Why Other EU Countries Apply the VAT Small-Business Exemption and Spain Does Not

Although other EU countries have implemented the VAT exemption scheme and Spain has not, despite sharing the EU legal framework, the difference reflects structural, historical and administrative factors that vary from one country to another.

1. Differences in the shadow economy and tax fraud

A key factor is the level of tax fraud and the size of the shadow economy. Spain’s shadow economy is relatively large compared with other European countries, making any measure that reduces VAT traceability appear risky.

Approximate comparative figures for Europe, based on studies such as those by the European Commission and the World Bank:

• Spain: 20–22% of GDP.
• France: 12–14% of GDP.
• Germany: 10–12% of GDP.
• Netherlands: 9–11% of GDP.

Where the shadow economy is smaller and tax compliance is more established, a VAT exemption scheme carries less fraud risk. In Spain, the concern is that small businesses may underreport revenue to remain below the threshold and avoid VAT.

2. Revenue model and reliance on VAT

Spain relies more heavily on VAT as a source of public revenue than some other countries. According to Eurostat:

• In Spain, VAT accounts for more than 30% of total tax revenue.
• In Germany and France, the share is lower because income tax and social security contributions make up a larger proportion.

A broad VAT exemption for small businesses could therefore reduce tax revenue significantly and make it harder to fund public services.

3. Tax enforcement and digitalisation

Some countries with VAT exemption schemes have more advanced tax-control systems. For example:

• Italy: despite having a sizeable shadow economy, it applies a VAT exemption threshold of €85,000 and requires e-invoicing to improve traceability.
• France: has introduced digital tools to prevent underreporting.
• Germany and the Netherlands: use stricter auditing and tax data-matching systems.

Spain’s mandatory e-invoicing system is still being implemented. Until it is fully operational, preventing fraud under a VAT exemption scheme may be more difficult.

4. Structure of Spanish businesses

Spain has a very high proportion of self-employed workers and microbusinesses compared with other European countries. Eurostat figures indicate:

• In Spain, 94% of companies have fewer than 10 employees.
• The share is lower in Germany and France, where there are more medium-sized and large companies.

A VAT exemption scheme in Spain would affect a very large number of workers and businesses, with a greater tax impact than in other countries.

5. How could Spain reduce the shadow economy?

Digitalisation and less cash use

• Move forward with mandatory e-invoicing for self-employed workers and SMEs.
• Further limit cash payments, currently capped at €1,000 for transactions between businesses and self-employed workers.

Tax reforms that encourage compliance

• Reduce the tax burden on small businesses and self-employed workers.
• Introduce a VAT exemption scheme, as in other EU countries, alongside effective tax controls.

More enforcement and deterrent penalties

• Increase labour and tax inspections in high-risk sectors.
• Strengthen penalties for undeclared employment.

Greater tax education and awareness

• Northern European countries have a stronger culture of tax compliance.
• Run public-awareness campaigns on how the shadow economy affects public services.