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Running a Estonian Company as remote (VAT)

How does the VAT system work?

Estonian company formation : VAT is added to your sales invoices, and in turn, you need to pay the VAT you collect as tax.

In case a VAT number and VAT reporting are needed, LeapIN will take care of applying for VAT and regular monthly tax reporting in Estonia. The VAT application process is initiated after your company registration and it takes around 3-5 business days to complete.

What is the VAT rate in Estonia?

The general VAT rate is 20%, but it also depends on the service/product sold and the customer’s type (B2B vs B2C) and location (Estonia, EU, outside EU).

The VAT rules are complex and depend on the nature of the services you provide and the type and origin of the customer. Not to worry though, as LeapIN will take care of VAT registration and compliance as part if it’s offered plans.

When does my business need a VAT number?

You can start selling your service(s) without a VAT number, but it’s obligatory to register your company as a VAT payer if:

  • Your turnover reaches €40 000, from the beginning of a calendar year (applicable when selling in the EU) AND/OR

  • You start providing ‘digital’ services (software, digital content etc) to individuals in the European Union (meaning that your company has to be registered for the MOSS Scheme)

If neither of the conditions mentioned above are met, applying for VAT-payer status is voluntary. There are some instances in which applying for a VAT-payer status may not be a good idea.

For example, you might not want to register as a VAT-payer if your customers don’t have VAT numbers. This will be the case if you plan to sell your services to:

  • only individuals in any of the EU member states OR

  • only companies and individuals outside the EU

  • to a company that is registered in one of the EU member states, but does not have a valid VAT number (you can check the validity of their VAT numbers from the VIES database)

When deciding whether to register your company as a VAT payer or not, you should also consider your expenses, as the location of your potential customers and suppliers impacts the result from a VAT perspective.

Do I need a VAT number if I’m selling software in online market stores?

If you sell software via the App Store or Google Play, you don’t need to add VAT, because these marketplaces will take care of this themselves. However, if you use another online marketplace to sell your software directly to your customer(s) who is/are consumers from the EU, then you’ll need to get a VAT number as well.

How can I get a VAT number and how long does it take?

Your accountant will help you with VAT number registration. The VAT number registration can be initiated after you’ve registered your company.

Please note that there has to be a justified reason for getting VAT payer status. You need to be transparent about your intended business activities. It helps if you already have some ongoing business activities in your Estonian company (proving that you aren’t trying to abuse the system).

It can then take up to 5 business days to process your VAT application.

Your Estonian VAT number will be automatically available in VIES for your business partners to check if needed.

What are the VAT rates for consultancy services?

If you sell services which need human intervention, such as consultancy, the following examples apply:

  • If your customer is a business from the EU (e.g. Germany), and has a valid VAT number, you apply 0% VAT adding a special clause on your invoice (You can check the validity of your customer’s VAT number here)

  • If the customer is a private individual or a business from Estonia, you need to charge 20% VAT (Estonian VAT)

  • If the customer is a private client or business from the EU, and does NOT have a valid VAT number, you need to charge 20% VAT (Estonian VAT)

  • If the customer is outside the EU (e.g. U.S.), don’t apply any VAT (0%)

How can I claim a VAT refund from the EU?

Getting a VAT refund from abroad is an option, but at the moment we don’t offer this as a set feature in our plans.

In case of VAT refunds from EU member states, applications will be submitted electronically through the Estonian e-Tax Board to the local tax authorities. Although the applications are submitted electronically, each EU member state has the right to impose different demands on the cost type and invoices. In addition, a foreign tax authority has the right to request further clarifications in their local language, which could make the whole return process more complicated.

The entire process takes a bit of time and is processed once per year. Usually, if your company is a VAT payer, most transactions with EU service providers are at 0% VAT, taking advantage of the so-called ‘reverse charge’ rule. So, the total number/size of transactions with a higher VAT % should be limited.

The main points regarding VAT refund from the EU:

  • VAT refunds are available from all European Union Member States

  • The minimum amount for application per calendar year is €50 (or equivalent amount in local currency)

  • The deadline for applications is September 30th of the next calendar year

  • Treatment of applications for foreign tax authorities can take up to 4 months

Usually the following costs are eligible:

  • Accommodation

  • Restaurant bills & entertainment

  • Subcontracting

  • Fuel

  • Exhibition costs (rent, tickets, etc.)

  • Seminars & conferences

  • Courses & training

  • Communication costs (postage, telephone and fax)

  • Car rental

  • Tolls

  • Warranty repairs

  • Domestic transportation (taxi, train, etc.)

  • Rental of office and other rooms

How does the VAT reverse charge mechanism work?

To benefit from the reverse charge mechanism, your company needs a valid VAT number.

If you’re registered as a VAT payer, but your customer within the European Union isn’t, it means your company can’t benefit from reverse charge (0% VAT rate) and your company will need to add 20% VAT to the sale. As the customer isn’t registered as a VAT payer, the extra VAT they’ll have to pay is non-refundable, making your service more expensive for them. Or, when looking at this from your perspective: if you already agreed a price with your customer without considering the VAT rules, it may be an unpleasant discovery that your company will need to pay VAT from the sale.

However, if your company doesn’t have a VAT number, you also can’t benefit from reverse charge as a buyer. It means any suppliers/vendors from the EU member states who have valid EU VAT numbers and are selling services to your company, will add their local VAT rate to their invoices meaning you have to pay more. If you both have VAT payer status, they could (in most cases) apply 0% VAT (using reverse charge).

When can I ask for an invoice with 0% VAT from seller?

You can ask for an invoice with 0% VAT (aka reverse charge) when the seller also has a VAT number. If this isn’t possible, getting a VAT refund from abroad is an option, but at the moment we don’t offer this type of VAT refund as a set feature in our plans.

What rules exist for VAT, and for charging VAT on invoices?

VAT rules can differ, depending on the nature of services you provide and type and origin of the customer. These rules should be also considered when compiling a sales invoice.

If you sell professional services (services which need human intervention (e.g. consultancy)):

  • If your customer is a business from the EU and has a valid VAT number, you apply 0% VAT, adding a clause on your invoice: ‘The purchase is liable to Intra-Community supply 0%, Reverse charge.’ You can check the validity of the customer’s VAT number on the European Commission website.

  • If the customer is a private individual or a business from the EU and does NOT have a valid VAT number, you need to charge 20% VAT (Estonian VAT)

  • If the customer is a private individual or a business from Estonia, you need to charge 20% VAT (Estonian VAT)

  • If the customer is outside the EU, you don’t apply any VAT

If you sell services which are automated and classified as digital services (e.g. cloud hosting):

  • If your customer is a business from the EU and has a valid VAT number, you apply 0% VAT, adding a clause on your invoice: ‘The purchase is liable to Intra-Community supply 0%, Reverse charge.’ You can check the validity of the customer’s VAT number on the European Commission website.

  • If the customer is a private individual or business from the EU and does NOT have a valid VAT number, you need to charge VAT according to the customer’s physical location. E.g. if the customer is in Germany it’s 19% vs Greece where VAT is 24%.

  • If the customer is a private individual or a business from Estonia, you need to charge 20% VAT (Estonian VAT)

  • If the customer is outside the EU, you don’t apply any VAT (so this is written as 0%)

How can I setup VAT handling with Quaderno?

If you want to integrate your chosen payment gateway with a VAT handling solution (if necessary), we recommend Quaderno.

They calculate the correct VAT rate to be charged, based on your customer’s location and billing details, and can be integrated with Paypal and Braintree. They generate a suitable invoice, which we’ll be able to receive through read-only access to your Quaderno account. Our accounting solution extracts all the necessary data and documents from your Paypal-Quaderno or Braintree-Quaderno integration and processes them for accounting purposes.

To sign up and use Quaderno, simply head to their website and follow the sign up process. During this, you can use the discount code ‘20off_forever’ to get your 20% discount as a LeapIN customer. This makes the price €23.20 per month, instead of €29 per month.

Once you’ve signed up, to link your Quaderno and your accountant accounts, just let your accountant know the email address you used to sign up, and we’ll take care of the rest. And if you have any questions about Quaderno, please contact them here.

Can I reclaim VAT from my LeapIN monthly payment?

Yes, Estonian VAT (20%) which is added to sales invoices can be offset by purchase VAT. This means if your company buys something from a VAT payer in Estonia (e.g. LeapIN), the VAT paid can be balanced against the VAT you charge elsewhere.

If your balance is positive, i.e. you earned more VAT than paid, you must pay the net sum to the Estonian Tax authorities. But if your balance is negative i.e. you earned less than you paid, you can reclaim this amount from Estonian tax authorities.

This means, even if you don’t have any sales in Estonia, you can reclaim the VAT paid to LeapIN or similar services. This isn’t refunded automatically, and you’ll have to submit an application depending on the total sum to be received (once per quarter/half a year).

Is adding VAT mandatory when I sell services to an Estonian client?

Whether you need to add VAT to an invoice or not depends whether your company has a valid VAT number or not.

If your company has a valid VAT number and your customer is an individual or a business from Estonia, you need to charge 20% VAT, which is the Estonian VAT rate. If your company doesn’t have a VAT number, then you cannot and should not insert VAT to an invoice.

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