«Value-added tax in the European Union — it is very confusing!» These are the major concerns that prevent e-residents from registering their own company. But is it that complicated? Let us find it out together.»

Common rules

The general rules are simple: if an Estonian company issues an invoice to a company or a private person in Estonia, it should add 20% VAT to the amount. The same rule applies if an invoice is issued to a private person residing in one of the EU countries.

If your Estonian company issues an invoice to a company registered in one of the EU countries, what matters is whether your business partner has a VAT number. If there is no VAT number, add 20% VAT to the amount of the invoice. If a VAT number exists, apply a 0% VAT rate to the sale of all goods and most services — this is the so-called intra-community transaction.

The VAT number provided by your business partner must be valid. The European Commission runs a website for the verification of the European VAT numbers — VIES (VAT Information Exchange System, https://ec.europa.eu/taxation_customs/vies/). On this website, you may verify the validity of the VAT number of your business partner while issuing an invoice. Do it with the utmost attention as in case you issue an invoice with a 0% VAT rate and later it turns out that the VAT number of your business partner is invalid, you will have to pay VAT from your own funds.

If you export goods or services outside the European Union, VAT is not added.

Sales to the United Kingdom

In this regard, it would be relevant to mention the United Kingdom. There are only a few days left before the end of 2020 and Brexit will take effect in all aspects of VAT from the 1st of January 2021. The British companies will no longer be deemed the EU companies. Therefore, the sales from an Estonian company to companies and private persons from the UK will be considered export transactions exempt from VAT.

When does it become necessary to get a VAT number in Estonia?

Please bear in mind that the VAT number is not automatically assigned at the registration of a new company in Estonia. Moreover, you do not even have to get it if the sales of your company to the Estonian or EU clients do not exceed 40,000 euros per year. If you choose so, you may voluntarily register your company as a VAT payer and get a VAT number.

For registration, you will need to submit an application to the Estonian Tax and Customs Board. It can be done with the e-MTA system using your e-Residency card. The Board may ask you to justify the need in assigning your company a VAT number and present evidence if entrepreneurial activity.

In case sales in Estonia or the EU exceed 40,000 euros per year, a company must register as a VAT payer, get a VAT number, and from then on submit monthly VAT returns.

Status of a entity liable to VAT with limited liability

if your company purchases services from outside the European Union in the total minimum amount of 10,000 euros per year, it must register as so called entity liable to VAT with limited liability and pay VAT of 20% from the cost of the received services. This of cource decreases your profit margin. Therefore, if you have sufficient grounds, it would be best to register as a person fully liable toVAT. Then, the services purchased outside the European Union will have to be declared, however, they will be exempt from VAT in Estonia.

Many IT companies incorporated in Estonia make this common mistake: they purchase services from individual entrepreneurs located outside the EU but fail to register either as full VAT payers or as VAT payers with limited liability. Afterward, while preparing an annual report, the managers of such companies get an unpleasant surprise discovering that they have to pay large amounts of VAT for the previous period. To avoid this, we recommend all e-residents to use the services of a professional accountant and prepare monthly accounting records. A good accountant will alert you when the time is due to get a VAT number.

VAT for internet sales

If you sell through an online store, the same VAT rates apply for online transactions as for offline sales: 20%, in case you sell goods to an Estonian customer, a private person in the European Union, or a European company that has no VAT number, and 0%, in case your client is a European company with a VAT number or any customer located outside EU.

Therefore, you need to detect the location of your customer and their status. According to the EU directive, the seller is obliged to do it using the following criteria:

  • The address of the client for issuing invoices.
  • IP address or another method of geolocation.
  • The location of the bank account that is used for making payments.
  • Mobile code of a sim-card used by the client.
  • The location of customers fixed landline and other criteria.

Life-hack: many companies that render payment services for online commerce also provide a client’s positioning service.
If your sales to customers from Austria, France, Germany, Luxembourg, and the Netherlands exceeded 100,000 euros, you need to register as a VAT payer in these countries, apply the local VAT rate to the local sales, and submit VAT declarations to the tax institutions in the corresponding countries. For other EU countries, the sales threshold is approximately 35,000 euros. It is crucial not miss the moment when your sales in respective ciuntries reach the threshold values.
In case your company sells electronic services, you have the option to apply for a mini one-stop-shop (MOSS) system to avoid the need to register in each of the EU Member States separately. If your Estonian company applies MOSS regime, you declare the supplies of services provided to each Member State separately, calculate the VAT according to the VAT rate of that specific Member State, and remit the necessary VAT to Estonian tax authorities. Thereafter, the Estonian tax authorities transfer the VAT to each Member State concerned. Under MOSS regime you only need one VAT number in Estonia to sell your services to customers in any country of the EU.

To summarize, it is important:

  • to get VAT number in Estonia, if the sales of your company in Estonia or the EU countries exceeded 40,000 euros,
  • to submit VAT declarations on a monthly basis
  • to apply VAT rates valid in Estonia: 
    • 20%, if you sell goods or services to
      • a customer in Estonia, 
      • a private person in the EU, 
      • a European company that has no VAT number. 
    • 0%, if your client is:
      • a European company with a VAT number, 
      • a customer located outside the EU. 

If you sell online, VAT rates remain the same.

  • if your Estonian company purchases services from outside the European Union, to check with your accountant if you should register the company as a taxable person with limited liability,   
  • if your sales to one of the EU countries exceeded the threshold of 35,000 or 100,000 euros, check if you have an obligation to get a VAT number in this country, apply a local VAT rate and submit local tax declarations, 
  • if you sell online services, keep in mind that you may use MOSS regime. In this case, you declare and pay VAT from your sales in all the EU member states only in Estonia.

Many e-residents run a successful business in the European Union through their Estonian companies. VAT reporting will not be a problem if you find a professional accountant and properly organise your data processing. I wish you every success!

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Disclaimer: this video is intended for informational and educational purposes only. Magrat OÜ shall assume no liability for any actions taken based on the information presented in this video. Viewers are encouraged to seek advice from professional tax advisors in their specific jurisdictions based on their specific circumstances.