We’re continuing on with our series of all things tax-related you need to know for doing business in Estonia. In this article we’ll look at Value Added Tax (VAT), an aspect of taxation that is important for both businesses and consumers. In order to comply with tax regulations in Estonia and make sure you have fair pricing for goods and services, you will need to have a good understanding of their VAT system. Let’s take a closer look at the ins and outs of VAT in Estonia, including recent changes in the VAT Act and what implications these changes might have for businesses and individuals.
What is VAT?
VAT is essentially a consumption tax imposed by the government – in this case, the Estonian government. VAT is paid by businesses and individuals registered as VAT liable. They pay either when the liability arises or voluntarily. This kind of tax is designed to be collected at each stage of production or distribution, and ultimately paid by the end customer. In Estonia, VAT is added to the price of most goods and services.
VAT is calculated based on the value added to a product or service at each stage of its production and distribution. This means that businesses pay VAT on their purchases (input VAT) and collect VAT on their sales (output VAT). The difference between the input VAT and output VAT is either paid to or refunded by the tax authorities.
To better understand VAT in Estonia, let’s look at some of the details including VAT rates and recent changes to the VAT Act.
VAT rates in Estonia
In Estonia, the VAT rate structure is tiered, categorising goods and services into different tax brackets.As of January 1, 2024, Estonia will implement some notable changes to its VAT rate system. The previous 20% rate will be replaced with a new standard VAT rate of 22%. Let's explore these rates and their implications:
Standard VAT rate (from January 1, 2024): 22%
The standard VAT rate is the most common rate applied to most goods and services in Estonia. It has increased from the previous 20% rate, so businesses and consumers should be aware of this adjustment in pricing.
The Estonian VAT Act has introduced transitional provisions related to the rate change:
Cash accounting for VAT:
Until December 31, 2025, for goods or services subject to the standard VAT rate, businesses using cash accounting for VAT may continue to pay VAT at the rate of 20% on transactions generated after December 31, 2023, if an invoice was issued to the purchaser, and the goods were dispatched, made available, or the service was supplied before January 1, 2024.
Long-term contracts related to immovables are covered by a second transitional provision. Until December 31, 2025, taxable persons can apply the 20% VAT rate based on a written contract concluded before May 1, 2023. This applies provided that the contract specifies the inclusion of VAT at a rate of 20% or adds VAT at the rate of 20% to the price. The contract should not provide for a change in the price due to a potential change in the VAT rate.
These transitional provisions are important for businesses to understand, as they impact the rate at which VAT is calculated and reported during the transition period.
VAT compliance and reporting
Making sure you are VAT compliant is important when running a business in Estonia. All businesses registered for VAT must follow the reporting requirements below:
Regular reporting: VAT-registered businesses must submit VAT returns at the specified intervals, typically on a monthly basis. The deadlines and procedures might vary depending on particular circumstances of your business.
Record-keeping: Make sure to keep accurate records of all transactions including invoices, receipts and other supporting documents. This is important for VAT and also for potential audits.
VAT payment: Always make sure to pay your VAT on time to the Estonian tax authorities. The payment should cover the difference between the output VAT collected and the input VAT paid.
How to pay VAT in Estonia?
There’s a structured process that businesses need to follow to fulfil their tax obligations when paying VAT in Estonia. The process includes the following:
VAT registration: Make sure your business is registered for VAT if it meets the criteria for mandatory registration. Voluntary registration is also an option.
Keep accurate records: As always, keep thorough records of your transactions, including invoices, receipts, and expenses, to calculate your VAT liability accurately.
Determine VAT rates: Make sure you know the right VAT rates applicable to your goods or services. Always stay on top of any changes, such as the standard VAT rate of 22% starting from January 1, 2024.
Collect output VAT: Add VAT to the prices of your goods and services and collect this output VAT from your customers.
Pay input VAT: Pay VAT on the purchases you make for your business, which is referred to as input VAT.
VAT return filing: File your VAT return on time, making sure to follow the new structure and specifications of the data transmission file implemented as of January 1, 2024.
VAT deductions and refunds
To optimise your tax liabilities, it’s important to know about the various deductions and refunds available. Here’s a brief overview:
VAT deductions: Businesses can deduct the input VAT they've paid on purchases and expenses from the output VAT they've collected from customers. This helps reduce the overall VAT liability.
VAT refunds: Sometimes businesses may be eligible for VAT refunds. However, the refund process typically requires compliance with specific criteria and procedures outlined by tax authorities.