Small Business VAT Exemptions: What They Mean for Cross-Border Invoicing

Under Articles 282–292 of the EU VAT Directive, Member States can exempt small businesses from VAT obligations. If your annual turnover is below your country's threshold, you can opt into this exemption. The result: you do not charge VAT on your invoices, you do not file VAT returns, and your administrative burden drops significantly.

The trade-off is that you cannot deduct input VAT on your business purchases (Article 289). Every euro of VAT on your software subscriptions, equipment, and professional services is a cost you absorb rather than reclaim.

Each Member State sets its own threshold, now capped at €85,000 under the harmonised framework introduced by Directive 2020/285. Some countries set their thresholds much lower — Greece at €10,000 — while others use the maximum.

When you are exempt, your domestic invoices look different. Article 289 provides that exempt businesses may not show VAT on invoices and are denied the right to deduct input VAT. You invoice your net amount with no VAT line, no VAT rate, and no VAT amount. Most countries require a note explaining why — in Germany, for example, you include "Gemäß § 19 UStG wird keine Umsatzsteuer berechnet."

Under Article 292d, Member States may relieve exempt SMEs from certain invoicing and accounting obligations. Article 292c separately allows Member States to exempt them from filing VAT returns. In practice, most countries still require you to issue invoices but exempt you from periodic VAT returns.

Under Article 292b (new from 2025), Member States may even release domestic-only exempt SMEs from the obligation to register for VAT and obtain a VAT ID. This means you may not have a VAT number at all — which has implications for cross-border transactions.

Before 2025, Article 283(1)(c) explicitly excluded taxable persons who were not established in the Member State where VAT was due from the small business exemption. This meant the exemption was strictly domestic. If you were a Finnish freelancer exempt in Finland, and you invoiced a German client, the Finnish exemption did not apply to that transaction.

In Schmelz (C-97/09, 2010), the CJEU acknowledged that the domestic-only restriction constituted a restriction on the freedom to provide services but held it was justified by overriding reasons of public interest and compatible with EU law. The legislative fix had to come from the Council, not the court. It took over a decade, but Directive 2020/285 finally removed this restriction by deleting Article 283(1)(c).

From 1 January 2025, Directive 2020/285 replaced the old thresholds in Article 287 with a new framework under Article 284. The key change: a taxable person established in one Member State can now benefit from the exemption in another Member State, provided their Union-wide turnover does not exceed €100,000 and their national turnover in the exemption Member State stays below that state's threshold.

The harmonised framework replaced the patchwork of individual derogation decisions (which allowed specific thresholds for the Netherlands, Poland, Hungary, and others). Most prior derogations expired by 31 December 2024, as the new rules under Article 284 took effect.

To use the cross-border exemption, you notify your home country and receive an EX identification number. This replaces the need for VAT registration in each country where you operate under the scheme.

This is the scenario that causes the most confusion. You are a small business below your domestic threshold, and you want to invoice a client in another EU country. There are several possible situations:

Using the cross-border SME scheme (from 2025): If you have notified your home country and received an EX number, and you are below both the national and €100,000 Union-wide thresholds, you can invoice without VAT in the client's country under the SME exemption.

Without the cross-border scheme: If you have not opted into the cross-border SME scheme, the standard rules apply. For B2B services under Article 44, the place of supply is in your client's country, and the reverse charge mechanism shifts the VAT obligation to your client. But reverse charge requires you to have a VAT ID — which you may not have if you are exempt.

The practical problem: Many corporate clients expect a VAT number and a proper reverse charge invoice. Without one, they may not be able to process your invoice through their accounting system. This is a business reality that often pushes small businesses toward voluntary VAT registration, regardless of whether they technically need one.

Under the SME exemption, you must not show VAT on your invoices (Article 289). The invoice should include:

Even as an exempt small business, you remain a "taxable person" under Article 9 of the VAT Directive. This has an important consequence: when you receive B2B services from a supplier in another EU country, the reverse charge mechanism under Article 196 applies to you.

Under Article 214(1)(d), a business receiving services for which it is liable under Article 196 must be identified for VAT purposes. This means you may need to obtain a VAT identification number specifically to account for the reverse charge on services you receive — even though you are exempt from charging VAT on your own supplies.

In practice, if you are using the cross-border SME scheme, your EX number serves as your identifier. But if you are a domestic-only exempt business receiving a service from abroad for the first time, you may need to take action to get identified.

The decision between staying exempt and registering for VAT voluntarily depends on your specific situation. Here are the factors that matter most for service businesses: