Who is a taxable person with limited VAT liability in Estonia?

3. Oct 2024

piiratud käibemaksukohustuslane

While the difference between a VAT-registered and non-VAT-registered business is relatively clear, many entrepreneurs haven’t even heard of limited VAT liability. In which cases do you become a limited VAT liable person, and what does it entail?

 

A person liable to value added tax

Let’s start from the beginning. In Estonia, a VAT-registered business is one whose taxable turnover exceeds €40,000 over 12 months. This means that from the moment your turnover exceeds the magical €40,000 threshold, you must register as VAT liable within three working days. You can also do this with lower turnover if it proves beneficial in certain cases. Additionally, you must register if you sell your products or services to other EU countries for €10,000 or more. 

Upon registration, your company receives a VAT number, and you start adding 22% VAT (in certain cases 9%, 5%, or 0%) to your invoices. You also become obligated to submit monthly VAT returns to the Estonian Tax and Customs Board. The deadline for submitting both VAT returns and EU intra-community supply reports is the 20th day of the month following the taxation period. The good news is that as a VAT-registered business, you have the right to deduct VAT on goods and services purchased for your company.

 

A person who is NOT liable to value added tax

A non-VAT-registered business is one whose taxable turnover remains below €40,000 from the beginning of the year. Since you don’t need to add VAT to your products or services, this might give you somewhat more favorable prices and a certain competitive advantage. Your accounting is also somewhat simpler because you don’t need to keep VAT records or submit VAT returns. 

However, unlike VAT-registered businesses, you don’t have the right to deduct VAT – this means that purchase invoices containing VAT are recorded as expenses in full in your accounting. Still, in certain cases, it might be more sensible to register for VAT despite having turnover below the threshold. This means you don’t have to wait until your turnover exceeds €40,000; you can register your company for VAT earlier. €40,000+ is simply the threshold where you have a legal obligation.

 

A taxable person with limited VAT liability

A taxable person with limited VAT liability remains an unknown entity for many entrepreneurs, often even when they actually have an obligation to register as one. What triggers this obligation? Broadly speaking:

1) When your company purchases goods from other EU member states and the value of these purchases exceeds €10,000 during a calendar year

2) When your company purchases and uses electronic services from foreign countries, including:

  • Web hosting and domain services
  • Platform advertising services (e.g., Meta/Facebook Ads, LinkedIn Ads, Google Ads)
  • Streaming services (e.g., Netflix, Youtube, Spotify business accounts)
  • Web-based design tools (e.g., Canva, Adobe Creative Cloud)
  • Software services (SaaS) (e.g., Microsoft 365, Salesforce)
  • Web-based project management tools (e.g., Asana, Trello, Basecamp)
  • E-learning platforms and online courses
  • Web-based accounting software (e.g., Xero, QuickBooks Online)
  • Web-based customer relationship management (CRM) solutions (e.g., HubSpot)
  • And others

What does limited VAT liability entail? It’s a peculiar status where you acquire certain obligations but have limited rights. Thus, a limited VAT liable person must calculate, declare, and pay VAT on all electronic services purchased from the EU. It’s worth noting that VAT must be paid according to Estonian rates (usually 22%), not the service provider’s country’s rate. Declaration occurs like for regular VAT-registered businesses, no later than the 20th of each month in VAT return (KMD) boxes 1 and 4, and the return must be submitted even if no purchases were made that month.

Since, unlike full VAT-registered businesses, companies with limited liability cannot deduct input VAT, purchased services (and likely some of your own offered prices) effectively become 22% more expensive. Therefore, it might be wise to consider registering as a regular VAT-registered business so you could at least deduct input VAT from the cost of the services listed above. You can read more about limited VAT liability on the Tax and Customs Board website.

 

Conclusion

In conclusion, VAT liability shouldn’t be feared. Yes, there’s a bit more accounting involved and declarations to make, but you gain access to reverse charging, VAT refunds, and several other opportunities. Our recommendation is simple – if you already face limited VAT liability requirements, it makes sense to register as a fully VAT-registered business.

 


 

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