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EU Mitigates the Rules of Taxation for Small Business

The European Union announced its intention to expand the powers of Member States with respect to changing the rates of VAT and mitigating the rules of taxation for small businesses. These changes are only part of a large-scale plan on revision of the European VAT system aimed at creating a single VAT zone.

We remind that the general rules of VAT in the European Union were agreed in 1992. According to the European Commission, they became obsolete and, in addition, too limited. The EU Commissioner for Taxation, Pierre Moscovici, noted: “Today we are taking another step towards the creation of a single VAT zone in the European Union with simplified rules for our Member States and, in particular, companies. These proposals will give EU countries greater freedom with regard to application of preferential VAT rates to specific products or services. At the same time, they will enable to reduce the number of bureaucratic mechanisms for small enterprises engaged in cross-border activities, thereby contributing to their growth and job creation”.

The Commission proposed to give EU Member States the opportunity to introduce certain benefits, along with a standard VAT rate of at least 15%, namely:

  • two separate reduced rates ranging from minimum 5% to the level of a standard rate chosen by the particular Member State;
  • one option for exemption from VAT (or “zero rate”); and
  • one option of the reduced rate, which would be set between zero and reduced rates.

The current list of goods and services to which preferential rates can be applied is proposed to be canceled. Instead, it is planned to enter a list of products, to which a standard rate of 15% or higher will always apply. In order to increase government revenues, Member States will be required to ensure the weighted average VAT rate to be at least 12%.

The second direction of proposals concerns small and medium-sized enterprises (SMEs). Currently, the EU Member States are allowed to release the sales of small businesses from VAT, provided that they do not exceed annual turnover. The turnover threshold varies depending on the particular EU country.

In addition to the existing thresholds, the EU proposed to introduce:

  • an income threshold of EUR 2.5m, according to which SMEs will be able to take advantage of such mitigation measures, regardless of whether they have been previously exempt from VAT or not;
  • the possibility for Member States to exempt all small businesses that are eligible to VAT exemptions for liabilities related to identification, invoicing, accounting or refund; and
  • a turnover threshold of EUR 100,000, which will allow companies to work in more than one Member State to receive a VAT exemption.

The Commission’s proposals will soon be submitted to the European Parliament and the European Social and Economic Committee, and then to the European Council for final adoption.