The Cross-Border SME VAT Exemption Scheme: What Changed in 2025

Every EU country allows small businesses below a certain turnover threshold to operate without charging VAT. If you qualify, you do not add VAT to your invoices, you do not file VAT returns, and you do not reclaim input VAT on your purchases. It simplifies everything — at the cost of not being able to recover the VAT you pay on business expenses.

This has existed for decades under Articles 282–292 of the EU VAT Directive (2006/112/EC). Each Member State sets its own threshold (capped at €85,000 under the harmonised framework introduced by Directive 2020/285, effective 1 January 2025), and businesses below it can opt into the exemption.

The catch, until recently, was that the exemption only worked domestically. A German freelancer below the Kleinunternehmer threshold could operate VAT-free in Germany, but the moment they invoiced a client in France or the Netherlands, the domestic exemption did not help them. Cross-border services followed their own VAT rules regardless.

Council Directive (EU) 2020/285 substantially restructured the SME exemption scheme in the VAT Directive — deleting some articles (285–287, 291–292), amending others, and inserting new provisions (280a, 284a–284e, 288a, 292a–292d) — creating a new framework that took effect on 1 January 2025. The headline change: small businesses can now use the VAT exemption across borders.

Under the new Article 284, a taxable person established in one Member State may benefit from the VAT exemption in another Member State, provided they meet two conditions: their Union-wide annual turnover stays below €100,000, and their national turnover in the exemption Member State stays below that state's threshold.

This was a direct response to the CJEU's ruling in Schmelz (C-97/09), which 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 came from the Council, not the court.

The scheme operates on two simultaneous thresholds, and you must stay below both to use the cross-border exemption.

National threshold: Each Member State sets its own, capped at €85,000. This is the maximum turnover you can have in that specific country while still being exempt there. If you only operate domestically, this is the only threshold that matters.

Union-wide threshold: €100,000 total across all EU Member States. This is your combined turnover everywhere in the EU. If you exceed this, you lose the cross-border exemption in every Member State simultaneously.

The turnover calculation under Article 288 includes the value of taxed supplies, exempt transactions with right of deduction, exports, exempt intra-Community supplies of goods (Article 138), and real estate/financial/insurance transactions (unless ancillary). It excludes disposals of capital assets.

To use the cross-border exemption, you must notify your Member State of establishment (MSEST). Under Article 284(3), this is a prior notification — you must do it before you start relying on the exemption in another country.

Under Article 284(5), the MSEST must communicate the individual identification number suffixed "EX" within 35 working days of the notification, and the exemption takes effect from that communication. This EX number is not a standard VAT identification number. It is a specific identifier for the cross-border SME scheme.

The EX number replaces the need for multiple VAT registrations across different Member States. Instead of registering for VAT in every country where you have clients, the EX number signals to other Member States that you are operating under the SME exemption.

If you use the cross-border exemption, Article 284b requires you to submit quarterly reports to your home country's tax authority. These reports must show your turnover in each Member State where you operate under the scheme.

Reports are due one month after the end of each calendar quarter. So Q1 (January–March) is due by 30 April, Q2 by 31 July, Q3 by 31 October, and Q4 by 31 January. Amounts must be denominated in euros (Article 284c), even if your home currency is different.

This is lighter than filing full VAT returns in each country, but it is still a compliance obligation. If you are used to filing nothing because you are below your domestic threshold, the cross-border scheme introduces new paperwork.

Article 288a governs what happens when you cross a threshold. The rules differ depending on which threshold you exceed.

Exceeding a national threshold: The exemption ceases in that Member State from the supply that caused the exceedance. However, a transitional tolerance of up to 10% applies by default under Article 288a(1), allowing the SME to continue the exemption for the remainder of the calendar year provided the national threshold is not exceeded by more than 10%. Member States may optionally raise this tolerance to 25%, or remove the ceiling entirely (the SME continues the exemption until the end of the calendar year regardless of how far the threshold is exceeded). However, neither option may result in exempting a taxable person whose national turnover exceeds €100,000.

Exceeding the €100,000 Union-wide threshold: The cross-border exemption ceases in all Member States simultaneously, and your EX number is deactivated. This is immediate — there is no transitional period for the Union threshold.

After exceeding a threshold, Article 288a imposes re-entry restrictions. For a national threshold: Article 288a(1) provides that the exemption is unavailable for one calendar year after the year of exceedance, with Member States having the option to extend this to two calendar years. For the Union threshold: Article 288a(2) provides that if the €100,000 ceiling was exceeded in the preceding calendar year, the cross-border exemption is unavailable for the current year; if exceeded during a calendar year, the exemption ceases immediately from the supply that causes the exceedance. You cannot simply drop back below and immediately re-enter.

Article 289 is clear: exempt SMEs have no right to deduct input VAT. This is the trade-off for not charging VAT on your sales. Every euro of VAT you pay on business expenses — software subscriptions, equipment, professional services — is a cost you absorb.

For service businesses with low expenses, this trade-off is often favourable. If you are a consultant whose main costs are a laptop and an internet connection, the input VAT you cannot reclaim is small compared to the administrative simplification of not dealing with VAT returns.

For businesses with significant expenses — agencies buying third-party services, businesses investing in equipment — the inability to reclaim input VAT can make the exemption less attractive. Run the numbers for your situation.

The SME scheme does not exist in isolation. It interacts with two other important EU VAT mechanisms.

OSS (One Stop Shop): The SME scheme and the OSS Union scheme can coexist. You can apply the SME exemption in some Member States and declare supplies via OSS in others. However, you cannot use both the SME exemption and OSS for transactions in the same Member State. In practice, the SME scheme and IOSS (Import One Stop Shop) are functionally incompatible, though no explicit provision in the VAT Directive expressly states mutual exclusivity.

Reverse charge: Even if you are exempt under the SME scheme, you remain a "taxable person" under Article 9 of the VAT Directive. This means the reverse charge mechanism under Article 196 continues to apply to B2B services you receive from suppliers in other EU countries. If a French consultant invoices you under reverse charge, you are liable to account for the VAT in your country — even as an exempt SME.

This is a detail that catches people off guard. The exemption simplifies your output VAT (what you charge), but does not eliminate all your obligations as a recipient of cross-border services.

Each Member State sets its own national threshold, up to the €85,000 maximum. Here are the verified thresholds from the Commission's SME Web Portal (sme-vat-rules.ec.europa.eu) as of 2025:

The cross-border SME scheme is most relevant to freelancers and small service businesses with modest cross-border turnover. Here is what it means in practice:

If you are below both thresholds: You can supply services to clients in other EU countries without charging VAT, without needing a VAT number in the traditional sense, and without the reverse charge mechanism applying to your sales. You get an EX number and file quarterly reports instead.

If you are already VAT-registered: The scheme is optional. If you are already registered for VAT and using the reverse charge mechanism for B2B cross-border services, you may find the existing system works fine. The SME scheme is primarily for businesses that are currently exempt domestically and want to extend that exemption cross-border.

Watch your total turnover carefully: The €100,000 Union-wide threshold is a hard cap. Exceeding it deactivates the exemption in every country simultaneously. If you are growing, monitor this threshold closely.