Since January 2025, businesses based in Poland have had new options for operating in other European Union countries. Thanks to the SME scheme (Small and Medium Enterprises), they can use the small business VAT exemption not only in Poland but also in other EU Member States. This change opens up new opportunities for small and medium-sized businesses to grow across borders, while simplifying their tax and administrative obligations.
The SME scheme responds to the needs of small businesses, which until now had to deal with complex VAT registration procedures in every EU country where they sold. The new rules let a business use the VAT exemption in a country where it has no place of business, which makes expansion into European markets much easier. Poland introduced the scheme by adding Articles 113a and 113b to the VAT Act (ustawa o podatku od towarów i usług), which set out the detailed rules for using the exemption.
The SME scheme – what it is and who it applies to
The SME scheme lets small businesses use the VAT exemption in other European Union countries, provided they do not exceed the turnover limit of EUR 100,000 a year and the national limit of the country in which they use the exemption. In the countries where the taxpayer uses the exemption, it does not need to register as a VAT taxpayer
The SME scheme applies only to taxable persons whose place of business establishment (siedziba działalności gospodarczej) is in an EU Member State. This is a fundamental rule that defines who is entitled to use the new possibilities. If a taxable person is not established in any Member State, it cannot use the VAT small business exemption in any EU country, even if it has a fixed establishment in a given Member State.
Under the law in force until the end of 2024, the VAT Act did not allow the small business exemption to be applied by taxable persons not established in Poland. This prohibition followed directly from Article 113(13) point 3 of the VAT Act, which was repealed on 1 January 2025
Legal basis of the SME scheme in the European Union
The SME scheme was introduced by Council Directive (EU) 2020/285 of 18 February 2020, which amended Directive 2006/112/EC on the common system of value added tax. The directive concerns the special scheme for small enterprises and Regulation (EU) No 904/2010 as regards administrative cooperation and exchange of information for the purpose of monitoring the correct application of the special scheme for small enterprises.
Directive 2020/285 has applied since January 2025. Each Member State decides for itself whether it applies a domestic small business exemption at all, but if it does, it must also grant it to taxable persons established in other EU countries who meet the conditions of the SME scheme (Article 284(2) of Directive 2006/112/EC)
A key feature of the directive is that the domestic exemption itself is optional: an EU country may, but does not have to, exempt small businesses from VAT. Countries that apply such an exemption must, however, also make it available to taxable persons from other EU countries. Since 1 January 2025 Spain has not applied the SME scheme, because it has no domestic small business exemption. Poland introduced the relevant provisions in the VAT Act.
The SME scheme lets a business use the small business VAT exemption in an EU country where it has no place of business. Until now, this option was available in each EU country only to that country's own taxable persons. The new rules open these exemptions to businesses from other Member States as well.
Article 113a of the VAT Act covers EU taxable persons who have no place of business in Poland but want to use the VAT exemption for sales of goods or services in Poland. Article 113b covers taxable persons based in Poland who want to use the VAT exemption in other EU countries
Implementing the SME scheme in Poland is part of a wider process of harmonising tax rules in the European Union. The aim is to make it easier for small and medium-sized businesses to operate in the single European market, by reducing the administrative and tax barriers that could discourage cross-border expansion.
Rules for using the SME scheme by businesses based in Poland
Businesses based in Poland can use the SME scheme if they meet certain statutory criteria. Under Article 113b of the VAT Act, a taxable person with its place of business in the Republic of Poland can use the SME exemption if it meets all the required conditions.
The basic requirement is having a place of business in Poland and no place of business in the EU country where the business wants to use the VAT exemption under the SME scheme. This condition ensures that the scheme is used as intended - by businesses operating across borders.
Annual turnover in the EU, excluding VAT, must not have exceeded EUR 100,000 in either the previous or the current tax year. This limit covers all turnover in the EU, with certain transactions excluded
Another condition is that the EU country to which the business in Poland wants to sell goods or services has introduced an exemption on terms corresponding to the SME scheme (Article 113b(1) of the VAT Act). A country that does not apply a domestic small business exemption (since 2025, Spain) does not make it available to foreign taxable persons either, so businesses must check whether the scheme is available in their specific destination country.
In addition, the business must meet the VAT exemption conditions set by the EU country to which it wants to sell goods or services. These conditions may differ from those set for foreign taxable persons using the VAT exemption in Poland, so you need to study each country's rules in detail.
- Check whether the SME scheme is available in the destination country
- Verify that you meet the national conditions for the VAT exemption
- Calculate your total turnover in the EU
- Prepare the registration documents
- Submit the notification to the competent tax office (urząd skarbowy)
Limits and thresholds in the SME scheme
The system of limits in the SME scheme consists of several elements which together determine whether you can use the exemption. The basic limit is annual turnover in the EU of EUR 100,000. It covers the total value of supplies of goods and services whose place of taxation is in the EU - both sales in Poland, where the domestic VAT exemption limit has been PLN 240,000 since 1 January 2026 (previously PLN 200,000), and sales in all other EU countries (Article 113a(1) point 1 of the VAT Act). Regardless of this, in each country where the business uses the exemption, it must not exceed that country's domestic limit.
A business in Poland should pay particular attention to the PLN 42,000 (EUR 10,000) limit, which applies jointly to intra-EU distance sales of goods to all EU countries (Article 22a of the VAT Act). Once it is exceeded, the sales are taxed in the consumer's country - this requires VAT registration in that country or the VAT OSS procedure, unless the business uses the SME exemption in that country
EU countries apply different domestic thresholds for the small business VAT exemption. In Poland the annual limit has been PLN 240,000 since 2026, while in selected other countries it is: EUR 25,000 in Germany, EUR 55,000 in Austria, EUR 60,000 in Slovenia and EUR 40,000 in Estonia.
The differences between domestic thresholds matter a great deal for business planning. A business may exceed the limit in one country and lose the exemption there, but it can still use the SME scheme in other countries, as long as it does not exceed the overall limit of EUR 100,000 across the whole EU.
Certain categories of transactions, excluding VAT, count towards the annual EUR 100,000 limit. Under Article 288 of the directive, the limit includes the value of supplies of goods and services to the extent that they would be taxed if they were made by a taxable person not covered by the SME VAT exemption.
| EU country | Exemption limit | Transitional period | Special conditions |
|---|---|---|---|
| Poland | PLN 240,000 (from 2026) | No | Exemption lost from the transaction that exceeds the limit; distance sales limit PLN 42,000 |
| Germany | EUR 25,000 | Yes | EUR 25,000 in the previous year and EUR 100,000 in the current year |
| Austria | EUR 55,000 | Yes | 10% tolerance until the end of the year |
| Slovenia | EUR 60,000 | Yes | 10% tolerance |
| Estonia | EUR 40,000 | No | No tolerance for exceeding the limit |
Transactions excluded from the SME scheme
The SME scheme does not cover all types of business transactions. Most EU countries exclude certain categories of transactions from the SME exemption, which, because of their nature, require the standard VAT procedure.
The most commonly excluded transactions include occasional transactions, such as the supply of a building or part of a building before first occupation and the supply of building land. Because of their value and nature, these transactions require special tax treatment.
Cross-border supplies of new means of transport from one Member State to another are excluded from the SME scheme as standard in most EU countries. These transactions are subject to separate VAT rules for intra-Community trade
EU countries can also specify goods or services whose sale requires VAT registration from the very first sale. This means that some categories of business activity may be completely excluded from the SME exemption.
Member States may also exclude transactions related to certain sectors of the economy from the SME scheme. This often concerns real estate transactions, financial transactions including insurance and reinsurance services, the granting of credit and credit brokerage, intermediation, fund management, supplies of buildings and parts of buildings, leasing and other similar services.
- Occasional transactions involving buildings and building land
- Supplies of new means of transport between EU countries
- Certain financial and insurance services
- Transactions requiring immediate VAT registration
- Fund management services
- Certain types of real estate services
Registering for the SME exemption
Registering for the VAT exemption under the SME scheme requires certain administrative steps in the right order. Taxable persons based in Poland who want to use the SME VAT exemption in another EU country must go through a registration process regulated in detail.
The first step for businesses using the small business VAT exemption in Poland that are not yet registered as an "exempt VAT taxpayer" (podatnik VAT zwolniony) is to file the VAT-R registration form. This form must be filed before the prior notification of the intention to use the exemption (Article 96(3c) of the VAT Act).
Documents concerning the use of the SME exemption - the prior notification, quarterly reports and their corrections, and the special power of attorney - are filed and delivered only through an account in e-Tax Office (e-Urząd Skarbowy) (Article 113b(18) of the VAT Act)
The next step is to file, electronically, the notification of the intention to use the VAT exemption with the competent head of the tax office, which is the Head of the Second Tax Office Warszawa-Śródmieście (Naczelnik Drugiego Urzędu Skarbowego Warszawa-Śródmieście). After filing the notification, the taxable person must wait for an EX identification number to be assigned for the purposes of the SME VAT exemption.
The competent head of the tax office has 35 working days after the day it receives the prior notification from the taxable person (Article 113b(4) of the VAT Act) to inform it of, or confirm, its EX identification number. Where additional verification is required, this deadline may be extended until the verification is completed.
- Prepare and file the VAT-R registration form
- File the notification of the intention to use the SME exemption
- Wait for verification by the tax office
- Receive the EX identification number or its confirmation
- Start using the exemption from the day you receive the confirmation
Practical example: A trading company from Kraków wants to start selling products in Germany using the SME scheme. First it files the VAT-R form, then the electronic notification to the Second Tax Office Warszawa-Śródmieście. After 28 days it receives an EX identification number and can start selling in Germany with the VAT exemption, provided it does not exceed the German limit (EUR 25,000 in the previous year and EUR 100,000 in the current year).
Different scenarios for assigning the EX identification number
The system for assigning EX identification numbers in the SME scheme takes account of different situations a business in Poland may find itself in. How the competent tax office proceeds depends on the specific circumstances of the notification and on the taxable person's history of using the scheme.
Where the taxable person indicated in the notification one EU Member State in which it intends to use the exemption, and that country confirmed its right to the exemption, the tax office informs the taxable person that it has been assigned an individual identification number prefixed with the code PL and containing the code EX for the purposes of the SME exemption.
Where the taxable person indicated more than one Member State in which it intends to use the exemption and at least one of the EU countries confirmed its right to the exemption, it also receives an individual EX identification number prefixed with the code PL
Where a Polish EX identification number has already been assigned for the purposes of the exemption in one EU country and the business chooses another country in which to apply the SME VAT exemption, the tax office confirms the existing Polish EX identification number to the taxable person.
A similar procedure applies where the taxable person indicated in the notification more than one EU country in which it intends to use the SME VAT exemption, a Polish EX identification number has already been assigned for the purposes of the SME VAT exemption in one of those EU countries, and another EU country has confirmed the taxable person's right to the SME VAT exemption.
| Taxable person's situation | Tax office action | Deadline |
|---|---|---|
| First application - 1 EU country | New EX number assigned | 35 working days |
| First application - more countries | New EX number assigned | 35 working days |
| Another country - existing number | EX number confirmed | 35 working days |
| Extension - existing number | EX number confirmed | 35 working days |
Possible refusal scenarios and their consequences
Not all applications for a Polish EX identification number are successful. There are several scenarios in which the taxable person may receive a refusal or information that it cannot use the exemption in a particular Member State.
The first scenario is where the taxable person has exceeded an annual Union turnover of EUR 100,000 in the previous or current year. In this situation, the competent head of the tax office issues a decision (postanowienie) refusing to assign the Polish EX identification number. This decision can be challenged by a complaint (zażalenie), which means that the taxable person can appeal against it.
The second scenario involves a refusal by another Member State. If the analysis of the prior notification carried out by another Member State shows that the exemption conditions set by that state are not met, the competent head of the tax office informs the taxable person that it cannot use the exemption in that particular Member State.
For example, if the Head of the Second Tax Office Warszawa-Śródmieście receives information from the German tax administration that a Polish taxable person is not entitled to the SME exemption because of German tax law, the Polish taxable person will be able to pursue its rights directly with the German tax administration.
This situation shows how complex the SME scheme is, as it requires cooperation between different tax systems. Each Member State may have its own specific requirements for small business exemptions, which must be respected by taxable persons from other countries.
It is worth stressing that a refusal by one Member State does not rule out using the exemption in other EU countries. The taxable person can continue to use the SME scheme in the states that have confirmed its right to the exemption, provided it does not exceed the overall limit of EUR 100,000 of turnover in the European Union.
Deactivation of the Polish EX identification number
The SME scheme provides for mechanisms to deactivate the Polish EX identification number in certain situations. Under Article 113b(12) of the VAT Act, there are several grounds on which the head of the tax office promptly issues a decision deactivating the number.
The first ground is exceeding an annual Union turnover of EUR 100,000 in the previous or current tax year. This criterion is continuously monitored by the tax administration on the basis of the quarterly reports filed by the taxable person.
Once the taxable person no longer meets the conditions for applying the SME exemption in all the Member States in which the exemption was applied, it loses the right to use the exemption in all Member States. As a consequence, the Polish EX identification number is deactivated
The second ground concerns a situation where the taxable person no longer meets the conditions for the exemption in all the Member States in which it used the exemption. This may happen, for example, as a result of a change in the law in a given state or a change in the nature of the taxable person's activity.
The third ground concerns a situation where the exemption has ceased to apply in all the Member States in which the taxable person used it. This may result from legislative changes introduced by those Member States.
The last ground concerns the end of the taxable person's business activity – where the taxable person has reported that it has ended or there is a justified presumption that the activity has ended. Examples of grounds for such a presumption are indicated by the reference to Article 96(4a) points 3, 4 or 6 of the VAT Act; they cover situations where:
- Despite documented attempts, it is not possible to contact the taxable person or its proxy
- The taxable person or its proxy does not respond to summonses from the head of the tax office
- A court has banned the taxable person from conducting business activity under separate provisions
In all these cases, the competent head of the tax office promptly issues a decision deactivating the Polish EX identification number. This decision is immediately enforceable, but it can be challenged by a complaint.
Reporting obligations in the SME scheme
Businesses based in Poland that use the SME scheme have specific reporting obligations, which they must meet regularly to keep the right to the exemption. The basic obligation is to file quarterly reports with the Head of the Second Tax Office Warszawa-Śródmieście within one month of the end of each quarter.
The deadline for the quarterly report expires even if its last day falls on a Saturday or a public holiday (Article 113b(14) point 1 of the VAT Act). In such cases the deadline does not move to the next working day.
The quarterly report must include the taxable person's details, information on its Polish EX identification number, the turnover achieved in each Member State for the quarter and the value of sales in Poland
If the information in the quarterly report changes, the taxable person must file a correction without delay. This obligation keeps the data in the tax administration system up to date and allows proper monitoring of the use of the SME scheme.
A special situation arises when annual sales in the EU exceed EUR 100,000. In that case the taxable person must file a quarterly report within 15 working days of the day on which the limit was exceeded. This report covers the period from the beginning of the quarter to the day the limit was exceeded.
- Filing quarterly reports regularly within one month
- Correcting incorrect information without delay
- Special reporting when the EUR 100,000 limit is exceeded
- Filing all documents electronically through e-Tax Office
- Keeping records of turnover in individual countries
- Monitoring the overall sales limit in the EU
Practical examples of using the SME scheme
Looking at practical examples helps you understand how the system of limits works and what happens when they are exceeded. The different scenarios show how complex the system is and how important it is to monitor turnover in individual countries and the overall EU limit precisely.
Both examples below are based on 2025 amounts, when the domestic exemption limit in Poland was PLN 200,000 (from 1 January 2026 - PLN 240,000). In the first example, a VAT-exempt taxable person with its place of business in Poland made domestic sales of PLN 230,000 (about EUR 53,905) between January and June 2025. In addition, it earned revenue from sales in Estonia totalling EUR 41,000. In this situation the business exceeded both the Polish limit of PLN 200,000 and the Estonian limit of EUR 40,000, losing the VAT exemption in both countries.
Although it lost the exemption in Poland and Estonia, the taxable person has not yet exceeded the annual EUR 100,000 limit for sales across the EU. It still has EUR 5,095 of the limit left, which it can use for sales in other EU countries
The second example shows a taxable person in Poland that, between January and April 2025, made domestic sales of PLN 90,000 (about EUR 21,093) and total sales to five EU countries of EUR 95,000, without exceeding the domestic VAT exemption limit in any of them.
In this case the taxable person exceeded the annual VAT exemption limit of EUR 100,000, which means it can no longer use the VAT exemption for sales in the EU. It can, however, still use the VAT exemption for domestic sales in Poland, because it has not exceeded the domestic limit of PLN 200,000.
Practical scenario: An IT company from Gdańsk provides programming services in three EU countries. In the first quarter its turnover was: Poland - PLN 45,000, Germany - EUR 20,000, Czech Republic - EUR 15,000, Austria - EUR 25,000. Total EU turnover is about EUR 70,500 (PLN 45,000 is about EUR 10,500), so the company can continue to use the SME scheme in all these countries, while keeping an eye on how close it is getting to the EUR 100,000 limit.
Records and invoicing in the SME scheme
Documenting transactions and invoicing obligations in the SME scheme need particular attention from businesses. Under Article 106b of the VAT Act, a VAT-exempt taxable person does not have to issue a sales invoice for sales exempt from VAT under a subject-matter or small business exemption (Article 106b(2)), unless the buyer requests an invoice within 3 months (Article 106b(3)).
However, a business in Poland using the SME scheme must check the rules in force in the country where the sale takes place. Different EU countries may have different invoicing requirements, even for VAT-exempt transactions.
In many EU countries, as in Poland, a taxable person making sales under the SME exemption does not have to issue an invoice. You should, however, check for special cases in which an invoice is required
A business in Poland may voluntarily issue an invoice documenting a sale under the SME VAT exemption. Such an invoice must include the individual VAT exemption identification number assigned by the Head of the Second Tax Office Warszawa-Śródmieście. This number should also be given to the customer, even if no invoice is issued.
The EX identification number is used to verify that the exemption has been applied validly and properly to a given transaction. It allows the customer to check whether the business really has the right to use the SME scheme in a given country and period.
Apart from invoicing obligations, a business in Poland using the SME scheme should keep sales records (in Poland, businesses using the small business exemption keep a record of sales for each day - Article 109(1) of the VAT Act; in other countries their own rules apply). These records are used to establish the value of sales and compare it with the VAT exemption limit of EUR 100,000 and with the domestic limits in individual countries.
In practice, keeping records broken down by the individual countries where sales take place makes things much easier. This is essential, because the quarterly report requires data for each country separately. Without a proper breakdown, problems can arise when preparing reports, and errors in settlements become more likely.
The consequences of keeping incorrect records or filing reports late can be serious. Without reliable records, it is hard to show that the limits have not been exceeded, and when a taxpayer stops meeting the conditions of the exemption, it loses the exemption and its Polish EX number is deactivated (Article 113b(12)). In Poland, if records are missing or unreliable, the authority may estimate the value of taxable sales (Article 109(2)). That is why it is particularly important to understand all the obligations and fulfil them systematically from the moment you start using the SME scheme.
Invoices of taxpayers from other EU countries using the SME scheme in Poland
Together with the changes to the VAT exemption for small businesses, the Minister of Finance amended the regulation on issuing invoices (regulation of 29.10.2021, Journal of Laws (Dz.U.) 2021 item 1979 – § 3 point 3a added from 1.01.2025 by the regulation in Dz.U. 2024 item 1938, in its current wording from 1.02.2026 – Dz.U. 2025 item 1742), adapting the rules to the SME scheme.
Foreign taxpayers using the VAT exemption in Poland under the SME scheme may, like Polish taxpayers using the small business VAT exemption, issue simplified invoices with a narrower set of data (§ 3 point 3a of the regulation). They do not issue invoices in KSeF (National e-Invoicing System) (Article 106ga(2) point 6 of the VAT Act). This simplification means invoices do not need to include VAT information that does not apply where the exemption is used.
A simplified invoice issued in Poland under the SME scheme must contain the date of issue, the invoice number, the full details of the seller and buyer with addresses, the buyer's identification number (from 1.02.2026), a description of the goods or services, the quantity, the unit price, the total amount due and the individual EX identification number (§ 3 point 3a of the regulation). No VAT rate is shown on such an invoice
The key change is the obligation to show on the invoice the individual EX identification number, which clearly identifies a business using the SME scheme (Article 106e(1) point 25 of the VAT Act). This number replaces the usual VAT information and confirms that the exemption is being used. No VAT rate is shown on the invoice, because the sale is covered by the exemption.
Invoices for foreign buyers should not show either a VAT amount or a VAT rate. In practice, it is recommended to add a note on the VAT exemption under the SME scheme, which helps buyers understand the legal basis for the absence of VAT on the invoice. It is also worth checking the detailed invoicing requirements in individual countries, as some Member States may introduce their own rules on what an invoice should contain.
| Invoice element | Requirement | Notes | Example |
|---|---|---|---|
| Date of issue | Mandatory | Day, month and year | 15-01-2026 |
| Invoice number | Mandatory | Unique number | FV/2026/001 |
| Seller's details | Mandatory | Name and address | ABC Sp. z o.o., ul. Główna 1 |
| EX number | Mandatory | Number with the code EX (Polish: with the prefix PL) | e.g. DE…EX |
| VAT rate | Not applicable | Not shown on an SME invoice | - |
Exceeding the limits – consequences and procedures
Exceeding the EUR 100,000 limit under the SME scheme has significant legal consequences and requires immediate action by the business. The system is designed to automatically exclude from the exemption firms that have exceeded the thresholds, ensuring that the benefits go only to genuinely small businesses.
The exemption ceases to apply from the transaction with which the limit was exceeded (in Poland, for taxpayers from other EU countries – Article 113a(7)). From that moment, sales in the countries where the business used the exemption are taxed under their rules, which usually means registering for VAT in those countries. In Poland, the VAT-R registration form is filed before the day on which the taxpayer loses the right to the exemption (Article 96(5) point 2 and (5a) point 1 of the VAT Act) – in practice, it needs to be prepared before the limit is exceeded. A Polish business that has exceeded the EUR 100,000 limit but still stays within the domestic limit of PLN 240,000 may continue to use the exemption in Poland (Article 113(1)). An active VAT taxpayer must charge VAT on every sale at the applicable rates.
Returning to VAT settlement also means you can deduct VAT on purchases again. The business can once again deduct VAT on business costs and thus reduce its tax liabilities. As a rule, VAT on purchases can be deducted from the moment the exemption is lost, and VAT on earlier purchases – only through the adjustment described below
As a rule, VAT on purchases already made and used up during the exemption cannot be recovered. In Poland, however, when goods and services change from being used for exempt sales to taxable sales, an input VAT adjustment is available: for goods for resale, materials and other goods still unused on the day the exemption is lost, and – proportionally for the remaining adjustment period – for fixed assets (Article 91(7)–(7d) of the VAT Act); in other countries, their rules apply. Even so, this limitation can have a significant financial impact, especially for firms that made significant investments during the exemption period.
Monitoring how close you are to the limits is key to avoiding unexpected consequences. Businesses should keep track of their turnover and plan what to do if the thresholds are exceeded. In some cases, it may be worth deliberately becoming an active VAT taxpayer before exceeding the limit, to control the timing of the change and prepare for the new obligations.
Waiting periods and returning to the exemption
The SME scheme takes account of the different approaches of individual EU countries to waiting periods, i.e. how long a business must wait before it can use the exemption again after losing it. These differences matter for the long-term planning of businesses using the SME scheme.
The directive provides that a taxable person who exceeded the threshold in the previous year does not use the exemption in the current year, and a Member State may extend this period to two years (Article 288a(1) of Directive 2006/112/EC). Countries differ mainly in how far the threshold may be exceeded in the current year. Germany is an example: the limit for the previous year is EUR 25,000, while in the current year the exemption applies up to turnover of EUR 100,000.
The Czech Republic applies a transitional period when the turnover limit is exceeded, which means the business must wait a certain time before using the exemption again. Austria applies a transitional period with a 10 percent tolerance for exceeding the limit until the end of the calendar year
Because waiting period systems vary so much, businesses in Poland need to study the rules of each country in which they plan to operate in detail. This information is available on the European Commission's websites, in the TEDB database (Taxes in Europe Database) and on the Commission's SME scheme portal.
Business planning must take into account not only the current options for using the exemption but also possible scenarios in which limits are exceeded and the related waiting periods before returning to the exemption. This is especially important for seasonal businesses or those with fluctuating turnover.
- Germany: EUR 25,000 in the previous year and up to EUR 100,000 in the current year
- Czech Republic: a standard transitional period applies
- Austria: 10% tolerance, with the exemption available until the end of the year
- Poland: no tolerance - the exemption can be used again no earlier than one year after the end of the year in which it was lost (Article 113(11) of the VAT Act)
- Estonia: no tolerance for exceeding the limit
- Slovenia: 10% tolerance
Simplifications and exclusions in the SME scheme
EU countries may introduce various simplifications for foreign taxable persons using the SME scheme, to make cross-border business easier and reduce the administrative burden. These simplifications can cover different aspects of the scheme, from exemption from certain formal obligations to special treatment when limits are exceeded.
Member States can individually set exemptions from certain formal obligations, which means that foreign businesses using the SME scheme may be exempt from some of the steps required of domestic taxable persons. This may include simplified reporting procedures or reduced documentation requirements.
EU countries can also set special obligations that a taxable person must meet when it exceeds the domestic VAT exemption limit. These may be additional notifications, special transitional procedures or specific reporting requirements
Some countries introduce exclusions from the SME scheme, which may concern certain sectors of the economy, types of activity or categories of taxable persons. These exclusions are intended to keep the tax system working properly and prevent abuse.
Simplifications may also concern verification and audit procedures. Foreign taxable persons using the SME scheme may be subject to simplified audit procedures or be entitled to use special channels for communicating with the tax administration.
Example of simplifications: A business from Poland selling online in Austria may be able to use a simplified reporting procedure, filing reports quarterly instead of monthly, and may be exempt from keeping detailed records of certain categories of transactions, as long as it does not exceed certain turnover thresholds.
Monitoring and control of the SME scheme
Monitoring and control of the SME scheme are based on administrative cooperation between EU Member States and the exchange of information needed to apply the scheme correctly. Regulation (EU) No 904/2010 was amended to provide suitable control mechanisms.
The control system is based on the exchange of information between the tax administrations of individual EU countries. This information includes data on taxable persons using the SME scheme, their turnover in individual countries and cases where the exemption limits have been exceeded.
The Polish tax office works with the tax administrations of other EU countries to verify whether taxable persons are entitled to use the SME scheme. This cooperation includes exchanging turnover data and verifying that the exemption conditions are met
The monitoring system also makes it possible to track taxable persons' total turnover across the whole EU, which is necessary to enforce the EUR 100,000 limit. Tax administrations have access to information on taxable persons' activities in other Member States, which allows effective control of compliance with the rules.
Control of the SME scheme may also include checking that the quarterly reports filed are correct, that the turnover declared matches the actual business activity, and that the conditions for the exemption in individual countries are met. VAT settlements and JPK files are prepared for clients who use our bookkeeping services.
Businesses using the SME scheme should be prepared for audits by the tax administrations of different EU countries. This requires keeping reliable business records and making sure that all documents confirming correct use of the scheme are available.
Benefits and limitations of the SME scheme
The changes bring significant benefits for small businesses, but they also come with certain limitations and new obligations. The most important benefit is that there are no formalities related to VAT registration in the EU countries where the business uses the exemption. Until now, businesses had to go through complex registration procedures, often requiring knowledge of local law and language, which was a significant barrier to expansion abroad.
The financial benefits are just as important. The VAT exemption means there is no need to charge and pay VAT on sales, which can significantly increase the competitiveness of small businesses on foreign markets. Better prices for products and services can make the offer more attractive and help the business grow faster. In addition, easier access to the markets of other Member States opens up new prospects for growth and diversification of revenue.
- No need to register as a VAT taxpayer in the EU countries where the exemption is used
- Greater competitiveness through better prices for products and services
- Simpler administrative procedures for cross-border sales
- Easier access to the markets of other EU Member States
- Lower costs of handling tax matters in different countries
The most important limitation is that input VAT on purchases cannot be deducted – exempt sales as a rule do not give the right to deduct input VAT on related purchases (Article 86(1) of the VAT Act). For firms with high costs of purchasing goods, materials or services, this loss may outweigh the benefits of the VAT exemption on sales. Every business must analyse its own cost and revenue structure to assess whether the SME scheme really pays off.
Is the SME scheme worth it?
The key factor affecting whether it pays off is the firm's cost structure. Firms with high costs of purchasing goods, materials or services may lose more by being unable to deduct input VAT than they gain from the VAT exemption on sales. On the other hand, firms providing high-margin services with low material costs may benefit significantly from the SME scheme.
- Analysis of the revenue and cost structure in terms of VAT
- Assessment of the impact on price competitiveness on foreign markets
- Calculation of the administrative costs of the SME scheme
- Comparison with the costs of traditional VAT registration in EU countries
- Analysis of business growth prospects and the risk of exceeding the limits
Example calculation: An IT firm selling software licences to consumers in several EU countries has annual revenue of EUR 80,000, of which 60% comes from foreign sales. Material costs are only 5% of revenue. Assuming, for simplicity, a single VAT rate of 21%, the firm does not charge about EUR 16,800 of VAT on sales per year, losing only about EUR 840 by being unable to deduct VAT on purchases. The difference in favour of the exemption is about EUR 15,960 a year – provided the firm keeps its existing prices.
Competitiveness on foreign markets also needs attention. The VAT exemption may allow you to offer more attractive prices, which is particularly important when competing with local suppliers. Remember, however, that in some situations buyers may prefer invoices with VAT, which allow them to make tax deductions.
Sometimes it may turn out that being an active VAT taxpayer and settling the tax is financially better for the business. This applies particularly to firms with high purchase costs or those planning significant investments. In such cases, the ability to deduct VAT on purchases may outweigh the benefits of the exemption on sales.
The long-term growth outlook is just as important. Businesses planning rapid growth and a fast increase in turnover should consider whether the SME scheme will only be a temporary solution. Frequent changes of tax status can generate additional costs and operational complications.
