voluntary VAT registration in estonia explained 

Discover when and why to voluntarily register your private limited company (OÜ) in Estonia as a person liable to VAT

This guest post is written by Attorney at Law Sergei Jegorov of TEGOS Law Firm. TEGOS has offices in Estonia, Latvia and Lithuania. TEGOS offers advising on taxation, among many other topics.

Value-added tax (VAT) is harmonised across the European Union (EU), meaning that the VAT rules of all Member States must comply with EU legislation and primarily Council Directive 2006/112/EC on the common system of value-added tax.  

Since accession to the EU in 2004, Estonia has been part of the EU single market and the Estonian VAT system has been part of the EU VAT system, according to which VAT is a universal consumption tax that covers all consumable goods and services. This is an indirect tax, which means that the tax burden is generally borne by the consumer who purchases the goods or services and pays VAT as part of the price of the product.  

VAT functions as an added value tax. The VAT payable is calculated by deducting input VAT (paid on purchases) from output VAT (charged on sales). An economic operator may deduct input VAT immediately if the acquired goods or services are used (directly or indirectly) for producing new taxable goods or services.  

The objective of the input VAT deduction mechanism is to ensure that persons liable to VAT are fully relieved of VAT incurred in the course of their economic activity. The common VAT system guarantees full neutrality in the tax burden on economic activity, regardless of the purpose or outcome of the activity, provided it is subject to VAT.  

In addition, the principle of VAT neutrality in terms of the tax burden on economic operators requires that initial investment costs incurred in the interests of the company should also be considered economic activity, meaning that input VAT is in principle deductible from investment costs related to a company wishing to engage in taxable activities. Therefore, as a rule, company founders wish to register their company as a person liable to VAT immediately in order to be exempt from VAT at an early stage of their operations.   

Mandatory VAT registration thresholds and rules 

A person liable to VAT is any person engaged in economic activity and registered or required to be registered as such. If the person’s annual turnover, with the place of supply in Estonia, exceeds 40,000 euros from the start of the calendar year, they are required to register as a person liable to VAT from the day the threshold is reached. This obligation does not arise if the person’s entire annual turnover consists of exempt supplies and supplies taxed at a zero rate, excluding intra-Community supplies of goods. 

From 1 January 2025, the threshold of 40,000 euros will include: 

1. taxable supply of goods and services, including turnover taxed at a zero rate, excluding the transfer of fixed assets; 

2. turnover from real estate transactions (e.g. sales, lease and rental transactions), excluding the transfer of fixed assets and occasional transactions; 

3. turnover from insurance services (including reinsurance and insurance intermediation) and financial services, excluding occasional services. 

Why some companies register for VAT voluntarily 

It is also possible to register voluntarily as a person liable to VAT, even if the economic operator has not yet generated any taxable turnover or if its turnover has not exceeded the threshold of 40,000 euros. In such cases, the person may only obtain such status with prospective effect (i.e. from the date of submitting the application).  

Voluntary registration enables the deduction of input VAT on startup expenses or investments made to initiate taxable activities. It should be noted that all persons registered as taxpayers are required to declare and, if necessary, pay VAT, i.e. a person registered as a taxpayer must submit VAT returns to the tax authority on a monthly basis, regardless of whether taxable turnover has been generated.  

Voluntary registration may be beneficial in cases where the economic operator primarily supplies goods or services to other economic operators who are also taxable persons, and likewise purchases goods or services predominantly from persons liable to VAT.  

If the economic operator’s customers are mostly private individuals, voluntary registration may not be reasonable, as private customers are not entitled to deduct VAT and, from the consumer’s perspective, VAT merely increases the final price of the goods or services. By not registering as a person liable to VAT, the economic operator can therefore sell products or services at a lower price or with a higher margin equivalent to the VAT amount.  

Registration may also be unnecessary if the business-related expenses are low and the economic operator does not plan to scale significantly. However, registration as a person liable to VAT would be advantageous if starting the business requires significant investments in fixed assets and there is an intention to exceed the threshold of 40,000 euros in the future, as it would then be possible to deduct input VAT on the acquired fixed assets. 

How to decide whether VAT registration is right for your OÜ 

Therefore, before submitting an application to the Estonian Tax and Customs Board, an economic operator should carefully assess whether registration as a person liable to VAT is indeed reasonable, taking into account the specific business activity, future plans, and needs.  

It should also be considered that if the company does not engage in economic activity in Estonia or its entire turnover in Estonia consists solely of exempt supplies (e.g. the company rents out residential premises or provides financial services which it does not wish to voluntarily subject to VAT) and no taxable transactions are planned to arise in Estonia, the Estonian Tax and Customs Board has the right to remove the person from the register of persons liable to VAT.  

Upon registration as a person liable to VAT, the applicant must be able to prove that they are engaged in business activity or are about to commence business activity in Estonia. The tax authority has the right to request additional evidence from the person or gather such evidence on its own initiative if the person’s engagement in or commencement of business activity is not sufficiently substantiated. The tax authority will refuse registration if the person is not engaged in business activity or will not commence such activity. 

What counts as proof of business activity in Estonia 

Evidence is any information that confirms that the applicant has either commenced business activity in Estonia or plans to do so. Examples of acceptable evidence include contracts with customers or suppliers (including preliminary contracts), procurement contracts, orders or issued invoices, as well as bank statements showing payments made for goods or services acquired for business purposes or payments received from customers.  

If no turnover has yet been generated, a business plan is also an appropriate form of evidence. Business activity may also be evidenced by lease agreements for premises or equipment, as well as employment contracts if such have been concluded. Information on business partners (both suppliers and customers) may also help assess whether the person is engaged in business activity in Estonia, including, for example, the locations of work sites or projects being undertaken. 

The economic operator must demonstrate that substantive business activity takes place in Estonia. Indicators of business activity in Estonia include, for example: 

1. the goods or services are sold to Estonian customers; 

2. the suppliers of goods or services are located in Estonia; 

3. the economic operator is physically in Estonia (e.g. office, warehouses, rental premises, employees, etc.); 

4. the business activities are managed from Estonia (e.g. the management board operates or management decisions are made in Estonia); 

5. other taxes are paid or intended to be paid in Estonia (e.g. corporate income tax, taxes on management board member remuneration, etc.). 

Why and how the tax authority may remove companies from the VAT register 

Just as the tax authority has the right to decide on registration, it also has the right to remove from the register a person liable to VAT who is not engaged in business activity in Estonia.  

If the business activity of the person liable to VAT is not sufficiently substantiated, the tax authority has the right to request additional evidence or collect such evidence on its own initiative. The tax authority will notify the person liable to VAT in writing of its intention to remove them from the register and will set a deadline for providing proof of business activity.  

If business activity is not substantiated within the prescribed time limit, the tax authority will remove the person from the register of persons liable to VAT. In its practice, the tax authority interprets this right broadly, but within the limits of the principle of VAT neutrality, and may also cancel the registration as a person liable to VAT if the business activity conducted in Estonia does not generate taxable turnover. 

Misuse of VAT numbers and risk factors for removal 

The practice of the tax authority in removing from the register persons not engaged in business activity in Estonia (including VAT-registered companies owned by e-⁠residents) is driven by the aim of preventing misuse of VAT registration numbers. An example of misuse of a VAT number is a situation where a person registered as a taxpayer deducts input VAT from all of their expenses, while the company’s total turnover consists of tax-exempt or zero-rated taxable turnover (excluding intra-Community turnover of goods).  

Misuse of a VAT number may also occur when an e-⁠resident’s company acquires real estate (particularly residential property), deducts input VAT on the purchase, but subsequently uses the property solely for exempt turnover (e.g. leasing it as a residence) or for private use. Similarly, VAT numbers may be misused when the taxable turnover is extremely low and does not exceed the registration threshold (40,000 euros) over multiple calendar years, while the amount of input VAT deducted from expenses is disproportionately high.  

Estonian companies with VAT numbers may also be exploited for tax fraud or money laundering abroad.1 To prevent VAT fraud or other forms of abuse of rights arising from the Value-Added Tax Act, the Estonian Tax and Customs Board must exercise control over the register of persons liable to VAT to ensure that it does not include persons who have no business activity in Estonia. 

Companies may come under closer scrutiny by the tax authority if a member of the management board has previously committed tax-related offences or has managed companies that have gone bankrupt, as well as individuals with no prior business experience and in respect of whom there is suspicion that they may be used as a front for issuing false invoices. Companies whose sole management board member resides and operates abroad may also attract attention.2 

Voluntary deregistration and tax risks to consider 

If a person is already registered as a person liable to VAT in Estonia but is not actually engaged in business activity in Estonia, it is advisable for the economic operator to submit an application to the Estonian Tax and Customs Board for removal from the register.  

An application for deregistration may be submitted to the tax authority if the turnover from transactions of the VAT-registered person that are considered to occur in Estonia has not exceeded, during the current or previous calendar year, nor is expected to exceed, during the next 12 months, the threshold of 40,000 euros.  

It is important to bear in mind that upon deregistration, the person liable to VAT must pay VAT on unsold goods for which input VAT was deducted at the time of acquisition. The taxable value of the goods is their acquisition cost or, in the absence thereof, their cost price.  

Input VAT deducted on the acquisition of non-alienated fixed assets will be adjusted. This means that before submitting an application for deregistration, one must consider the potential risks and determine the tax liability that may arise in connection with the previously deducted input VAT upon termination of registration.  

Special VAT schemes for cross-border business activity 

Companies established in Estonia by e-⁠residents must also consider the following alternatives in cases where the company’s sales activity essentially takes place in other EU Member States.  

Depending on the nature of the business activity, an e-⁠resident’s company may also make use of the OSS/IOSS special schemes in Estonia, while being registered as a person liable to VAT in Estonia. The OSS scheme applies to services rendered to final consumers in other Member States, as well as to intra-Community distance sales and the sale of goods through online marketplaces.  

A company applying the OSS scheme declares the turnover arising in another Member State and pays VAT to the Estonian tax authority. The VAT rates of the Member States where the final consumers are located apply to distance sales and services rendered, but the relevant VAT can be paid through the Estonian tax authority.  

The IOSS special scheme can be used by taxable persons engaged in distance sales of goods imported from non-Union countries to end consumers located in the European Union. The IOSS special scheme may be used, for example, by an e-⁠resident company registered as a person liable to VAT in Estonia that imports goods from China to the European Union.  

A company using the IOSS special scheme may declare and pay VAT on all goods covered by the scheme in a single Member State (the Member State of registration), instead of paying VAT at the time of import in each Member State where the goods are delivered. When using the IOSS special scheme, the seller collects VAT from the buyer upon payment for the goods and declares it to the tax authority on behalf of the buyer. 

Other VAT options for small enterprises with EU turnover 

The IOSS/OSS special schemes allow the declaration of VAT for cross-border business-to-consumer (B2C) sales made to all Member States on a single return and enable the payment of all such VAT in the seller’s country of establishment, without the need to register as a person liable to VAT in the Member States where the final consumers are located.  

Use of these special schemes is voluntary, and if the seller chooses not to use them, they must register as a person liable to VAT in the Member States where the final consumers are located and carry out the usual customs formalities for imported goods.3  

A person engaged in business who is established in Estonia and who generates turnover in other Member States may, if desired, use the scheme for small enterprises, which simplifies business operations in other Member States. The special scheme allows the economic operator to operate in another Member State without being registered there as a person liable to VAT. The special scheme may be applied if: 

1. the calendar year turnover within the Union, including Estonia, does not exceed in the current year and did not exceed in the previous calendar year 100,000 euros; 

2. the calendar year turnover in the other Member State where the person wishes to apply the exemption does not exceed in the current year and did not exceed in the previous calendar year or in the two preceding calendar years, if so provided in the relevant Member State, the threshold set in that Member State for the exemption available to persons engaged in business there. 

Final thoughts 

In summary, it is important to keep in mind that voluntary registration as a person liable to VAT should always be a carefully considered decision based on the actual needs of the company and aligned with the economic operator’s commercial objectives. Registration as a person liable to VAT should not be an automatic or self-evident step, but a conscious decision justified by the specific business activity and serving the interests of the company. It is always advisable to consult a tax expert before making such a decision. 

Sources

1 See also: Financial Intelligence Unit. Typology report 1TT202212. Use of Estonian VAT-registered companies for committing tax fraud and money laundering abroad. 

2 Lehis, L. Commentary on Estonian Tax Laws 2023. 

3 e-MTA. Brief overview of changes to EU VAT rules.