the selected countries.
The EX number is added to the business’s existing VAT identification number and must be quoted in relevant cross-border transactions. Businesses must also notify their home authority of any changes — such as choosing to opt out of the scheme in a particular country — and the exemption ceases from the first day of the next quarter after the change is reported.
Compliance Requirements Under the SME Scheme
The scheme significantly simplifies reporting compared to standard VAT registration in multiple countries:
Single quarterly report — instead of filing multiple VAT returns in different member states, businesses submit a single quarterly report to their home tax authority, which then coordinates with the other member states involved.
No VAT charged — businesses under the scheme do not charge VAT on qualifying sales of goods and services in the countries where the exemption applies.
No VAT deduction — as a trade-off, businesses under the SME scheme cannot reclaim the VAT paid on their purchases relating to exempt supplies. This is an important factor to weigh when deciding whether the scheme is beneficial.
Accurate records — businesses must maintain records of their turnover across all EU member states to monitor both thresholds on an ongoing basis.
Domestic SME Exemption: Unchanged Rules
The cross-border extension builds on the existing domestic SME exemption, which remains in place. Member states continue to exempt small businesses from VAT where their annual turnover stays below the national threshold — now capped at €85,000. Businesses may use the domestic exemption without opting into the cross-border scheme.
Implementation Across Member States
While the framework entered into force on 1 January 2025, implementation varies by member state. Most EU countries transposed Council Directive 2020/285 into national law by the implementation date, but the specific national thresholds, procedures, and any additional requirements differ. Some countries, such as Bulgaria, completed their transposition slightly later. Businesses should verify the current rules and national thresholds in each member state where they plan to use the exemption.
The European Commission has published a dedicated SME web portal with country-by-country information and access to the SME-on-the-web database, where the VAT registration status of businesses using the cross-border scheme can be verified.
Benefits for E-Commerce and Cross-Border Sellers
For small e-commerce businesses selling to consumers across the EU, the SME scheme offers a practical alternative to OSS registration — particularly for businesses whose turnover in individual EU countries remains modest. Under the scheme, small businesses can apply a VAT exemption across multiple EU countries without needing to register for VAT in each member state individually. This can reduce overall VAT compliance costs significantly — the European Commission’s own estimates suggested savings of up to 18% of annual VAT compliance costs for eligible businesses.
Summary
The EU VAT SME scheme has been in force since 1 January 2025 and represents a significant step towards harmonising VAT compliance for small businesses operating across EU borders. The key points for 2026 are:
- EU-wide turnover must remain below €100,000
- Turnover in each country of exemption must stay below that country’s national threshold (max €85,000)
- Businesses must notify their home country and obtain an EX identification number
- A single quarterly report replaces multiple foreign VAT registrations
- The scheme is optional and can be applied selectively by country
- Businesses cannot deduct input VAT on exempt supplies
For questions about whether the SME scheme is right for your business, or for support with EU VAT compliance more broadly, our team is ready to help: Contact us — amavat®
Bartosz Moch
