Starting January 1, 2025, small and medium-sized enterprises (SMEs) in the European Union will have to comply with new VAT rules designed to simplify compliance and enhance cross-border trade opportunities, while also presenting various challenges. In this context, SMEs must stay informed and carefully plan their tax strategy to take advantage of the new facilities and avoid difficulties.

New EU VAT rules applicable to SMEs

The VAT exemption threshold for SMEs will be harmonized across the EU and set at a maximum of EUR 85,000. Thus, small businesses with an annual turnover below this threshold will be able to supply goods and services without charging VAT, which will reduce administrative burdens and lower costs for consumers. However, SMEs benefiting from this exemption will not be able to deduct VAT on their purchases.

SMEs will be registered in their country of origin and will receive a unique identification code with the prefix “EX”, used for filing a single quarterly return covering all transactions carried out within the European Union. Issued invoices will include only this unique code, thereby eliminating the need for multiple filings.

Benefits for SMEs

The adoption of these rules brings significant advantages for SMEs, such as the removal of the obligation to register for tax purposes in each Member State where they operate, provided the exemption conditions are met.
Additionally, the single quarterly reporting simplifies tax administration, and the elimination of standard VAT obligations will allow SMEs to offer more competitive prices. The new regulations also contribute to greater flexibility in cross-border trade.

Challenges for SMEs

However, there are important challenges to consider. For example, not all EU Member States will implement the exemption scheme, which may create competitive disparities between SMEs from different countries. SMEs must check whether the countries in which they operate apply the new regime and comply with each jurisdiction’s specific requirements.

Moreover, VAT exemption entails the inability to deduct VAT on purchases, which can lead to increased operational costs. In Romania, the current exemption threshold is higher than the one set at the European level, and national legislation will need to be updated to reflect the new requirements.

Despite the benefits, there are also aspects that require attention:

• Different implementation across Member States – Not all EU countries will adopt this exemption regime, which may create competitiveness gaps between SMEs.

• Loss of VAT deduction – Exempt SMEs will not be able to deduct VAT on purchases (e.g., raw materials, equipment, services), which may lead to higher operational costs.

• Impact on Romanian companies – Currently, Romania has an exemption threshold of approximately EUR 88,500, higher than the EU threshold. SMEs must assess whether switching to the new regime is advantageous or whether they should remain under the national system.

Recommendations for SMEs

To implement the new regulations smoothly, SMEs must adopt a proactive approach. It is essential that they analyze their EU-wide turnover and determine whether they meet the new exemption thresholds, while also evaluating the impact of losing VAT deductibility on their costs.

As each Member State may introduce specific rules, SMEs must stay informed about legislative changes in Romania and in other countries where they operate.

Consulting a tax specialist and implementing a VAT management system can help SMEs reduce tax risks and improve compliance. SMEs that prepare in advance and develop a solid tax strategy will be able to fully benefit from the advantages offered by the new regulations.

If you want your SME to make informed decisions and carefully plan its tax strategy, Cabot Transfer Pricing can help: https://cabot-tp.ro/en/