Upcoming Changes for Small Businesses in the EU: VAT Reform and Practical Examples
Starting from 2025, significant changes to the Value Added Tax Act (VAT) and Taxation Act will take effect in Estonia and across the European Union, aimed at simplifying cross-border operations for small businesses. These amendments are designed to reduce administrative burden and provide small businesses with easier access to foreign markets without incurring excessive tax obligations. Below is a brief overview of the updates and two practical examples to clarify how the small business scheme might work. Please note, however, that this legislation is still under review and has not yet been finalized.
Key Changes
Reduced Administrative Burden: Small businesses operating in other member states will not need to register for VAT until their turnover in that specific country exceeds local VAT thresholds, provided their total EU-wide turnover is under €100,000. This change significantly reduces the need for separate registrations and reporting requirements in every country where they do business.
New Rules on Real Estate and Fixed Assets: For example, new real estate sold within one year of first use must be subject to VAT. For fixed assets, the input VAT calculation will need to align with actual usage rather than initial projections.
Example 1: Small Business Turnover Below €100,000
Consider Mari, who owns a small business in Estonia selling handmade goods. Her company’s annual turnover in Estonia is €30,000, and she also sells products in Finland and Latvia, with annual turnovers of €8,000 and €5,000, respectively. Her total turnover within the EU is therefore €43,000, which is below the small business threshold of €100,000.
With the new rules, Mari can apply the small business scheme as follows:
- Simplified Registration and Reporting: Mari does not need to register for VAT or submit separate VAT reports in Finland and Latvia, as her turnover in these countries is below their local VAT thresholds.
- Declaration Submission in Estonia: Mari can declare her total turnover, including sales to Finland and Latvia, in a single VAT declaration submitted to the Estonian Tax and Customs Board. This reduces her administrative burden and allows her to focus on her core business.
Example 2: Small Business Turnover Above €100,000
Now, consider Jüri, who owns a small Estonian business selling electronics. His annual turnover in Estonia is €50,000, and he also sells products in Finland and Sweden, with turnovers of €30,000 and €25,000, respectively. His total EU turnover is therefore €105,000, exceeding the small business scheme threshold of €100,000.
Since Jüri’s total turnover surpasses the threshold, he cannot use the small business scheme and will need to follow these requirements:
- VAT Registration in Each Member State: Jüri will need to register as a VAT payer in any member state where his turnover exceeds the local VAT thresholds, such as in Finland and Sweden.
- Meeting Tax Obligations by Country: Jüri will need to declare and pay VAT according to the tax laws in Finland and Sweden, as his turnover in each country has exceeded local thresholds. In addition, he must continue declaring his Estonian turnover to the Estonian Tax and Customs Board.
Summary
These updates in VAT legislation are aimed at helping small businesses operate more easily and cost-effectively across EU borders. For businesses whose turnover remains below €100,000, the small business scheme provides a way to reduce the administrative load and associated tax costs. However, for businesses with turnover above this threshold, additional tax obligations arise for each country in which they operate.
These reforms provide significant benefits, particularly for small businesses that previously had to register and report VAT across multiple countries even at lower turnover levels. It is important to remember that the proposed changes are still under review and subject to final approval before they are set to take effect.
