Estonia’s e-Residency program has revolutionized how global entrepreneurs can establish and manage businesses online. Operating in EU member states will raise the question of mandatory or voluntary VAT registration in Estonia and other countries where your Estonian company operates. In some EU countries, VAT registration is compulsory from day one to comply with national tax regulations. Some of your business partners or clients in the EU may even require you to have a VAT number to match their internal policies when checking their subcontractors. This blog post will guide you through the essentials of VAT registration in Estonia, from understanding the rules to registering and staying registered.
What is Value Added Tax (VAT)?
Value Added Tax (VAT) is a consumption tax added to invoices at each stage of the supply chain where businesses buy and sell goods and services. It is a well-observable part of the company’s tax compliance in Estonia, as all transactions beyond 1000 euros per month between counterparts have been reported to the Estonian tax authority ever since 2014. This enables the Estonian tax authority (EMTA) to compare if the VAT reclaims are legit, as the discrepancies are automatically detected when buyers attempt to reclaim VAT that the seller never declared and paid.
The big idea behind VAT is that VAT-registered businesses can always reclaim the outgoing VAT from their expenses if these are business-related expenses. On the other hand, consumers must pay VAT on everything they consume according to the national VAT rates that vary in the EU. The EU VAT directive sets the standard VAT rate minimum as 15%, but sadly, there is no upper limit. Because of that, some EU countries struggling with their fiscal balance are gradually increasing their VAT rates to collect more tax from individuals who consume goods and services.
Value Added Tax (VAT) in Estonia
In Estonia, registering a company for VAT is either obligatory or voluntary. The VAT system is straightforward and aligned with the EU VAT directive. It has a standard rate of 22% since January 2024, which will increase to 24% on 1 July 2025. EMTA (The Estonian Tax and Customs Board) enables businesses to register, declare, and pay VAT through the user-friendly e-Tax portal.
Mandatory Registration
Businesses and sole proprietors must register for VAT when their taxable turnover exceeds €40 000 in a calendar year. Registration must be completed within three business days of reaching this threshold, and your business becomes VAT-liable from that moment. Taxable supply is only selling to the residents of the EU, so anything you export to countries outside of the EU does not count towards the threshold.
Voluntary Registration
You may apply for VAT registration even if your annual turnover does not exceed €40 000. This is particularly useful for businesses operating in B2B markets with VAT-registered Estonian or EU business clients who don’t mind. A second important consideration is related to your company incurring regular expenses with VAT, such as business services you buy from Estonia or other EU countries.
Is Voluntary VAT Registration Right for You?
Evaluate whether VAT registration aligns with your business needs. Registration offers a financial advantage for those B2B companies that pay VAT on their purchases. Conversely, B2C companies with minimal VAT-related expenses may find limited advantages, and their customers would pay more for services.
Responsibilities for VAT-Registered Companies
VAT-registered businesses must add the applicable domestic VAT rate when selling to domestic consumers or persons not registered for VAT in the EU. Reversed zero-rate VAT can be applied to sales invoices to other EU VAT-registered persons.
All this must be reported with the monthly VAT declarations via the e-Tax portal by the 20th of the following month, even if there were no transactions. Not submitting your declarations can quickly result in late filing penalties and deregistration. As the VAT Act prescribes, businesses must maintain detailed records of all transactions, including all mandatory invoice details with VAT amounts.
Recent Concerns About VAT Registration Revocation
Estonian e-residents have recently voiced concerns over the EMTA updated VAT registration revocation policies, which require you to prove substantial business activity in Estonia to maintain a VAT registration in Estonia. Critics highlight that e-resident companies typically operate internationally, with limited business connections in Estonia, and VAT registration is not expected to be available only for residents who live in Estonia. Most e-resident businesses serve clients and have contractors outside Estonia.
Some claim that other EU countries, such as Spain, also grant VAT numbers to businesses engaging in cross-border EU trade with no clients in Spain itself. By contrast, EMTA policies may limit e-resident companies’ ability to supply goods and services in the EU with Estonian VAT registration when their business activities are not centred in Estonia. While Unicount cannot speak about the Spanish tax authority practices, we do know that VAT laws in the EU are aligned around the VAT directive so that providing physical goods or services in a country results in a place of taxable supply to the country of service provision even if the legal person is registered in another member state.
Therefore, the possibility of not being able to keep VAT registration in Estonia can raise questions about the alignment of the Estonian tax authority’s policies with the realities of e-residents, many of whom view the current approach as a threat to the attractiveness of using an Estonian company for cross-border trade, forgetting that the VAT directive sets out the national policies for detecting the place of supply.
New Proposal for Declaring Small Invoices
To enhance Estonian businesses’ tax compliance, the Estonian Ministry of Finance proposed on 4 December 2024 a mandatory monthly reporting of all invoices for VAT-registered companies starting from 1 January 2027. Under this initiative, businesses must declare details of all transactions that carry VAT, similar to the 1000 euro threshold invoice details disclosure in force since 2014. Ministry of Finance hopes that this will improve transparency and reduce tax evasion.
This will have implications for e-resident companies registered for VAT in Estonia. Smaller Estonian VAT-registered companies may face additional accounting service or local software expenses, as the reporting for medium and large companies is already automated via mass data transfer from the local accounting software to the e-Tax information system when submitting monthly VAT returns. So, if the proposal is enacted, your accounting system must capture and report every VAT invoice with Estonian counterparties on the VAT return (KMD) appendix KMD INF.
This proposal reflects Estonia’s commitment to efficient tax oversight and collection but could increase complexity for small businesses, especially those with international operations. We encourage you to monitor developments closely and prepare for potential adjustments in your accounting practices.
Registering or De-registering for VAT in Estonia with Unicount
Unicount simplifies VAT registration for e-resident founders. Use the Unicount Client Dashboard to order VAT registration services. The process typically takes five working days. If your company no longer meets Estonian VAT registration criteria, consider de-registering. Unicount offers accounting services to calculate and declare taxable turnover, reclaim VAT, and manage de-registration applications efficiently.
Stay Informed with Unicount
At Unicount, we’re committed to keeping e-residents informed about legislative changes. Subscribe to our newsletter or follow our blog for updates on Estonia’s tax landscape.
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