Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises
Date: 2018-01-18
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: VAT, administrative formalities, company growth, liberalisation of trade, simplification of legislation, small business, tax exemption, tax harmonisation, tax law, turnover

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   EUROPEAN COMMISSION  Brussels, 18.1.2018  COM(2018) 21 final 2018/0006 (CNS)  Proposal for a COUNCIL DIRECTIVE amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises {SWD(2018) 9 final} - {SWD(2018) 11 final}  
 
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

Value  added  tax  (VAT)  is  a  consumption  tax,  borne  ultimately  by  the  final  consumer,  but 
which is collected by businesses that supply goods or services. The VAT Directive1 lays down 
a series of administrative obligations to ensure that the system functions properly (e.g. VAT 
registration,  invoicing,  accounting  and  reporting).  The  compliance  burden  derived  from  the 
need  to  observe  these  obligations  generates  a  cost  for  businesses  referred  to  as  the 
‘compliance  cost’.  VAT  obligations  are  particularly  burdensome  for  small  businesses  given 
that they have  more limited resources than large businesses. This leads to small businesses2 
(hereinafter  ‘SMEs’)  bearing  proportionally  higher  VAT  compliance  costs  than  larger 
businesses. 

The VAT Directive therefore sets out several provisions designed to ease the burden on SMEs 
dealing  with  VAT.  Such  provisions  are  largely  contained  in  Title XII,  Chapter 1  of  the 
Directive, ‘Special scheme for small enterprises’ (hereinafter the ‘SME scheme’). These allow 
Member States to (i) provide for simplified procedures for charging and collecting VAT; and 
(ii)  exempt  SMEs  with  an  annual  turnover  below  a  certain  threshold  from  charging  and 
deducting  VAT  (hereinafter  the  ‘SME  exemption’).  Simplified  VAT  obligations  are  also 
available in the VAT Directive but outside of the SME scheme. Such measures are optional – 
Member States can apply them and businesses can avail themselves of them. 

The current initiative is part of the reform package announced in the VAT action plan3. This 
was enhanced by the follow-up to this plan4, as explained further in the section on consistency 
with  existing  policy  provisions  in  the  VAT  area,  and  by  President  Juncker’s  letter  of  intent 
accompanying the State of the Union Address 20175. However, the review is long overdue for 
three main reasons. 

First,  despite  the  fact that Member States  may exempt  SMEs from  VAT  – an  option that  is 
widely used – SMEs continue to suffer from disproportionate VAT compliance costs due to 
how  the  SME  exemption  is  designed.  In  particular,  SMEs  involved  in  cross-border  trade 

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Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 
347, 11.12.2006, p. 1) 
At  EU  level,  SMEs  are  generally  defined  according  to  the  Commission  Recommendation  of  6 May 
2003  concerning  the  definition  of  micro,  small  and  medium-sized  enterprises  (OJ L 124,  20.5.2003, 
p. 36). With its rules for small enterprises, the VAT Directive however targets businesses operating on a 
much smaller scale, which under the general definition would be considered as ‘micro-enterprises’ (that 
is, with turnover up to EUR 2 000 000). Such businesses make up about 98% of all EU enterprises.  
Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on an action plan on VAT — Towards a single EU VAT area — Time 
to decide (COM(2016) 148 final). 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee — On the follow-up to the Action Plan on VAT — Towards a single 
EU VAT area — Time to act (COM(2017) 566 final). 
State of the Union 2017. Letter of intent to President Antonio Tajani and to Prime Minister Jüri Ratas, 
13 September 2017, accessible at https://ec.europa.eu/commission/sites/beta-political/files/state-union-
2017-brochure_en.pdf. See also Annex I to the Commission Work Programme 2017, COM(2016) 710 
final, Strasbourg, 25.10.2016, p. 3, accessible at 
https://ec.europa.eu/info/sites/info/files/cwp_2017_annex_i_en.pdf. 

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cannot benefit from the SME exemption in Member States other than the one in which they 
are established. In addition, high VAT compliance costs also stem from the complexity and 
diversity of rules on VAT obligations across the EU, which SMEs may have to observe when 
trading cross-border. 

Second,  the  current  system  has  distortive  effects  on  competition  on  both  domestic  and  EU 
markets.  The  SME  exemption  in  one  Member  State,  which  is  available  only  to  businesses 
established  there,  has  a  negative  impact  on  the  competitive  situation  of  those  established  in 
other Member States that supply the same market. This issue is set to worsen with the shift 
towards  destination-based  taxation  under  the  proposed  definitive  VAT  system;  many  SMEs 
may have to charge their customers VAT that differs from that of the Member State in which 
they  are  established.  The  principle  of  destination-based  taxation  states  that  VAT  has  to  be 
declared and accounted for in the Member State where the customer is established (Member 
State of ‘destination’) rather than in the Member State where the SME is established (Member 
State of ‘origin’). This means that (i) there is no level playing field for SMEs to trade within 
the EU; and (ii) SMEs are discouraged from carrying out cross-border operations and making 
the most of the opportunities afforded by the single market due to VAT-related obligations in 
other Member States. 

At  domestic  level,  distortions  arise  because  the  simplified  VAT  obligations  are  linked  in 
principle to the use  of the SME exemption, and SMEs outside the exemption  (because  they 
have exceeded the turnover threshold or have opted for the normal VAT arrangements) cannot 
benefit from them. This may result in the ‘threshold effect’, in which SMEs slow their growth 
to avoid crossing the SME exemption threshold. 

Third, the review provides the opportunity to encourage voluntary compliance and therefore 
help reduce revenue losses due to non-compliance and VAT fraud. While SMEs already find 
it  difficult  to  comply  with  domestic  VAT  obligations,  compliance  with  VAT  obligations  in 
other Member States for those involved in cross-border trade is an even more serious obstacle 
due to the lack of alignment across the EU. The simplified registration and payment system 
MOSS  (Mini  One  Stop  Shop)  has  addressed  these  problems  in  terms  of  electronic  services 
supplied to final consumers (B2C). Although the e-commerce proposal expands the MOSS to 
all B2C supplies, there is still a need for further improvement. 

There are two more reasons that call for action.  

First, the SME scheme is already obsolete, working as it does on the basis of deviations. In its 
provisions,  the  VAT  Directive  itself  provides  the  possibility  to  depart  from  the  basic  SME 
exemption  threshold  of  EUR 5 000  by  expressly  setting  thresholds  for  19  Member  States. 
However, 10 Member States currently rely on derogations from the applicable threshold, and 
several new requests for derogation have been already submitted. 

Second,  the  SME  scheme,  which  provides  for  measures  to  be  applied  in  the  Member  State 
where  the  small  enterprises  are  established,  is  becoming  unsustainable  as  the  VAT  system 
shifts towards destination-based taxation. 

As a result, the review aims to create a modern, simplified SME scheme. In particular, it seeks 
to (i) reduce VAT compliance costs for SMEs both domestically and at EU level; (ii) reduce 
distortions of competition both domestically and at EU level; (iii) reduce the negative impact 
of  the  threshold  effect;  and  (iv)  facilitate  compliance  by  SMEs  and  monitoring  by  tax 
administrations.  

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This is in line with the objectives of this proposal, whose aim is to: 

 

 

 

• 

help create an environment that is conducive to SME growth; 

help create an efficient and robust VAT system with a view to creating a single EU 
VAT area; and 

contribute to the smooth functioning of a deeper and fairer single market. 

Consistency with existing policy provisions in the policy area 

The review is part of the VAT action plan setting out ways to modernise the VAT system in 
order to make it simpler, more fraud-proof and business-friendly. In particular, this proposal 
complements two other legislative initiatives resulting from the VAT action plan on the shift 
towards  destination-based  taxation:  (i)  the  e-commerce  proposal,  which  was  adopted  in 
December 20166; and (ii) the definitive VAT system proposal, which was adopted in October 
20177.  It  is  also  consistent  with  the  VAT  place  of  supply  rules  for  telecommunications, 
broadcasting and electronically supplied services8, which entered into force in 2015. 

Consistency with other EU policies 

• 
The proposal is consistent with the 2015 single market strategy9, where the Commission set 
out  to  help  SMEs  and  start-ups  grow  and  to  address  key  difficulties  that  SMEs  face  in  all 
phases of their lifecycle – these prevent them from taking full advantage of the single market. 
It is also in line with EU policies on SMEs, as set out in the 2016 Start-Up Communication10 
and 
the  2008  Small  Business  Act 
Communication11. 

the  ‘Think  Small  First’  principle  outlined 

in 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

The  Directive  resulting  from  this  proposal  amends  the  VAT  Directive  on  the  basis  of 
Article 113 of the Treaty on the Functioning of the European Union. This provision enables 
the Council, acting unanimously in accordance with a special legislative procedure and after 

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Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  and  Directive  2009/132/EC  as 
regards  certain  value  added  tax  obligations  for  supplies  of  services  and  distance  sales  of  goods 
(COM(2016) 757 final). 
Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  on  the  common  system  of  value 
added tax as regards certain harmonisation and simplification rules within the current value added tax 
system  and  introducing  the  definitive  system  for  the  taxation  of  trade  between  Member  States 
(COM(2017) 569 final). 
Council  Implementing  Regulation  (EU)  No 1042/2013  of  7 October  2013  amending  Implementing 
Regulation (EU) No 282/2011 as regards the place of supply of services (OJ L 284, 26.10.2013, p. 1); 
and Council Regulation (EU) No 967/2012 of 9 October 2012 amending Implementing Regulation (EU) 
No 282/2011  as  regards  the  special  schemes  for  non-established  taxable  persons  supplying 
telecommunications services, broadcasting services or electronic services to non-taxable persons (OJ L 
290, 20.10.2012, p. 1). 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European 
Economic and Social Committee and the Committee of the Regions upgrading the Single Market: more 
opportunities for people and business (COM(2015) 550 final), p. 4. 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions  —  Europe’s  Next  Leaders:  The 
Start-Up and Scale-Up Initiative (COM(2016) 733 final), p. 4. 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European 
Economic  and  Social  Committee  and  the  Committee  of  the  Regions  ‘Think  Small  First’  A  ‘Small 
Business Act’ for Europe (COM(2008) 394 final), p. 4-5 and 7-8. 

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consulting  the  European  Parliament  and  the  Economic  and  Social  Committee,  to  adopt 
provisions for the harmonisation of Member States’ legislation in the area of indirect taxation. 

• 

Subsidiarity (for non-exclusive competence)  

The  proposal  is  consistent  with  the principle  of  subsidiarity  as  set  out  in  Article 5(3)  of  the 
Treaty on European Union12. The main problems that have been identified (high compliance 
costs,  distortive  effects  etc.)  are  triggered  by  the  rules  of  the  existing  VAT  Directive. 
Simplifying them in order to reduce the compliance burden of SMEs requires the Commission 
to submit a proposal to amend the VAT Directive. The Member States have very little room 
for  manoeuvre in  connection  with the Directive. As a result, this proposal will clearly offer 
value over and above what can be achieved at Member State level. 

• 

Proportionality 

The proposal is consistent with the principle of proportionality as it does not go beyond what 
is necessary to meet the objectives of the Treaties, in particular the smooth functioning of the 
single market. In accordance with the subsidiarity test, it is not possible for Member States to 
address  the  problems  facing  SMEs  that  are  triggered  by  existing  VAT  rules  without  a 
proposal  to  amend  the  VAT  Directive.  The  proposed  improvements  are  limited  to  a  small 
number of VAT provisions that lie at the heart of the problems identified. Section 7.4 of the 
impact assessment accompanying this proposal contains further details. 

• 

Choice of the instrument 

A Directive is proposed in order to amend the VAT Directive. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Ex-post evaluations/fitness checks of existing legislation 

In  preparing  the  proposal,  the  rules  on  SMEs  currently  provided  for  in  the  VAT  Directive 
have  been  evaluated.  The  evaluation,  which  can  be  found  in  Annex 8  of  the  impact 
assessment accompanying this proposal, is based in particular on a retrospective evaluation of 
elements of the EU VAT system13 conducted by an external consultant in 2011 and a study on 
the SME scheme carried out by another external consultant in 2017. 

• 

Stakeholder consultations 

The consultation  strategy sought to gather feedback  from stakeholders on the application  of 
the  current  VAT  provisions  for  SMEs  and  to  get  their  views  on  possible  changes  to  such 
provisions. 

The  strategy  consisted  of  (i)  a  consultation  targeting  2 000  small  enterprises,  which  was 
carried  out  as  part  of  the  2017  study;  (ii)  an  SME  panel  consultation  conducted  by  the 
Enterprise Europe Network14, with 1 704 contributions received; (iii) an internet-based open 

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Consolidated version of the Treaty on European Union (OJ C 326, 26.10.2012, p. 13). 
Final report, London 2011, available at: 
https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/publications/stu
dies/report_evaluation_vat.pdf. 
The  Enterprise  Europe  Network  (EEN)  is  a  project  managed  by  the  European  Commission  (DG 
GROW)  that  helps  businesses  innovate  and  grow  on  an  international  scale.  It  is  the  world’s  largest 

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public consultation held over 12 weeks from 20 December 2016 to 20 March 2017, with 113 
contributions  received15;  (iv)  a  workshop  held  under  the  auspices  of  the  Fiscalis  2020 
Programme and organised in the form of a joint meeting of the Group on the Future of VAT 
(GFV)  and  the  VAT  Expert  Group  (VEG)  to  allow  business  representatives  from  VEG  to 
the  REFIT  platform16.  Spontaneous 
participate;  and  (v)  contributions  received  via 
contributions have also been taken into account.  

• 

Collection and use of expertise 

The review that this proposal is based on relies mainly on the analysis carried out as part of 
the 2017 study on the SME scheme. This study assessed how the current VAT rules for SMEs 
in  the  VAT  Directive  function  at  domestic  and  EU  level.  It  also  developed  options  for 
reviewing the current rules and analysed the impact of such options. 

In addition, two more studies have fed into this review: the 2016 study on modernising VAT 
for  cross-border  e-commerce  and  the  2011  study  involving  a  retrospective  evaluation  of 
elements of the EU VAT system. 

• 

Impact assessment 

The impact assessment for the proposal was considered by the Regulatory Scrutiny Board on 
13 September 2017. The Board issued a positive opinion on the proposal together with some 
recommendations,  which  have  been  taken  into  account.  The  opinion  of  the  Board,  the 
recommendations and an explanation of how they have been taken into account are included 
in Annex 1 of the Staff Working Document accompanying this proposal. 

• 

Regulatory fitness and simplification 

This  initiative  is  part  of  the  REFIT  programme.  According  to  the  Commission  Work 
Programme17, which outlined the new initiatives to be adopted under that programme in 2017, 
the  SME  review  was  included  in  the  Commission  priority18  ‘A  Deeper  and  Fairer  Internal 
Market with a Strengthened Industrial Base’. 

The proposal delivers on the REFIT-related objectives to (i) reduce the VAT burden on SMEs 
and tax administrations; and (ii) to reduce distortions at EU level so that SMEs can take full 
advantage of the single market. In particular, compliance costs for SMEs are expected to be 
reduced by 18 % under this initiative compared to the baseline scenario outlined in the impact 
assessment  (EUR 56.1 billion  per  year,  compared  to  EUR 68 billion  per  year  at  present). 
Cross-border  trading  activities  by  SMEs  within  the  EU  are  also  expected  to  increase  by 
13.5 %. It should also have a positive impact on both voluntary compliance and on business 

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support network for SMEs with international ambitions. The network consists of 600 partners in all EU 
countries and more than 30 non-EU countries. 
The input received from participants and the full report on the results are available on DG TAXUD’s 
website. 
See  in  particular  REFIT  Platform,  Stakeholder  Suggestions,  XVIII  —  Taxation  and  customs  union, 
available at https://ec.europa.eu/info/sites/info/files/taxation_and_customs_union.pdf. 
Annex 1  to  the  Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the 
European  Economic  and  Social  Committee  and  the  Committee  of  the  Regions  —  Commission  Work 
Programme 2017 (COM(2016) 710 final), p. 3. 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council,  the  European 
Economic and Social Committee and the Committee of the Regions — Commission Work Programme 
2017 (COM(2016) 710 final), p. 8-9 (priority number 4). The Commission’s priorities are outlined in 
the Political Guidelines presented at the start of the Commission’s mandate. 

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competitiveness.  For  more  information,  see  sections 6  and  7  of  the  impact  assessment 
accompanying this proposal. 

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative implications for the EU budget. 

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements  

Implementation  of  the  proposal  will  be  monitored  as  part  of  the  responsibilities  of  the 
Commission  for  ensuring  that  EU  VAT  legislation  is  correctly  applied.  In  addition,  the 
Commission  and  Member  States  will  monitor  and  evaluate  whether  this  initiative  is 
functioning properly and the extent to which its objectives have been achieved based on the 
indicators set out in section 8 of the impact assessment accompanying this proposal. 

• 

Overview of the main provisions in the proposal  

The main provisions of the proposal are as follows: 

(1) 

(2) 

(3) 

(4) 

opening up the exemption for small enterprises to all EU eligible businesses, whether 
or not established in the Member State where the VAT will apply and the exemption 
will be available; 

establishing  an  updated  value  for  the  maximum  level  of  national  exemption 
thresholds; 

introducing  a  transitional  period  during  which  small  enterprises  that  temporarily 
exceed the exemption threshold will be able to continue using the exemption; 

introducing  simplified  VAT  obligations  for  both  exempt  and  non-exempt  small 
enterprises. 

Detailed explanation of the specific provisions of the proposal 

Points 1 to 7, 13, 17, 19 and 20 of Article 1 propose a number of amendments that relate to 
updates,  technical  adjustments  and  references  to  the  SME  exemption  in  other  provisions  of 
the VAT Directive. 

Point 8 of Article 1 introduces a new Article 280a to provide definitions of various concepts 
necessary for applying provisions of the  special scheme provided for in Title XII, Chapter 1 
of the VAT Directive. 

The  definition  of  ‘small  enterprises’  helps  clarify  those  provisions  and  increase  the  legal 
certainty  for  taxpayers.  It  would  cover  all  enterprises  whose  Union  annual  turnover  in  the 
single  market is  no higher than EUR 2 000 000.  With reference to  their  VAT treatment, the 
introduction  of  this  definition  allows  for  simplification  measures  targeted  at  enterprises 
which,  in  economic  terms,  are  small  even  though  their  turnover  exceeds  the  exemption 
threshold.  The  wider  category  of  small  enterprises  therefore  includes  enterprises  exempted 
from VAT as well as enterprises eligible for exemption but who opted for the application of 

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the  normal  rules  or  whose  turnover  exceeds  the  exemption  threshold  and  who  are  therefore 
taxed on the basis of the normal rules. 

There are also two definitions of turnover that have been introduced in order to facilitate the 
application  of  the  national  exemption  thresholds  (‘Member  State  annual  turnover’)  and  the 
eligibility condition applicable to non-established small enterprises (‘Union annual turnover’).  

Points 9,  10  and  16  of  Article 1  provide  for  changes  resulting  from  the  elimination  of 
graduated tax relief, which has been found to be a source of complexity and contributes little 
to  reducing  the  compliance  burden  of  small  enterprises.  This  measure  should  therefore  be 
removed. 

Point 11  of  Article 1  amends  Article 283(1)  as  regards  the  exclusion  from  the  exemption  of 
non-established  enterprises.  This  amendment  is  necessary  to  open  up  the  exemption  to  EU 
businesses not established in the Member State where they carry out supplies subject to VAT.  

Point 12 of Article 1 amends Article 284 to define the new scope of the exemption for small 
enterprises,  which  will  remain  optional  for  Member  States.  Member  States  that  decide  to 
implement the SME exemption will have the possibility to set their threshold at the level that 
reflects best their particular economic and legal context. However, in order to ensure that the 
scope of the exemption is limited to the smallest enterprises and to limit the possible distortive 
effects  of  the  exemption,  the  VAT  Directive  will  set  the  maximum  level  of  the  exemption 
threshold  common  to  all  the  Member  States.  The  exemption  will  be  available  to  all  EU 
eligible  businesses,  whether  or  not  established  in  the  Member  State  where  they  carry  out 
supplies subject to VAT.  

For any small enterprise able to avail itself of the exemption in a Member State where it is not 
established, two conditions must be met: (i) the enterprise’s annual turnover in that Member 
State (‘Member State annual turnover’) should be below the exemption threshold applicable 
there; and (ii) its overall turnover in the single market (Union annual turnover) should not be 
higher  than  EUR 100 000.  The  latter  eligibility  condition  should  prevent  abuse  by  large 
enterprises that, in the absence of the overall EU turnover threshold, would be able to benefit 
from  the  SME  exemptions  in  several  Member  States  (e.g. if  their  turnover  in  each  Member 
State  were  below  the  applicable  SME  exemption  threshold)  despite  having  a  large  overall 
turnover. 

In order to ensure the effective control of application of the conditions of the exemption, the 
Member State in which a business availing itself of the exemption in other Member States is 
established  must  collect  all  relevant  information  on  its  turnover.  Therefore,  where  a  small 
enterprise  avails  itself  of  the  exemption  in  Member  States  other  than  that  in  which  it  is 
established, the Member State of establishment will have to ensure the accurate declaration of 
the Union annual turnover and the Member State annual turnover by the small enterprise and 
will  inform  the  tax  authorities  of  the  other  Member  States  concerned  in  which  the  small 
enterprise carries out its supplies. 

Point 14 of Article 1 modifies Article 288 to clarify which transactions should be taken into 
account  while  calculating  the  annual  turnover,  serving  as  a  reference  for  applying  the 
exemption to small enterprises. 

Point 15  of  Article 1  inserts  a  new  Article 288a,  which  introduces  a  transitional  period  for 
small enterprises making use of the SME exemption whose turnover exceeds the exemption 
threshold in a given year. Such enterprises are allowed to continue using the SME exemption 
for that one year, provided that their turnover does not exceed the applicable SME threshold 
by  more  than  50 %  in  that  year.  The  provision  reflects  two  endpoints  to  this  transitional 

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period, which act as a safeguard against the abuse of this measure: time-related (1 year) and 
turnover-related (exceeding the applicable exemption threshold by more than 50 %). 

Point 18 of Article 1 introduces a new Section 2a on simplification measures for both exempt 
and  non-exempt  enterprises.  The  new  subsection 1  integrates  a  number  of  simplified 
obligations for exempt enterprises into the exemption scheme (registration, invoicing, keeping 
of  accounts  and  VAT  returns).  In  addition,  Member  States  retain  the  possibility  to  release 
exempt small enterprises from other obligations referred to in Articles 213 to 271. 

The new subsection 2 provides for a set of simplified obligations for small enterprises that do 
not  benefit  from  the  SME  exemption.  Such  enterprises  could  be  both  those  eligible  for 
exemption  but  opting  for  taxation  on  the  basis  of  the  general  rules  and  those  with  turnover 
above the exemption threshold but lower than EUR 2 000 000, who therefore qualify as small 
enterprises  in  the  sense  of  the  newly  introduced  definition.  As  exempt  enterprises  cannot 
deduct  the  input  VAT,  the  exemption  would  not  really  address  the  concerns  of  all  eligible 
enterprises.  In  particular,  small  enterprises  supplying  goods  and  services  to  other  taxable 
persons  may  prefer  to  be  taxed  on  the  basis  of  the  general  rules.  Reducing  the  VAT 
compliance costs for such enterprises is therefore linked to simplifying their VAT obligations 
rather than to the exemption itself.  

Member  States  should  therefore  also  define  a  set  of  simplified  VAT  obligations  for  non-
exempt small enterprises. Such a set should include simplified registration, simplified record 
keeping  and  longer  tax  periods,  which  would  result  in  less  frequent  filing  of  VAT  returns. 
Non-exempt  small  enterprises  should  also  be  able  to  opt  for  the  application  of  normal  tax 
periods. 

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2018/0006 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2006/112/EC on the common system of value added tax as regards 
the special scheme for small enterprises 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 113 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Parliament1,  
Having regard to the opinion of the European Economic and Social Committee2,  

Acting in accordance with a special legislative procedure, 

Whereas: 

(1) 

(2) 

Council  Directive  2006/112/EC3  allows  Member  States  to  continue  to  apply  their 
special schemes to small enterprises in accordance with common provisions and with a 
view  to  closer  harmonisation.  However,  those  provisions  are  outdated  and  do  not 
reduce  the  compliance  burden  of  small  enterprises  as  they  were  designed  for  a 
common system of value added tax (VAT) based on taxation in the Member State of 
origin. 
In  its  VAT  action  plan4,  the  Commission  announced  a  comprehensive  simplification 
package  for  small  enterprises  aimed  at  reducing  their  administrative  burden  and 
helping  create a fiscal environment to  facilitate their growth and the development of 
cross-border  trade.  This  would  entail  a  review  of  the  special  scheme  for  small 
enterprises  as  outlined  in  the  Communication  on  the  follow-up  to  the  action  plan  on 
VAT5. The review of the special scheme for small enterprises constitutes therefore an 
important element of the reform package set out in the VAT action plan. 

(3) 

The  review  of  this  special  scheme  is  closely  linked  to  the  Commission’s  proposal 
setting  out  the  principles  for  a  definitive  VAT  system  for  cross-border  business-to-
business  trade  between  Member  States  on  the  basis  of  the  taxation  of  cross-border 

1 
2 
3 
4 

5 

OJ C , , p. . 
OJ C , , p. . 
OJ L 347, 11.12.2006, p. 1. 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on an action plan on VAT — Towards a single EU VAT area — Time 
to decide (COM(2016) 148 final of 7.4.2016). 
Communication  from  the  Commission  to  the  European  Parliament,  the  Council  and  the  European 
Economic and Social Committee on the follow-up to the Action Plan on VAT — Towards a single EU 
VAT area — Time to act (COM(2017) 566 final of 4.10.2017). 

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(4) 

(5) 

(6) 

(7) 

supplies  of  goods  in  the  Member  State  of  destination6.  The  VAT  system’s  shift 
towards destination-based taxation has identified that a number of the current rules are 
not suited for a destination-based tax system. 

In order to address the issue of the disproportionate compliance burden faced by small 
enterprises, simplification measures should be available not only to enterprises that are 
exempt under the current rules, but also to those considered small in economic terms. 
For  the  purposes  of  the  simplification  of  the  VAT  rules,  enterprises  would  be 
considered  ‘small’  if  their  turnover  qualifies  them  as  micro  enterprises  under  the 
general definition provided for in Commission Recommendation 2003/361/EC7. 

The special scheme for small enterprises currently only allows for an exemption to be 
granted to enterprises established in the Member State in which the VAT is due. This 
has  a  negative  impact  on  competition  for  non-established  enterprises  in  the  single 
market. To address this and to avoid further distortions, as a result of the shift towards 
destination-based taxation, small enterprises established in Member States other than 
that in which the VAT is due should also be allowed to benefit from the exemption. 

Small enterprises may only benefit from the exemption where their annual turnover is 
below the threshold applied by the Member State in which the VAT is due. In setting 
their threshold, Member States should abide by the rules on thresholds laid down by 
Directive 2006/112/EC. Those rules, most of which were put in place in 1977, are no 
longer suitable.  

To  simplify  things,  a  number  of  Member  States  have  been  authorised  to  apply  a 
threshold  higher  than  that  authorised  under  Directive  2006/112/EC  on  a  temporary 
basis.  As  it  is  not  appropriate  to  continue  modifying  general  rules  using  measures 
granted by way of derogation, the rules on thresholds should be updated. 

(8)  Member States  should be left to  set their national threshold for the exemption at the 
level  that  suits  their  economic  and  political  conditions  best,  subject  to  the  upper 
threshold  provided  for  under  this  Directive.  In  this  regard,  it  should  be  clarified  that 
where  Member  States  apply  different  thresholds,  this  would  need  to  be  based  on 
objective criteria. 

(9) 

The annual turnover threshold, which is the basis for the exemption under this special 
scheme, consists only of the combined value of supplies of goods and services made 
by a small enterprise in the Member State where the exemption is granted. Distortions 
of competition could arise where an enterprise, not established in that Member State, 
could benefit from such an exemption regardless of the turnover it generates in other 
Member States. In order to mitigate such distortions in competition and as a revenue 
safeguard,  only  those  enterprises  whose  Union  annual  turnover  is  below  a  certain 
threshold  should  be  eligible  for  exemption  in  a  Member  State  where  they  are  not 
established. 

(10) 

In  order  to  ensure  that  small  enterprises  are  not  discouraged  from  developing  their 
business  and  to  ensure  a  gradual  transition  from  exemption  to  taxation,  small 

6 

7 

Proposal  for  a  Council  Directive  amending  Directive  2006/112/EC  on  the  common  system  of  value 
added tax as regards certain harmonisation and simplification rules within the current value added tax 
system  and  introducing  the  definitive  system  for  the  taxation  of  trade  between  Member  States 
(COM(2017) 569 final of 4.10.2017). 
Commission Recommendation 2003/361/EC of 6 May 2003 concerning the definition of micro, small 
and medium-sized enterprises (OJ L 124, 20.5.2003, p. 36). 

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enterprises  whose  turnover  does  not  exceed  a  certain  limit  should  be  allowed  to 
continue benefitting from the exemption for a limited period of time. 

(11) 

In order to reduce the compliance burden on small enterprises, their obligations should 
also be simplified. Given that the need for obligations varies and largely depends on 
whether  small  enterprises  are  exempt  from  VAT,  different  sets  of  simplified 
obligations should be put in place. 

(12)  Where  an  exemption applies, small enterprises availing themselves  of the exemption 
should,  at  a  minimum,  have  access  to  simplified  VAT  registration,  invoicing, 
accounting and reporting obligations.  

(13)  Furthermore, in order to ensure compliance with conditions for exemption granted by 
a  Member  State  to  enterprises  not  established  there,  it  is  necessary  to  require  prior 
notification of their intention to use the exemption. Such notification should be made 
by the small enterprise to the Member State where it is established. That Member State 
should thereafter, based on the information declared on the turnover of that enterprise, 
provide that information to the other Member States concerned.  

(14) 

In  addition  to  granting  an  exemption  from  VAT,  the  special  schemes  also  allow  for 
graduated  tax  relief.  Graduated  tax  relief  is  a  source  of  complexity  and  contributes 
little  to  reducing  the  compliance  burden  of  small  enterprises.  This  measure  should 
therefore be removed. 

(15)  To reduce the compliance burden of small enterprises that are not exempted, Member 
States  should  be  required  to  simplify  VAT  registration  and  record  keeping  and  to 
prolong tax periods so as to provide for less frequent filing of VAT returns.  

(16)  To help small enterprises that encounter difficulties in paying VAT to the competent 
authority because they have not yet received payment from their customers, Member 
States may, under an optional scheme, allow taxable persons to use a cash accounting 
scheme to account for VAT. This scheme should be modified to bring it into line with 
the definition of small enterprises. 

(17)  The objective of this Directive is to reduce the compliance burden of small enterprises, 
which  cannot  be  sufficiently  achieved  by  the  Member  States  and  can  therefore  be 
better  achieved  at  Union  level.  As  a  result,  the  Union  may  adopt  measures  in 
accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on the 
European  Union.  In  accordance  with  the  principle  of  proportionality  as  set  out  in 
Article 5, this Directive does not go beyond what is necessary in order to achieve these 
objectives. 

(18) 

In  accordance  with  the  Joint  Political  Declaration  of  28 September  2011  of  Member 
States  and  the  Commission  on  explanatory  documents8,  Member  States  have 
undertaken  to  accompany,  in  justified  cases,  the  notification  of  their  transposition 
measures  with  one  or  more  documents  explaining  the  relationship  between  the 
components  of  a  directive  and  the  corresponding  parts  of  national  transposition 
instruments. With regard to this Directive, the legislator considers the transmission of 
such documents to be justified. 

(19)  Directive 2006/112/EC should therefore be amended accordingly, 

8 

OJ C 369, 17.12.2011, p. 14. 

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HAS ADOPTED THIS DIRECTIVE: 

Directive 2006/112/EC is amended as follows:  

(1) 

in Article 2(1)(b), point (i) is replaced by the following: 

Article 1 

'(i) 

a  taxable  person  acting  as  such,  or  a  non-taxable  legal  person,  where  the 
vendor is a taxable person acting as such who is not eligible for the exemption 
for  small  enterprises  provided  for  in  Article 284  and  who  is  not  covered  by 
Articles 33 or 36;';  

(2) 

(a) 

Article 139 is amended as follows: 

the first subparagraph of paragraph 1 is replaced by the following: 

'The exemption provided for in Article 138(1) shall not apply to the supply of goods 
carried  out  by  taxable  persons  who  are  covered  by  the  exemption  for  small 
enterprises provided for in Article 284.'; 

(b) 

paragraph 2 is replaced by the following: 

'2. The exemption provided for in Article 138(2)(b) shall not apply to the supply of 
products subject to excise duty by taxable persons who are covered by the exemption 
for small enterprises provided for in Article 284.'; 

(3) 

(a) 

(b) 

(4) 

Article 167a is amended as follows: 

the second paragraph is replaced by the following: 

'Member  States  which  apply  the  optional  scheme  referred  to  in  the  first  paragraph 
shall set a threshold for taxable persons using the scheme within their territory, based 
on  the  annual  turnover  of  the  taxable  person  calculated  in  accordance  with 
Article 288. That threshold may not be higher than EUR 2 000 000 or the equivalent 
in national currency.'; 

the third paragraph is deleted; 

in Article 220a(1), the following point (c) is added:  

'(c)  where the taxable person is a small enterprise as defined in Article 280a.';  

(5) 

in Article 270, point (a) is replaced by the following: 

'(a) 

the  total  annual  value,  exclusive  of  VAT,  of  their  supplies  of  goods  and 
services  does  not  exceed  by  more  than  EUR 35 000,  or  the  equivalent  in 
national  currency,  the  amount  of  the  annual  turnover  which  is  used  as  a 
reference for application of the exemption for small enterprises provided for in 
Article 284;'; 

(6) 

(7) 

in Article 272(1), point (d) is deleted; 

in Article 273, the second paragraph is replaced by the following:  

'The  option  referred  to  in  the  first  paragraph  may  not  be  relied  upon  in  order  to 
impose additional invoicing obligations over and above those laid down in Chapter 3 
or  to  impose  additional  obligations  on  small  enterprises  over  and  above  those  laid 
down in Section 2a in Title XII, Chapter 1.';  

(8) 

in Title XII, Chapter 1, the following Section -1 is inserted: 

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'Section -1 
Definition 

Article 280a 

For the purposes of this Chapter, the following definitions shall apply: 

(1) 

(2) 

(3) 

'small enterprise' means any taxable person established within the Community 
whose  Union  annual  turnover  is  no  higher  than  EUR 2 000 000  or  the 
equivalent in national currency; 

'Member  State  annual  turnover'  means  the  total  annual  value  of  supplies  of 
goods  and  services,  exclusive  of  VAT,  made  by  a  taxable  person  within  that 
Member State; 

'Union annual turnover' means the total annual value of supplies of goods and 
services,  exclusive  of  VAT,  made  by  a  taxable  person  within  the  territory  of 
the Community.'; 

(9) 

the heading of Section 2 of CHAPTER 1 of TITLE XII is replaced by the following: 

'Exemptions'; 

(10) 

Article 282 is replaced by the following: 

'Article 282 

The exemptions provided for in this Section shall apply to the supply of goods and 
services by small enterprises.'; 

(11) 

(12) 

in Article 283(1), point (c) is deleted; 

Article 284 is replaced by the following: 

'Article 284 

1.  Member  States  may  exempt  the  supply  of  goods  and  services  made  within  their 
territory by small enterprises established in that territory whose Member State annual 
turnover,  attributable  to  such  supplies,  does  not  exceed  a  threshold  fixed  by  those 
Member States for the application of this exemption. 

Member  States  may  fix  varying  thresholds  for  different  business  sectors  based  on 
objective criteria. However, those thresholds shall be no higher than EUR 85 000 or 
the equivalent in national currency. 

2. Member States that have put in place the exemption for small enterprises shall also 
exempt the supplies of goods and services in their own territory made by enterprises 
established  in  another  Member  State,  provided  that  the  following  conditions  are 
fulfilled:  

(a) 

(b) 

the  Union  annual  turnover  of  that  small  enterprise  does  not  exceed 
EUR 100 000; 

the  value  of  the  supplies  in  the  Member  State  where  the  enterprise  is  not 
established does not exceed the threshold applicable in that Member State for 
the granting of the exemption to enterprises established in that Member State.  

EN 

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3.  Member  States  shall  take  appropriate  measures  to  ensure  that  small  enterprises 
benefiting from the exemption satisfy the conditions referred to in paragraphs 1 and 
2. 

4.  Prior  to  availing  itself  of  the  exemption  in  other  Member  States,  the  small 
enterprise shall notify the Member State in which it is established.  

Where a small enterprise avails itself of the exemption in Member States other than 
that  in  which  it  is  established,  the  Member  State  of  establishment  shall  take  all 
measures necessary to ensure the accurate declaration of the Union annual turnover 
and the Member State annual turnover by the small  enterprise  and shall inform the 
tax  authorities  of  the  other  Member  States  concerned  in  which  the  small  enterprise 
carries out a supply.';  

(13) 

(14) 

Articles 285, 286 and 287 are deleted; 

Article 288 is replaced by the following: 

'Article 288 

The annual turnover serving as a reference for applying the exemption provided for 
in Article 284 shall consist of the following amounts, exclusive of VAT: 

(1) 

(2) 

(3) 

(4) 

the  value  of  supplies  of  goods  and  services,  in  so  far  as  they  would  be  taxed 
were they supplied by a non-exempt taxable person; 

the value of transactions which are exempt, with deductibility of the VAT paid 
at the preceding stage, pursuant to Articles 98 and 138; 

the value of transactions which are exempt pursuant to Articles 146 to 149 and 
Articles 151, 152 and 153; 

the  value  of  real  estate  transactions,  financial  transactions  as  referred  to  in 
points (b)  to  (g)  of  Article 135(1),  and  insurance  and  reinsurance  services, 
unless those transactions are ancillary transactions.  

However, disposals of the tangible or intangible capital assets of an enterprise shall 
not be taken into account for the purposes of calculating turnover.'; 

(15) 

the following Article 288a is inserted: 

'Article 288a 

Where  during  a  subsequent  calendar  year  the  Member  State  annual  turnover  of  a 
small  enterprise  exceeds  the  exemption  threshold  referred  to  in  Article 284(1),  the 
small enterprise shall be able to continue to benefit from the exemption for that year, 
provided that its Member State annual turnover during that year does not exceed the 
threshold set out in Article 284(1) by more than 50%.';  

(16) 

(17) 

(18) 

in Article 290, the second sentence is deleted; 

Articles 291 to 294 are deleted; 

in Title XII, Chapter 1, the following Section 2a is inserted: 

'Section 2a 
Simplification of obligations for small enterprises 

Subsection 1 
Exempt small enterprises 

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Article 294a 

For  the  purposes  of  this  Subsection  'exempt  small  enterprise'  means  any  small 
enterprise benefitting from the exemption in the Member State in which the VAT is 
due as provided for in Article 284(1) and (2). 

Article 294b 

Member  States  may  release  exempt  small  enterprises  established  in  their  territory 
that are carrying out only transactions within that Member State from the obligation 
to state the beginning of their activity pursuant to Article 213 and to be identified by 
means of an individual number pursuant to Article 214.  

Where this option is not exercised or where small enterprises are required to state the 
beginning  of  their  activity  and  be  identified,  Member  States  shall  put  in  place  a 
simplified procedure for the identification of such small enterprises by means of an 
individual number.  

Article 294c 

Member States shall release exempt small enterprises from the obligation to issue an 
invoice pursuant to Article 220.  

Member States shall not impose an obligation on exempt small enterprises to issue an 
invoice pursuant to Article 221. 

Article 294d 

Member States may release exempt small enterprises from certain or all obligations 
on accounting laid down in Chapter 4 of Title XI.  

Where  Member  States  require  invoices  to  be  stored,  they  may  not  impose  further 
requirements  on  exempt  small  enterprises  in  addition  to  those  provided  for  in 
national law in areas other than VAT and relating to record keeping.  

Article 294e 

Member States may release exempt small enterprises from the obligation to submit a 
VAT return laid down in Article 250. 

Where  this  option  is  not  exercised,  Member  States  shall  allow  such  exempt  small 
enterprises to submit a simplified VAT return to cover the period of a calendar year. 
However,  small  enterprises  may  opt  for  the  application  of  the  tax  period  set  in 
accordance with Article 252. 

Article 294f 

Member  States  may  release  exempt  small  enterprises  from  certain  other  or  all 
obligations referred to in Articles 217 to 271. 

Subsection 2 
Non-exempt small enterprises 

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Article 294g 

Member  States  shall  put  in  place  a  simplified  procedure  to  allow  small  enterprises 
not benefiting from the exemption provided for in Article 284 to obtain an individual 
identification number in order to comply with Article 214. 

Article 294h 

Notwithstanding  Articles 244  to  248a,  Member  States  shall  determine  simplified 
obligations relating to the storage of invoices by small enterprises. 

Article 294i 

For small enterprises the tax period to be covered in a VAT return shall be the period 
of  a  calendar  year.  However,  small  enterprises  may  opt  for  application  of  the  tax 
period set in accordance with Article 252. 

Article 294j 

Notwithstanding Article 206, Member States shall not require interim payments to be 
made by small enterprises.'; 

(19) 

in Article 314, point (c) is replaced by the following: 

'(c)  another  taxable  person, in  so  far  as the  supply  of  goods  by  that  other  taxable 
person  is  covered  by  the  exemption  for  small  enterprises  provided  for  in 
Article 284 and involves capital goods;'; 

(20) 

in Article 334, point (c) is replaced by the following: 

'(c)  another  taxable  person,  in  so  far  as  the  supply  of  goods,  carried  out  by  that 
taxable  person  in  accordance  with  a  contract  under  which  commission  is 
payable on a sale, is covered by the exemption for small enterprises provided 
for in Article 284 and involves capital goods;'. 

Article 2 

1. 

Member  States  shall  adopt  and  publish,  by  30 June  2022  at  the  latest,  the  laws, 
regulations  and  administrative  provisions  necessary  to  comply  with  this  Directive.  
They  shall  communicate  to  the  Commission  the  text  of  those  provisions  without 
delay. 

They shall apply those provisions from 1 July 2022. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

Article 3 

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This Directive is addressed to the Member States. 

Done at Brussels, 

Article 4 

For the Council 
The President 

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