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The status of a small business brings legal advantages, as many countries have specific regulations for small entrepreneurs. Small business owners who are starting their operations or are about to do so should seek detailed information on this topic. This includes both exemptions from VAT within the EU and specific tax reliefs. While Germany and Austria offer few specific tax benefits apart from a general income tax exemption, many other EU countries have significantly more favorable regulations.
 
Why Special Regulations Are Important
 
Special regulations for small businesses and self-employed individuals exist to ease entry and promote growth. For instance, some countries offer specific allowances or reduced tax rates, which help retain more capital within the business for growth purposes. The small business regulation, which allows for VAT exemption or reduced tax rates, is another advantage. This can simplify accounting and improve the company's liquidity.
 
Unfortunately, it's not new that the tax burden for many entrepreneurs in numerous countries is high. The question arises about what happens when the very factors crucial for a business’s growth are restricted by government interventions. It seems questionable whether this is justified or merely a means to capture part of the business’s success.
 
Special Regulations for Small Entrepreneurs in the EU
 
When discussing special regulations, it's important to distinguish between income/corporation tax and VAT across the EU. In Germany, the small business regulation refers to VAT, which is not charged up to a certain revenue threshold for private customers. This threshold varies significantly among EU countries and can be advantageous for B2C companies.
 
However, those primarily serving business clients should avoid the small business regulation. Without a VAT number, neither input tax can be deducted nor reverse-charge procedures used, making services more expensive due to the VAT rate.
 
In Germany, there are no specific income tax reliefs for self-employed individuals up to a certain revenue threshold. In other EU countries, thresholds for micro-enterprises are significantly higher, and in poorer member states, self-employed individuals effective ly pay very little tax.
 
Comparison of Member States
 
- Bulgaria: Small businesses can benefit from a special VAT system, which does not require VAT for revenues below the national registration threshold. The effective tax burden for self-employed individuals is 7.5% plus social contributions.
 
The modified VAT system for small businesses allows member states to set a threshold of up to €85,000 annual revenue for VAT exemption. This exemption also applies to eligible SMEs based in other member states. The system provides simplifications for registration and reporting and establishes an EU-wide threshold of €100,000 annual revenue for cross-border applications. This allows taxpayers in any member state where they are not resident to exempt their supplies from VAT, provided certain conditions are met.
 
- Germany: The small business regulation allows self-employed individuals with low revenues to not charge VAT. This regulation is mainly beneficial for private customers. For 2024, the revenue thresholds are: The revenue must not exceed €22,000 in the previous calendar year and is not expected to exceed €50,000 in the current calendar year.
 
- Ireland: Small businesses must register if their annual revenue exceeds certain thresholds, though the tax burden can be reduced under certain conditions.
 
Annual revenue of €80,000 for goods or €40,000 for services: Standard rate: 23%. Reduced rates: 13.5% for construction services, 9% for hospitality.
 
Self-employed individuals in Ireland pay PRSI (Pay Related Social Insurance), a type of social insurance contribution: Contribution rate: Self-employed individuals pay 4% of their annual income. Minimum contribution: There is a minimum contribution of €500 per year. Even if 4% of their income is less than €500, they must still pay at least €500. If a self-employed person earns less than €5,000 per year, they do not have to pay PRSI contributions. If more, they pay 4% of their income as PRSI contributions.
 
- Lithuania: Small businesses enjoy tax exemption in the first year and then pay a reduced tax rate, which will rise to 6% in 2025. Self-employed individuals must register for VAT if their revenue in the last 12 months exceeds €45,000 or if the value of imported goods from the EU in the previous year exceeded €14,000. This exemption means they do not have to charge VAT on their sales and also cannot claim input VAT.
 
- Luxembourg: While there is no specific tax regime for self-employed individuals, income taxes and social contributions must be paid, leading to a tax burden of up to 42%. Self-employed individuals must register for VAT if their annual revenue exceeds €35,000. The standard VAT rate is 17%.
 
Social security contributions must also be paid, amounting to about 24% to 28% of income, covering various risks. For companies with profits up to €175,000, a reduced rate of 15% plus a 7% solidarity surcharge on the paid tax applies.
 
- Malta: The MicroInvest program offers tax incentives for small businesses investing in their operations, granting tax credits of up to 45% of expenses. For companies in Gozo, the tax credit is even 65%. With an effective corporate tax rate of just 5%.
 
Self-employed individuals in Malta pay income tax on their profits. The tax is progressive, with rates from 0% to 35%, depending on income. For annual revenues over €35,000, VAT registration is required.
 
- Austria: New self-employed individuals are exempt from many trade regulations, and the small business regulation exempts from VAT if the annual revenue is below €35,000. This revenue limit can be exceeded by up to 15% once every five years. Small business owners do not have to remit VAT to the tax office and cannot deduct input VAT from their expenses.
 
- Portugal: The simplified tax regime for small businesses reduces administrative burden and provides a simplified method for tax calculation. Services related to local accommodation management in restricted zones are assessed at 50% of gross income. General services have a coefficient of 35%, while specific professional services have a coefficient of 75%. Income from crypto mining and intellectual property use is taxed at 95%. Operating subsidies are assessed at 10%.
 
In addition to these coefficients, taxpayers can claim specific deductions, such as a fixed amount of €4,104 or higher social security contributions, if these exceed 10% of gross income.
 
- Spain: The "Régimen Especial de Trabajadores Autónomos (RETA)" provides social security regulations, and the flat-rate taxation offers significant tax relief for self-employed individuals.
 
Self-employed individuals can switch from the objective assessment system to the direct assessment system without the usual three-year obligations.
 
Self-employed individuals must register for VAT if their annual revenue exceeds €85,000. Efforts are being made to eliminate the quarterly VAT reporting requirement for self-employed individuals with revenue below this threshold. This change is expected to be fully implemented by January 2025.
 
The Canary Islands have their own tax regime. Self-employed individuals and small businesses benefit from various tax reliefs: Reduced corporate tax rate: The general corporate tax rate is reduced to 4%, subject to certain conditions. ZEC Zone: Companies registered in the Canary Islands Special Zone (ZEC) can also benefit from a reduced tax rate of 4%. Reduced VAT rate: The Canary Islands apply the "Impuesto General Indirecto Canario" (IGIC) instead of VAT. The general IGIC rate is 7%, lower than the Spanish standard VAT rate.
 
- Cyprus: Self-employed individuals must register with social security services and pay progressive income tax, with no tax up to €19,500. For income from €19,501 to €28,000, the tax rate is 20%, from €28,001 to €36,300 is 25%, from €36,301 to €60,000 is 30%, and over €60,000 is 35%. Tax returns must be submitted by September 30, and tax payments are due in two installments in July and December.
 
For self-employed individuals with an annual revenue exceeding €15,600, VAT registration is required. The standard VAT rate is 19%. VAT returns and payments are due quarterly.
 
Conclusion
 
The variety of regulatory requirements in the EU presents significant challenges for small businesses. This bureaucracy and the associated costs often act as barriers to entry, limiting competition and strengthening the dominance of large corporations. Nevertheless, some EU countries offer attractive tax conditions that allow small businesses to survive in an otherwise heavily regulated market.
 
Establishing a business requires careful planning. Working with our experts can help streamline this process, providing valuable insights and tailored strategies to ensure successful outcome. Don’t hesitate any longer. Apply to become a client today to work with our experts on legal strategies to overcome barriers.
 

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