If you run a business supplying largely automated electronic services, here are some tips from Thompson&Stein on simpler VAT reporting
This is a guest post about the MOSS scheme by Thompson&Stein, an international law firm serving e-residents and a member of the e-Residency Marketplace. Learn more about working in partnership with the e-Residency programme here.
Value Added Tax (VAT) is a consumption tax that is applied to nearly all goods and services that are bought and sold for use or consumption in the EU. The laws regarding VAT for Estonia are set out in the Value-Added Tax Act.
For a general introduction to VAT, visit the e-Residency Knowledge Base and also refer to the Estonian Tax and Customs Board website.
This article discusses VAT treatment of selling electronic services, specifically the scheme called ‘MOSS’ (Mini One Stop Shop), concerning the taxation of electronic communications services and electronically supplied services, which came into force in Estonia in January 2019.
MOSS was introduced to simplify the VAT obligations of small businesses by allowing those which provide digital services on a small scale to follow the VAT rules of their own country of residence upon the taxation.
Since the publication of this article, further changes to VAT have come in force in the European Union, including the One Stop Shop (OSS) and Import One Stop Shop (IOSS) schemes. Learn more in this guest post.
What are electronically supplied services?
To answer this question, you should determine whether the services you provide meet the conditions set out in the Estonian Value-Added Tax Act and EU Regulations. Service delivery must be automated and require minimal human intervention. A detailed list of digital services is available here.
- delivery of services related to websites (e.g. website creators, ready templates, CMS systems)
- hosting services
- downloading and updating computer programs
- subscriptions to electronic magazines, e-books, access to paid content available on the website, sale of advertising space on online pages
- music, films and games, including gambling, transmitted electronically
- political, cultural, sports, scientific and entertainment broadcasts transmitted electronically
- e-learning and other services similar to the above-mentioned (e.g. internet courses, webinars)
If your service does not meet the above criteria, you should apply the general rules of VAT taxation.
Sale of electronic services to entrepreneurs
If the purchase is made by an entity (natural or legal person) who is a registered VAT payer in another EU member state, the reverse charge rules apply. The place of taxation of the service is the buyer’s country of residence. Therefore, do not include the VAT rate in the invoice, but do add the information about the method of tax settlement. Such transactions should also be shown in the VAT declaration and the EU sales declaration, known in Estonia as the ‘VD’ form.
Sale of electronic services to individuals on a small scale
Usually, most customers of electronic services are private individuals who do not have the status of a VAT payer and buy services for private purposes.
If your annual sales to this type of customers do not exceed €10,000, you can apply the general rules. That is, if the recipient has indicated their address of residence is in the EU, regardless of the Member State, 20% Estonian VAT should be added (or a rate of 9% if applicable for the type of service you offer). It is worth mentioning that since 1 May 2020 Estonia reduced the VAT rate on e-books from 20% on 9%. Such transactions should be included in the VAT return as a domestic supply of services.
Sales of electronic services to individuals above €10,000 per year
On 1 January 2019, a special settlement scheme called MOSS (Mini One Stop Shop) came into force in Estonia, which implemented EU VAT Directive (2006/112/EC) by amending Article 10 of Estonia’s Value-Added Tax Act.
MOSS enables tax settlement in one place on the sale of digital, telecommunications, television and radio broadcasting services for non-VAT payers residing in the European Union. Thanks to this, the entrepreneur does not have to register for VAT in every member country where he provides services. The VAT declaration and tax payment are handled by the Estonian Tax and Custom Office and then forwarded to other member countries.
How does the MOSS scheme work in practice?
The first step is to apply to use the MOSS scheme in the e-MTA portal, which you can access on the e-MTA website here.
If you receive a positive decision, you can then make the appropriate modification to your sales system. Each order should include the relevant VAT rate for the country of residence of the customer. For example: for a purchase of software by a natural person residing in Austria, you would add a 20% VAT rate. If the customer is from Hungary, you would add a 27% VAT rate. For every purchase, you must confirm the VAT rate your service is subject to for the relevant country, especially if you want to apply a lower tax rate.
For more information, visit the Estonian Tax and Customs Board website:
Settlement of MOSS scheme transactions with the Tax Office
The MOSS declaration should be submitted quarterly, by the 20th day of the following month. Learn about other tax deadlines in this blog post about e-resident entrepreneurs’ legal obligations.
For the first quarter the declaration must be submitted by April 20th, for Q2 by July 20th, for Q3 by October 20th, and for the last quarter the declaration must be submitted by January 20th of the following year. The deadlines are the same to transfer the amount indicated in the declaration. Timely payment of tax indicated in the MOSS declaration is particularly important.
After receiving the declaration, the Estonian tax office will settle accounts with other member states. In the event of a delay in payment on your part, it may be necessary to pay the tax directly to the respective Member States’ tax authorities, which will take more time and will be more expensive.
This post was written by Krzysztof Sosnowski, Partner at Thompson&Stein, an international law firm serving e-residents and a member of the e-Residency Marketplace.
Learn more about working in partnership with the e-Residency programme here.