Value Added Tax (VAT) is the main type of indirect taxation in Estonia and in other European Union (EU) countries.
It is a tax on consumption which is applied during the production and distribution process to most goods and services. It is also applied to goods, and certain services, entering the country. Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process rests with the business making the supply, i.e. the sale.
A business registered for the tax will charge VAT (output tax) on its sales, and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, a refund can be claimed.
A transaction is within the scope of Estonian VAT if the following conditions are met:
There are three rates of VAT that are applied to goods and services in Estonia; the standard rate, the reduced rate, and the zero rate. In addition, some goods and services are exempted from the tax.
Businesses that make exempt supplies are unable to claim all of the input tax that they incur, so the VAT paid to suppliers will be a real cost.
Most goods imported into Estonia from outside the EU are subject to VAT. The tax will have to be paid by the importer at the time of importation. Where the importation is for business purposes and the importer is registered for VAT, it may be possible to reclaim the tax (subject to certain rules).
It is also important to note the interaction between VAT and customs duty. Customs duty is levied across the EU at the place where goods are imported into the community. It is levied in order to bring the cost of goods produced outside the EU up to the same level as those produced within it. Once duty (and VAT) has been paid by the importer, the goods are in ‘free circulation’ and they can then be released for use in the home market. Unlike other indirect taxes, such as VAT, once duty has been paid it is not usually recoverable by the importer. It therefore represents a bottom line cost to the importing business if it cannot be passed on in higher prices.
It is therefore very important to ensure that the correct rate of duty is applied. VAT is charged on the value of the importation, including any custom duty.
A person who either makes or intends to make taxable supplies of goods or services in the course or furtherance of a business must register for VAT if the value of its taxable supplies in Estonia exceeds the annual registration limit (€40,000), or is expected to exceed the limit in the near future. A person is required to submit an application for registration as a taxable person to the tax authority within three working days as of the date on which the registration obligation arises. A business can register on a voluntary basis even if the registration limit has not been exceeded.
Additionally, if a foreign person engaged in business with no permanent business establishment in Estonia creates taxable supply in Estonia but such supply is not taxed in Estonia upon the acquisition of goods or receipt of services by a taxable person or taxable person with limited liability, the registration obligation shall arise for the person as of the date on which the taxable supply is created.
For these purposes, a person includes any legal entity. Therefore, once a person is registered for VAT, all of his business activities will be covered by the registration – even if the nature of some of those activities are very different.
The tax authority shall register a parent undertaking and its subsidiaries as a single taxable person, ie VAT group, on the basis of a joint application by such taxable persons. Taxable persons who are economically and organisationally related shall also be registered as a VAT group on the basis of a joint application if more than 50 percent of the shares, holding or votes of each company to be registered within the composition of a VAT group are owned by one and the same person or if the persons are related on the basis of a franchise contract.
A corporate body cannot be treated as a member of more than one VAT group at a time.
The main advantage of a VAT group registration is that, apart from a few limited exceptions, any supply of goods or services by a member of the group to another member of the group is disregarded for VAT purposes. This reduces the risk of VAT being accidentally omitted on supplies between separately registered connected companies.
However, there are some disadvantages and any decision on whether to group register should be taken with care. For example, all VAT group members (including former members) are jointly and severally liable for the VAT debt of the group during the period of their membership.
The tax authority may register the company retrospectively, on its own initiative, if a business fails to register at the correct time.
The normal VAT registration limits and regulations also apply to businesses who are not established in Estonia.
Registration for VAT in Estonia may also be required where a non-established EU business is involved with e-commerce including but not limited to distance selling of goods/services. Distance selling occurs when a taxable supplier in one EU country supplies and delivers goods/services to a customer in another EU country who is not registered or liable to be registered for VAT. Such customers are known as non-taxable persons and include private individuals and businesses as well as other organisations that are not registered for VAT (either because of their size, or the fact that they are exempt from having to register due to the nature of their activities). The common examples of distance sales are goods supplied by mail order and via the internet.
All EU countries are applying a distance selling threshold of €10,000 per calendar year, or the equivalent in its own currency.
Distance sales from another EU country to non-taxable persons in Estonia will be subject to VAT at the appropriate rate in the suppliers’ country. However, once the value of those distance sales to Estonia exceeds the threshold of €10,000:
Suppliers can choose to make Estonia the place where the goods are supplied by registering for VAT voluntarily before the threshold is reached.
Additionally, with effect from 1 July 2021, new regulation for suppliers operating in e-commerce have been implemented. To ensure compliance with this, suppliers have the choice to either register for VAT in each Member State where their customers reside, or elect to register under the EU VAT OSS simplification scheme in a single Member State (where they are established). Businesses with multiple establishments in the EU can choose which Member State to operate OSS (the Member State of Identification). However, the OSS cannot be used to report local sales (delivery of goods/services within the same state) to customers in a Member State in which e-commerce suppliers have a fixed establishment and OSS registration.
With effect from 1 January 2015, Article 58 of Directive 2006/112/EC was amended. The rules determining the place of supply of electronically supplied services supplied to private consumers (B2C) changed from the Member State where the supplier belongs (ie where established) to the Member State of the consumer. The result of this is that local VAT is chargeable at the applicable rate in each of the Member States in which electronically supplied services are made (ie where the customer belongs). To ensure compliance with this, suppliers have the choice to either register for VAT in each Member State where their customers reside, or, similarly to e-commerce rules, elect to register under the EU VAT OSS simplification scheme in a single Member State (where they are established).
Businesses with multiple establishments in the EU can choose which Member State to operate OSS (the Member State of Identification). However, the OSS cannot be used to report local sales to customers in a Member State in which suppliers of electronically supplied services have a fixed establishment.
Non-EU suppliers without an establishment in a Member State are free to select a Member State of their choosing to operate OSS and become their Member State of Identification.
A person of another Member State engaged in business with no permanent establishment in Estonia has the right to appoint upon registration as a taxable person a tax representative, who has been approved by the tax authority.
A person of a third country engaged in business with no permanent establishment in Estonia shall appoint, upon registration as a taxable person, a tax representative, who has been approved by the tax authority.
The taxable period is one calendar month. The VAT return and appendix thereto shall be submitted to the tax authority by the 20th day of the month following the taxable period.
The first taxable period for a taxable person (and taxable person with limited liability) is the period from the date of registration until the end of the same month. If the number of calendar days in the first taxable period is less than fifteen, the taxable person or taxable person with limited liability may declare the supply of the first period together with the supply of the following taxable period and submit one return concerning two taxable periods.
The VAT return shall be submitted electronically if the person has been a taxable person for at least 12 months or more than five invoices are included in the appendix to the VAT return. On the basis of a reasoned request made by a taxable person or a taxable person with limited liability, the tax authority may allow the submission of a VAT return on paper.
The data from the invoices issued to and received from a legal person, sole proprietor and state, rural municipality and city authority and the registry code issued to a transaction partner in Estonia, the personal identification code in the case of a notary and bailiff shall be reflected in the appendix to the VAT return.
The appendix to the VAT return shall reflect the invoices in which the transferor of the goods or provider of services has marked the supply taxable at the 20% and 9% VAT rate, except for the invoices submitted under the special arrangement, if the invoice or the total amount of invoices without VAT makes up at least €1,000 for one transaction partner during the taxation period. The transaction partner-based threshold shall be calculated separately for purchase and sale invoices. The invoices shall not be summed up in the appendix to the VAT return.
A default surcharge penalty may be imposed by the tax authority if VAT returns are not submitted on time.
If the tax is not paid by the due date, 0.06% tax interest will be calculated per day on top of the tax amount.
For the late submission or payment, the tax authority can issue a notification to the taxpayer confirming that a penalty may be imposed if the obligation will not be replete by a given deadline.
Businesses registered for VAT in Estonia that make supplies of goods or services to traders registered for the tax in other EU countries are required to complete and submit EC Sales Lists (ESLs). The ESLs must show details of the recipients of the goods and services.
ESLs should be submitted for each taxable period, by the 20th day of the month following the taxable period.
In addition, if the value of the intra-EU trade in goods dispatched or arriving from other EU is above an annual threshold, a supplementary declaration (referred to as an Intrastat declaration) has to be submitted for either or both. These declarations have to be submitted on a monthly basis.
Yes. A range of penalties can be imposed where businesses do not comply with the VAT rules.
Civil penalties and interest can be applied for errors and omissions made on tax returns, or where the tax is paid late. Penalties can also be applied where the business has failed to maintain adequate records, provide information (including additional declarations), or makes repeated mistakes.
Criminal proceedings may be brought in the case of more serious matters.
Yes, it may be possible to reclaim the VAT incurred in certain circumstances. Two schemes exist, one for businesses established in the EU and another for businesses established elsewhere.
The EU cross border refund scheme is available in all EU States, and enables a business established in the EU to recover VAT incurred in another member State. To be eligible to make a claim, the claimant must be a taxable person established in an EU member State other than the one from which the claim is to be sought. In addition, the claimant: must not be registered, liable, or eligible to be registered in the member State from which he is claiming the refund must have no fixed establishment, seat of economic activity, place of business or other residence there during the refund period he must not have supplied any goods or services in the member State of refund, apart from certain limited exceptions.
The amount that is refundable is determined by the deduction rules that apply in the country making the refund. The claim is submitted electronically to the tax authority from whom the repayment is being sought.
The refund period must not cover more than one calendar year or less than three calendar months – unless it is covering the remainder of a calendar year. The claim has to be made by 30 September of the year following that in which the VAT was incurred.
Businesses established outside of the EU can, subject to certain conditions, also reclaim the VAT incurred on imports into Estonia or purchases of goods and services used in Estonia. The scheme is available to any person carrying on a business established in a third country, ie outside the EU, provided that in the period of the claim:
The refund period must not cover more than one calendar year or less than three calendar months – unless it is covering the remainder of a calendar year. The claim has to be made by 30 September of the year following that in which the VAT was incurred.
A VAT invoice must show:
An invoice may be issued on paper or, subject to acceptance by the acquirer of goods or the recipient of services, by electronic means.
A simplified invoice may be issued, provided that the amount indicated in the invoice does not exceed €160, exclusive of VAT, in the following cases:
In Estonia it is possible to submit VAT declarations as xml-or csv-file but it is not mandatory. Generally, VAT returns must be submitted electronically, but this can also be done by entering data manually into the database of tax authorities.
Real-time VAT reporting has been under discussion, but whether and when it comes into effect is not known.
For further information on indirect tax in Estonia please contact:
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Kristjan Järve |
Nadežda Mihhailitšenko |
