First of all, it is important to note that when you set up a company in Estonia you are not automatically treated as a person liable for VAT nor do you have the right to deduct input VAT which the company incurs when buying goods or services for its business.
The turnover threshold for mandatory VAT registration is EUR 40,000 from the beginning of a calendar year. So basically, if your annual taxable supply is below EUR 40,000, then you have no obligation to register as a person liable for VAT and you are not required to calculate and pay VAT on the provided services, which would otherwise be taxable.
However, the moment you exceed the threshold you have three business days to register yourself as a taxable person. It is important to point out that the Estonian Tax and Customs Board shall start treating you as a taxable person the moment your taxable supply reaches the threshold. So, when you realize that it’s likely that you are going to reach it, then it would probably be wise to anticipate the registration obligation and set the process in motion. As a VAT payer, you must now pay VAT to the Estonian Tax and Customs Board and submit monthly VAT returns (even for the months when there could be nothing to declare).
Voluntary registration before reaching the registration threshold is also possible. All you need to do is provide the Estonian Tax and Customs Board with sufficient evidence (normally a business plan) that proves your intentions of starting and running a business. Be aware that the Tax Authorities may refuse VAT registration if you have no transactions with customers located and operating in Estonia. You will, however, need to determine whether your company is VAT-liable in another jurisdiction. You should know within five business days if the Tax Authorities have accepted your application or not. If they do, you will be registered as a taxable person at the date of the application. The Estonian VAT number starts with a prefix EE which is followed by nine digits: EE123456789
What are the main VAT implications if your company is registered for VAT purposes?
The following is based on an assumption, that you have established an OÜ in Estonia and provide services to your clients. Provision of services to other Estonian companies and/or individuals will generally be subject to standard 20% VAT rate. There’s also a reduced 9% VAT rate in use, which applies to the provision of accommodation services and to the sale of books, certain periodicals, pharmaceutical products and medical devices. If you, however, provide services to customers in another EU Member States or third countries, then a 0% VAT rate is generally applied.
If you issue invoices to corporate customers (so-called business-to-business or B2B transactions) in the other EU Member States or third countries you should include a VAT registration number of the customer and a reference to “reverse charge mechanism” meaning that you apply 0% VAT and the customer applies and reports VAT by self-assessment in the Member State who issued the VAT identification number.
The situation becomes a little more complex when your customers are final consumers (so-called business-to-consumer or B2C transactions) in the other EU Member States or third countries. If services are provided to final consumers outside of Estonia, such supplies would be subject to Estonian VAT, unless an exception based on the nature of the service applies. In the latter case, there might be an obligation to register your company for VAT in the country where final consumers are located and comply with local VAT rules. Also, keep in mind, that there are rules depending on the type of service that is performed which allocate where a certain service should be subject to VAT.
If your company provides services that are entirely taxable (20%, 9% or 0% VAT rates are applied), then you can deduct VAT paid on the purchase of goods and services on all costs related to your business activities aimed at making taxable supplies (with a couple of exceptions to the general rule). If at the end of the month you have paid more input VAT than you have added to your taxable supply, then after official approval from the Tax Authorities, these funds will be released to your prepayment account and you are able to use it to cover other tax-related liabilities or apply for a refund.
As a VAT registered taxable person your company is liable to calculate and pay VAT on its taxable supply, goods and/or services purchased under the reverse charge mechanism from the other EU Member States and third countries. In some rare cases, goods purchased from another Estonian taxable person will also be subject to reverse charge (e.g. scrap metal).
The taxable period for VAT is one month and you must declare and pay VAT to the Tax Authorities by the 20th day of the month following. You are able to file VAT tax returns in the e-Tax/e-Customs online environment. VAT declarations KMD and an Annex KMD INF listing all sales and purchase invoices with domestic counterparties exceeding EUR 1,000 in one month must be declared on KMD INF. Supplies of services to VAT-registered customers of other EU Member States must be declared in the monthly VD return due also by 20th of the following month.
Please review the Estonian Tax and Customs Board website for more details and, specifically, to understand cases where obligations may arise in a foreign country and you would not register for VAT liability in Estonia.
After you have determined, whether you should register as a person liable for VAT in Estonia, you can follow the instructions provided by the Estonian Tax and Customs Board here.
If you need help with VAT registration, most service providers in our Marketplace offer assistance.
This article is part of a Business Guide
This article is a part of larger set of guidelines that e-Residency project team has requested for you and that has been compiled in cooperation with AS PwC. The full version of the Business Guide will be available for download shortly.
Articles in the Knowledge Base and the Business Guide are intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. This information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.