Estonia, a digital-savvy nation, has long been a magnet for global entrepreneurs, especially through its e-Residency program. However, the recent tax changes announced by the Estonian government have raised some questions, particularly when it comes to Value Added Tax (VAT), for e-Residents.
Taxes: One of life’s inevitabilities!
Every government needs to raise tax revenue, and Estonia is no exception. Indeed, geopolitical tensions in the Baltic region caused by Russia’s illegal war in Ukraine, as well as the global economic downturn globally, have put pressure on finances everywhere.
Estonia has one of the lowest debt-to-GDP ratios in the EU and the lowest tax-to-GDP ratio. But budgets must be balanced, at the state level, just as in your own business, or even household. The new coalition government has therefore approved a series of tax amendments that will come into effect in 2024 and 2025.
This will mostly impact the personal income taxes of those living in Estonia, but the most notable change for e-Residents is the increase in the standard VAT rate from 20% to 22%, effective from January 1, 2024.
What do these VAT in Estonia changes mean for e-Residents?
Most private limited companies operated by e-Residents of Estonia will be liable for collecting and paying VAT, and your service provider like GroüHub will take care of your calculating and reporting obligations.
It is important to remember that you as the business owner hold legal responsibility for this, however, so you need to understand what’s going on.
Let us just recap, then:
What is VAT anyway?
VAT stands for Value Added Tax, and it is a consumption tax. It is charged equally on all products (with some variations, see below), and everyone pays the same rate on goods they buy, regardless of their own income or wealth.
What are my VAT obligations as an Estonian e-Resident?
Your e-Resident company in Estonia automatically becomes subject to VAT once your annual revenue crosses the €40,000 mark in sales, aligned with the calendar year. VAT registration is also mandatory if you are selling imported goods within the EU under the Import One-Stop Shop (IOSS) scheme, although exceptions exist for businesses selling solely outside the EU.
Upon hitting the €40,000 revenue milestone, you must register as a taxable entity with the Estonian Tax and Customs Board. Therefore, it is prudent to proactively register well before you reach this revenue threshold - but do not worry, because GroüHub will advise you and ensure you are set up for compliant success in good time.
Then you will join most businesses in the world, acting as an unpaid tax collector for the government, at the prevailing rate required!
It is important to accurately identify the correct VAT number for your clients - in the EU you can use VAT Search to locate it, or you may find it lurking in a small print footer link to their business or privacy terms.
This is so that the correct rate can be applied when you invoice. It’s those rates that are changing.
Estonian VAT Rate Increases from 2024
The standard VAT rate will rise from 20% to 22% starting January 1, 2024.
For e-Residents, this means that all VAT-excluded services purchased in Estonia will become 2% more expensive unless outgoing VAT can be deducted.
Purchases from VAT-registered Estonian-based businesses (such as your GroüHub service fees) will appear 2% more expensive, but this tax will be netted off in your monthly reporting, against any VAT you owe.
Special VAT Arrangements for Existing Contracts
Businesses can continue applying the 20% VAT rate on turnover from contracts concluded before May 1, 2023, provided that the contract states the use of the 20% VAT rate, and does not allow for revising this rate when the tax rate changes.
This is good news for business operators with retainers and long-term contracts, but these will need to be adjusted for compliance at the point of expiry/renewal.
Also, payers implementing special arrangements for cash accounting for VAT have the right to declare and pay VAT at the rate of 20%, if turnover occurs in 2024 for goods sent or made available or services provided in 2023, or if an invoice with a VAT rate of 20% is submitted in 2023, (even if the payment is received in 2024.)
Reduced VAT Rates on Specific Services
Certain product categories are completely exempt from VAT because their consumption is regarded as essential for life - this includes things like education and healthcare.
Other things are subject to reduced rates under the same principles, to protect consumers - but these rates are also changing.
For example, the reduced VAT rate for accommodation services will increase from 9% to 13%, but this increase is deferred until January 1, 2025. After this time, e-Residents visiting Estonia might find their gross costs slightly higher.
Press publications will also see a VAT increase from 5% to 9%, again deferred until 2025, and with similar extensions for publications created or invoiced before the deadline.
It’s important to be aware that these longer-term adjustments may be subject to changes yet, because politics moves fast, especially in Estonia. But right now, these are the stated intentions, as regards these specific services and categories.
What else do e-Residents need to know about the Estonian tax changes in 2024?
Starting from January 1, 2024, payment service providers will be required to store data on cross-border payments and transmit this data quarterly to the tax authority. This aims to detect cross-border VAT fraud and improve competitive conditions in e-commerce.
Non-residents from outside the European Union must generally appoint a tax representative for VAT registration in Estonia. However, amendments to the VAT Act may change the requirements for non-residents to appoint tax representatives.
This will not impact GroüHub customers, however, as our Estonian entity will continue to act as both your virtual office and tax representative in Estonia - so there is nothing to change or worry about.
There are also forthcoming changes to the 14% regular dividend rate, but we will bring you further information about this soon.
Indeed, GroüHub will continue to keep you fully aware and informed while the tax landscape in Estonia undergoes these changes, and we will ensure that all our clients are prepared for the upcoming shifts. While the increase in VAT rates will have a direct impact on the cost of doing business, understanding these changes can help e-Residents make informed decisions and adapt their business strategies accordingly.
Disclaimer:
We urge you to book an individual consultation with us today, because an article like this can offer only generalized news, and should not be regarded as specific financial or tax compliance advice. Please talk to a GroüHub advisor today.
Further reading: https://globaltaxnews.ey.com/news/2023-1256-estonia-significant-tax-changes-in-2024-and-2025
We offer you to book a personalized advisory call with our expert, who will listen, understand, explain and clarify your questions about e-Residency and doing business in Estonia.
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