VAT Liability – Who needs to register, What Is VAT, and When must it be paid?

VAT liable person is a term that refers to the obligation to pay VAT on generated turnover according to legislation. VAT liable is a simplified colloquial expression referring to the term VAT liable person.

What is VAT?

VAT is an indirect consumption tax added to the price of goods or services and must be paid by the consumer. Accounting for VAT inevitably accompanies the operations of any sufficiently large business. Estonia’s VAT regulation can be found in the current Value Added Tax Act.

VAT registration – when is it mandatory and when voluntary?

Anyone engaged in business activities, including individuals, may be registered as a VAT liable person.

A person engaged in business is obligated to register as VAT liable if their taxable turnover exceeds 40,000 euros from the beginning of the calendar year.

VAT registration can also be done voluntarily, regardless of the size or existence of annual turnover. However, it is required that you are engaged in or about to start business activities in Estonia.

As a registered VAT payer, you must maintain daily records of taxable and exempt turnover, based on which VAT must be paid in the following month.

When is voluntary registration reasonable?

Primarily when you sell your products or services to other businesses that are also VAT liable. In such cases, they can deduct input VAT on transactions.

When should you wait until your turnover reaches 40,000 euros?

If your business partners are private customers, they cannot deduct VAT. In such a case, voluntary registration is not advisable.

Not being VAT liable allows you to offer services at a lower price than your competitors. The VAT markup may sway customers to choose a competitor.

Alternatively, you can offer your service at the same final price as VAT-registered competitors but earn a higher profit by not adding VAT.

Early registration is therefore not always reasonable, especially considering the additional time or cost associated with accounting.

Registering as a VAT liable person (VAT application)

You can submit the application via the e-Business Register, the e-Tax Board environment, or at a Tax and Customs Board office.

If you fail to submit the registration application on time, the tax authority will register you on its own initiative, retroactively from the date required. Our lawyers can help ensure your application is submitted correctly.

The application must be submitted within three business days from the date the obligation arose (i.e., the day turnover exceeds 40,000 euros). The tax authority will make a decision within five business days. However, registration is effective from the date turnover exceeded the threshold. It is advisable to submit your application early if you foresee exceeding the limit soon. Submitting it at the last moment risks becoming VAT liable without realizing it.

Issuing invoices as a VAT liable person

If you are VAT registered and have received a personal VAT-number, each sales invoice must include the following:

• Applicable VAT rate and amount;
  • Until July 2025, the standard VAT rate is 22%
  • Starting July 2025, the standard VAT rate is 24%
  • See all current VAT rates in Estonia
• Transaction amount;
• VAT-number;
• Invoice issue date;
• Description of goods or services;
• Unique invoice identifier or number;
• Buyer’s details;
  • Name, registry code, legal address
  • VAT-number if issued
• Full list of invoice requirements (clause 7)

The taxable person must retain copies of issued and received invoices in chronological order for seven years from the date of issue or receipt.

Proper invoice documentation is essential. If source documents do not clearly indicate what specific service the invoice refers to, it may be assumed for tax purposes that the service was not received. In such a case, input VAT cannot be deducted, as deduction is only allowed based on proper invoices.

Though issuing invoices may seem simple, accuracy is vital. The service must be described in sufficient detail. In Supreme Court practice, it has been found that an invoice must include a detailed service description or at least a reference to a document containing it. The description must allow verification of service delivery. Figures must support this and allow credibility checks. An invoice must refer to a specific service, not an abstract category. Linking a service to a specific object alone may not be enough.

Submitting a VAT return

VAT must be accounted for and paid monthly. The VAT return must be submitted by the 20th day of the month following the taxable period. VAT must also be paid by that date. The VAT return form is established by the Minister of Finance and is currently available here.

Your first taxable period as a VAT payer is from the date of registration until the end of that month. If the first period has fewer than fifteen calendar days, you may declare that turnover together with the following month in a single return.

You must also submit a return even if no reportable transactions occurred during the period (a so-called zero return). Also, you must submit a return if you issued an invoice including VAT without being VAT registered.

Errors in invoices and VAT returns

In business, there may be a need to cancel a declared invoice or issue a credit invoice – a negative invoice correcting the original price. In such cases, you do not need to modify the original declaration but rather include the correction in the period when the credit invoice was issued.

A different situation arises if you made an error in calculating VAT: failed to declare turnover, reported a taxable transaction as exempt, applied the wrong rate, etc. If you made a mistake in the VAT return, you must amend the previously submitted declaration and file a new one with corrected data. You can also seek help from a law firm. The Supreme Court has confirmed in practice that incorrectly reported VAT creates a new tax obligation, which ends only when the invoice is corrected, not when the error is discovered. If a tax decision has already been made for that period, it must also be amended when the return is corrected.

Additionally

VAT liability is a broad topic, and the above only scratches the surface. Our lawyers have written more extensively about input VAT deductions and the differences between exempt and zero-rated supplies. VAT is only one of many obligations that come with entrepreneurship, so we also recommend reviewing our article on what other laws an entrepreneur should know when operating in Estonia.

For specific questions or legal assistance, you can always turn to the lawyers at Lepmets & Nõges Law Firm via our team page.