In most of our articles, we focus on e-residents, who sell services and not goods, cross-border. In this article, however, let's imagine that instead of services, you will be an e-commerce entrepreneur selling goods to customers located within the EU.
The process for becoming an e-resident and registering a company will remain the same and is described at 5 steps on how to start a company online. This article aims to give general guidance and provide links to useful information for an operating entrepreneur.
For this overview to be more practical, we will focus on 2 basic scenarios:
Scenario 1: Your Estonian company has a webshop through which you sell goods to individuals and companies in the EU. The goods are kept in a warehouse in a Member State other than Estonia;
a warehouse keeper (or a third party) is contracted for sending the ordered goods directly to buyers and executing other related tasks (e.g. invoicing).
Scenario 2: Your Estonian company purchases goods manufactured outside the EU (e.g. China) and keeps those in a warehouse located in another third country (e.g. India). When goods are ordered by EU buyers through the webshop, the goods are shipped directly to them from the warehouse.
Scenario 1: Selling goods from a warehouse located in another Member State
To keep it simple, it is important to make several assumptions, so let's assume that the goods are
- considered EU goods for VAT purposes. These are either made in the EU or, if made outside the EU, are released for free circulation in the EU (customs cleared and VAT, excise duty and import duties, if applicable, are duly paid).
- not subject to specific regulations (e.g. excise duty) or licensing (e.g. pharmaceuticals);
- not second-hand goods, works of arts or collectors’ items.
In principle, when trading in the EU, you always should ask yourself four questions about VAT registration obligation and applicable VAT.
- Is my company obliged to get a VAT registration?
- In which Member State must I get a VAT registration?
- In which Member State must I pay VAT?
- Which VAT rate applies?
There are several general rules in respect of the supply of goods in the EU which you must be aware of and which should help you answer the above questions. You will see that having only Estonian VAT registration isn’t enough if you are planning to sell goods to consumers everywhere in the EU.
1. If the goods are sold to a local consumer in the Member State where the warehouse is located, VAT rules of that Member State apply.
Each Member State has established a VAT registration threshold, which is formally called „exemption for small enterprises“. VAT registration thresholds can be found here.
This scheme is usually available to companies established in a particular Member State. However, it also applies to non-resident companies with a fixed establishment in this Member State. A concept of fixed establishment for VAT is complex and not yet fully developed if compared to a permanent establishment for corporate taxation purposes – these concepts are not the same.
In brief, a fixed establishment is a place in another Member State with sufficient human and technical resources enabling it to make supplies of goods or services. If you will have no presence or staff in the Member State where the warehouse is located, as in for example dropshipping business model, it is unlikely that the Estonian company will be deemed having a fixed establishment in the Member State of warehouse location.
If you have a fixed establishment and domestic supplies of goods remain below the registration threshold in a calendar year, you need not add VAT of that Member State to the sales.
If you don’t have a fixed establishment in a Member State where the warehouse is located, you will probably be required to register upon the first sale of goods to consumers in that Member State. VAT liability on the supply of goods to local businesses registered for VAT could remain with the Estonian company (VAT is added to sales) or it might be shifted to the corporate buyer (VAT self-assessed by the buyer), depending on the rules adopted by that Member State. Once the threshold is exceeded, you will be required to register and add VAT to the sales. VAT rates applied in each Member State can be found here. The procedure for VAT registration also differs in each Member State.
Also, you need to find out the local invoicing rules for sales to consumers and corporate buyers. In addition to VAT rules, provisions of other domestic legislation, such as Consumer Protection, could be relevant.
2. When supplying goods to consumers, including individuals and legal persons not identified for VAT, in another Member State, the Estonian company will be regarded as carrying out distance sales from the Member State where the warehouse is located.
Distance selling is generally defined as the supply and delivery of goods by or on behalf of a vendor to consumers of another Member State. The definition does not include the supply of new means of transport or goods supplied after assembly or installation. Distance sales thresholds in each Member State can be found here.
Supply of goods by distance selling below the threshold set by the destination Member State is subject to VAT in the Member State where the warehouse is located. When the threshold is exceeded, the Estonian company will be required to register for VAT in the Member State of destination, apply, report and pay VAT, as appropriate.
From 1 July 2021, as of implementation of the e-commerce package, distance sales thresholds will be abolished. A One Stop Shop system will be introduced to report EU distance sales in one VAT return. The related press release by the European Commission can be found here. More information about special schemes OSS and IOSS for imposing VAT on e-commerce and services is available on the website of the Estonian Tax and Customs Board and e-Residency bog post on this topic.
3. If the Estonian company will be supplying goods with transport to another Member State to buyers identified for VAT in the Member State of destination, such supply is called intra-Community supply of goods from the Member State where the warehouse is located.
Intra-Community supply of goods usually triggers VAT registration at once and without any threshold, but you must check the rules of the Member State where the warehouse is located.
Intra-Community supply of goods is exempted from VAT (or subject to 0% VAT) by the vendor; corresponding acquisition of the goods by the buyer is called intra-Community acquisition whereby the buyer self-assessed VAT on the acquisition in the Member State of destination.
There are specific requirements for invoices issued in respect of intra-Community supplies of goods and the obligation to prove the cross-border movement of goods and to comply with the reporting requirements, as set by the Member State where the warehouse is located.
Scenario 2: Selling goods from a warehouse located in a third country
If the goods sold to consumers through Estonian company’s webshop are delivered to them from a third country, e.g. India or China, the Estonian company will still be regarded as making distance sales to the consumers, as described above.
Customs formalities must be undertaken (goods to be assigned to import for free circulation procedure) when the goods are entering the EU. The Estonian company will be deemed an importer of record, who is responsible for any import related obligations, including payment of import VAT and customs duties, if applicable, in the Member State of importation.
The Estonian company must obtain an EORI number prior to making imports into the EU. More information on EORI number can be found here.
Low-value consignment relief (no import VAT or customs duty) is yet available if the value of imported goods is less than 22 euros, but the rule will change as of 1 July 2021. The exemption for imports of small consignments of up to EUR 22 will be abolished.
There are global online marketplaces (e.g. Amazon, eBay, etc) who provide a variety of services to start-ups, including customs clearance of non-EU goods.
Once the goods are released into free circulation and become EU goods for VAT purposes, the Rules 1 and 2, as described above, apply for determining where to register for VAT and VAT or which Member State applies to the sale.
Need more help?
If you find any of this information confusing or you have additional questions, check out our Marketplace, where Business Service providers can provide you with business consultation.
Watch the recording of the webinar "How to start your e-commerce/dropshipping business in Estonia with e-Residency":
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. Download the full version of the Business Guide.
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.