The reform of the small business regulation in VAT law, which is included in the first Annual Tax Act 2024 (JStG 2024) passed at the beginning of June, will bring significant changes. These changes are intended to offer small companies in the EU more flexibility and competitive advantages and also standardize national regulations across the EU.

Reason for the reform of the small business regulation

Until now, small businesses could only use the tax exemption in their country of residence. As soon as a German small business generated sales in another EU member state, it may have had to pay VAT there from the first euro and be subject to local registration and declaration obligations. Conversely, this also applied to foreign small businesses in Germany. This regulation was perceived as restrictive and distorting competition, which led to its revision by Directive (EU) 2020/285. The new EU requirements must be transposed into national law by January 1, 2025.

Significant changes at EU level

A core element of the reform is the abolition of the domestic limit and the change from non-collection to collection. National turnover limits will be harmonized and a new turnover limit of EUR 100,000 will be introduced for small businesses operating across borders. Member States can set national turnover limits of up to EUR 85,000. Small businesses whose annual turnover does not exceed the EUR 100,000 EU-wide limit can also use the tax exemption in other member states. They must monitor various turnover limits: the national border of their country of residence, the national borders in other EU countries in which they operate and the EU-wide border.

National implementation in the JStG 2024

The first JStG 2024 provides for a new version of Section 19 UStG and the introduction of a new Section 19a UStG. The small business regulation will be changed from a non-levy to a non-genuine tax exemption. This means that the tax exemption also includes the exclusion of input tax deduction. These changes are accompanied by new regulations on invoicing for small businesses.

Case groups of the new regulation

The new regulation basically distinguishes between three groups of cases:

1. Purely national small businesses: These are subject to the regulations of § 19 para. 1-3 UStG-E.
2. Domestically based small businesses operating across borders: Section 19 para. 1-3 and para. 6 UStG-E and § 19a UStG-E.
3. Small businesses based in other EU countries and operating in Germany: Section 19 para. 4 and 5 UStG-E are relevant.

Determination of sales

Up to now, the limits of EUR 22,000 for the previous year and EUR 50,000 for the current year have been gross limits. If, contrary to the forecast decision, turnover exceeds EUR 50,000 in the current year, this has no effect on the status as a small business. It was not until the following year that the standard taxation was applied.

In future, the gross limit will become a net limit. This means, for example The following applies to entrepreneurs whose sales are subject to the regular tax rate of currently 19%: If their revenue does not exceed EUR 29,750 in 2024 and the limit of EUR 119,000 is not exceeded in 2025, the small business regulation will continue to apply in 2025. From 2026, the entrepreneur will then be subject to standard taxation.

Attention: Forecast decision becomes sharp limit

Unlike in the past, there is no longer a forecast decision. If the entrepreneur exceeds the turnover limit of (gross) EUR 119,000 in the current year, contrary to the forecast made at the beginning of the year, this means that the regulations are no longer applicable. The turnover that exceeds the limit is no longer to be treated as tax-free within the meaning of the new Section 19 UStG. It is important and good that the tax exemption does not apply retroactively to all sales for the year. This would have led to an extremely high level of bureaucracy and corresponding invoice and registration corrections.

Conclusion & practical advice

These adjustments are intended to make it easier for small businesses to benefit from the advantages of tax exemption in other EU states without being confronted with excessive administrative burdens. The reform thus aims to simplify and modernize the existing regulations and promote cross-border trade within the EU.

Entrepreneurs who exceed EUR 50,000 in the current year, but not the limit of EUR 100,000 (net), can also make use of the small business regulation in the following year if this proves to be advantageous. Whether this is the case must always be examined on a case-by-case basis. In particular, a possible input tax deduction in the event of a waiver in combination with typical customers (private individuals or entrepreneurs) and the increased administrative effort (including the submission of advance VAT returns) must be compared.