What must an Estonian VAT taxable person know?
Value-added tax (VAT) is an indirect consumption tax added to the price of goods or services, which must be paid by the consumer of the goods or services. Accounting for VAT is inevitably associated with the activity of any reasonably large enterprise. The Estonian VAT regulation can be found in the current VAT Act. Below we describe when an entrepreneur must register or is able to register as a VAT taxable person and what to keep in mind when issuing invoices and submitting VAT returns and what help can you get from Law Firms Estonia.
Registration as a VAT taxable person
Any person engaged in business, including a natural person, may be a VAT taxable person. A person engaged in business must register as a VAT taxable person if the taxable turnover exceeds €40,000 from the beginning of the calendar year. As a registered taxable person, you must keep daily records of taxable and tax-exempt turnover.
The application must be submitted within three working days from the day the registration obligation arises (i.e. the day when turnover exceeds €40,000). The tax authority makes a decision on registration as a VAT taxable person within five working days. However, the person is registered as a VAT liable person starting from the aforementioned date when the turnover exceeded €40,000. Therefore, the application should be submitted earlier rather than later, if it is foreseeable that turnover will soon exceed the limit. If you submit the application at the last allowed moment, you risk becoming a taxable person during the interim period without knowing it.
The application can be submitted through the e-Business Register, the e-MTA environment, or the Tax and Customs Board office. If you do not submit the registration application on time, you will be registered retroactively by the tax authority on their own initiative, for this mistake contact Leno Law Firms Estonia.
It is also possible to register as a taxable person voluntarily, regardless of the size or existence of annual turnover. However, the prerequisite is that you are engaged in entrepreneurship in Estonia or are about to start it. You must prove this fact to the tax authority (for example, business plans, pre-contracts, rental or lease agreements for premises or inventory are suitable evidence).
In what cases would voluntary registration be reasonable? Primarily, if you sell your products or services to other companies that are also VAT taxable persons. In this case, they can deduct input VAT from transactions. If your customers are end-users, they do not have the option to deduct VAT. In such a situation, voluntary registration is not reasonable. The VAT-related price increase may influence the customer's decision to choose your competitor instead. However, if you do not have a VAT obligation, you can offer a service at a lower price than your competitors. Alternatively, you can offer a service at a similar final price as your taxable competitors, but earn a higher profit from the lack of added VAT. Therefore, it is not reasonable to register as a taxable person voluntarily for no particular reason, especially since your job will become more time consuming or you will entail additional accounting costs.
After registering as a taxpayer, you must issue an invoice to the buyer or recipient when providing a service or selling goods. The invoice must be issued within seven calendar days from the day the goods were dispatched or made available to the buyer, or when the service was provided. A service that lasts longer than the taxation period is deemed to have been provided or received during the taxation period in which the service ends. When providing services or selling goods regularly to the same buyer, the dispatch or availability of the goods or the provision or receipt of the service is deemed to have taken place during the taxation period that ends on the day the invoice is issued or the period for payment of the goods or services has been agreed, but no later than at the end of 12 calendar months.
The taxable person must keep copies of invoices issued and received in chronological order for seven years from the date of issue or receipt.
The most important information that must be included on your invoice is as follows: invoice number, date of issue, your details and the buyer's details, information about the content of the goods or services, transaction price, taxable amount with the VAT rate, and the amount of VAT to be paid. A more detailed list of all the information required on the invoice is provided in § 37 (7) of the Estonian Value Added Tax Act.
Issuing an invoice may seem simple, but it must be done correctly, while describing the content and quantity of the service as accurately as possible. In the practice of the Supreme Court, it has been found that the invoice must indicate a detailed description of the service or at least a reference to a document where the description and figures are presented. The service description is detailed when it ensures the verifiability of receiving the service. The figures supplement the description of the service and must enable the verification of the believability of the volume of the service. The invoice must describe a specific service, not refer abstractly and indefinitely to the type of service. Even linking the service to a specific place or object may not necessarily be sufficient for this purpose.
Proper and orderly invoicing is important because if it is not clear from the source documents for which specific service the invoice was issued, it can be argued during taxation that the taxable person did not receive the service. In this case, there is no right to deduct input VAT because deduction can only be made on the basis of a proper invoice.
Submitting a VAT declaration
VAT must be calculated and paid for each calendar month. The VAT declaration must be submitted by the 20th of the month following the taxable period. The same deadline applies for paying VAT to the Tax and Customs Board. The form for the VAT declaration is established by the Minister of Finance's regulation, and the current form is available here.
The first taxable period of the taxable person is the period from the date of registration until the end of the corresponding month. If there are fewer than fifteen calendar days in the first taxable period, you may declare the turnover for the first taxable period together with the turnover for the next taxable period by submitting one declaration for both periods.
You must also submit a VAT declaration even if you have not made any transactions or actions subject to declaration during the relevant taxable period (a so-called zero declaration). You must also submit a declaration if you are not registered as a VAT payer, but have nevertheless issued an invoice to which you have added VAT.
Errors in invoices and VAT declarations
In business, there may be a need to cancel an already declared invoice or to issue a credit invoice - a negative invoice where the original price had to be corrected later. In such cases, you should not change the original declaration that covers the taxable period in which you submitted the invoice, but rather you must include it in the declaration for the taxable period in which you issued the credit invoice.
A different situation arises if you have made an error in calculating VAT itself: if you have not declared turnover, declared a transaction subject to VAT at the VAT-free rate, determined the tax rate of a service incorrectly, etc. If you have made an error in filling out the VAT declaration, you must change the previously submitted VAT declaration for the taxable period and submit a new VAT declaration with the corrected information. The Supreme Court has confirmed in its practice that incorrectly indicated VAT creates a new tax obligation, and this obligation ends only with the correction of the invoice, not with the detection of the error. If a tax decision has already been made for the period, the taxable person must also request a change in the tax decision when correcting the declaration.
The obligation to pay value-added tax is an inevitably broad topic, and above we have only covered a very narrow part of it. Our lawyers have written a longer blog post on input tax deduction and why one should not confuse tax-exempt turnover with turnover subject to a 0% VAT rate. Moreover, accounting for value-added tax is just one aspect of the obligations that come with entrepreneurship, so we recommend taking a look at our article on what other laws an entrepreneur must be familiar with when operating in Estonia.