After establishing your trading company in Estonia, one of the key priorities is securing a valid VAT number for your business. This article offers helpful tips on how to successfully navigate the process, along with important advice on one common pitfall to avoid. It’s better to be cautious than to regret it later!
There is a crucial point we emphasize to new clients immediately. Under the current VAT regulations, it can be highly disadvantageous for an Estonian company without a valid Estonian VAT number to purchase services from outside Estonia. The VAT law outlines a variety of services, ranging from consulting to brokerage, that are commonly used in business and fall under these rules.
If an Estonian company without a VAT number purchases services from abroad, it is required to register as a limited VAT payer from the very first transaction. This means the company cannot reclaim input VAT and must pay VAT to the state on the value of the purchased service, regardless of the transaction size. This can be especially burdensome if the amounts involved are substantial.
Entrepreneurs often don’t realize that even in cases where there seems to be no active business activity, services purchased from outside Estonia may still fall under VAT obligations. This includes:
- Advertising services – for example, purchasing advertising services from platforms like Facebook or Google AdWords.
- Data processing services – this includes anything related to the electronic sharing of data, such as a paid Dropbox subscription.
- Electronically supplied services – these are services provided automatically with minimal human intervention, which could not be offered without information technology. Examples include purchasing software (downloadable without physical media), games, mobile apps, fees for online learning platforms and forums, e-commerce service fees, e-books, various other digital products, web hosting fees, and more.
Such services create VAT liabilities even if the company is not registered for VAT in Estonia, and ignoring this can lead to significant additional costs and administrative burden.
And of course, the most common purchases include consulting services from a business partner or related entity, legal assistance, transportation services, and accounting services. The full list is much longer.
For every such service purchase, an Estonian company must register as a limited VAT payer, declare the purchase, and pay VAT on the purchase amount according to the applicable rate in Estonia. Furthermore, it’s important to note that input VAT paid on services purchased in Estonia cannot be reclaimed under these circumstances.
The most complicated case we encountered involved a client who claimed not to be actively operating and, therefore, didn’t submit monthly documents. However, when it was time to prepare the annual report, it was revealed that the client had a contract with a Danish supplier to whom they paid a monthly consultancy fee. The amounts involved were significant, which caused the client a major issue due to not seeking advice in a timely manner. In effective tax planning, timing is crucial.
Similar cases have occurred with several Lithuanian, Polish and Spanish clients, where payments were made for legal and advertising services.
To summarize, it’s important to note that limited VAT liability exists and can negatively impact your business. Under limited VAT status, companies are required to pay VAT on services purchased from abroad without the ability to reclaim input VAT, which can significantly increase costs, especially for larger transactions. This adds a financial burden and additional complexities to managing VAT.
In today’s fast-paced business world, mistakes in tax compliance can be costly. At InCorpora, we are your trusted advisors and tax experts, here to help you avoid the common pitfalls that have caught others off-guard. With our deep expertise, we ensure that your business remains fully tax compliant, while safeguarding you from unnecessary risks.
Don’t wait for problems to arise—reach out to us today to learn about our proven solutions designed to keep your business on the right track. Let us help you navigate the complexities of tax regulations with confidence.
CONTACT US NOW to stay compliant, avoid costly mistakes, and protect your hard-earned success!
