Earlier this year the Estonian parliament adopted changes to the country’s value-added tax (VAT) rates for the coming years.
These rate changes will impact most of our e-resident clients with a limited company in Estonia. Both businesses and consumers are better off being informed well before these changes are in effect. Here’s an overview of the changes.
Change in VAT Rate from 1 January 2024
Starting from January 1, 2024, Estonia will see an increase in the standard VAT rate from 20% to 22%. This change will apply to most goods and services. However, there are specific provisions for transactions occurring around the New Year’s transition.
Transitional Provision for Long-term Contracts
For contracts (like leasing agreements and real estate transactions) signed before May 1, 2023, a 20% VAT rate can still be applied until December 31, 2025. This is conditional on the contract stating that the price includes VAT at 20% and does not anticipate a change due to VAT rate adjustments.
It’s advisable for businesses with such contracts to consult with your accountant to understand the implications of these changes on their operations and future transactions.
Changes from 1 January 2025
Further changes will take effect from 1 January 2025. The VAT rate for accommodation services, including those with breakfast, will increase from 9% to 13%. VAT on press publications will rise from 5% to 9%.
What it Means for Estonian Company Owners
These changes in VAT rates will have at least three implications:
1. Pricing Adjustments: You may need to adjust your prices to accommodate the new VAT rates.
2. Accounting and Invoicing: Accounting systems must be updated to reflect these changes. Special attention should be given to long-term contracts and transactions around the transition periods.
3. Budgeting: You may need to consider changing your budgets and financial plans.
A good sample is our case. While the Standard VAT rate of 22% means that we need to add more VAT to our services in 2024 we have also made a decision to support Clients that are not registered for VAT. This means that we reduce our annual virtual office and contact person service fees to keep the annual price at 199 euros including VAT. Therefore, the new net price for all annual subscriptions from 1 January 2024 is reduced from €165.83 to €163.11 to fight the inflation together.
Conclusion
The upcoming changes in Estonia’s VAT rates are significant and require attention from trading companies. Staying informed and seeking professional advice helps to adopt VAT rate changes effectively. As always, it’s good to communicate with your accountant to avoid any financial losses due to invoices issued with the wrong VAT rate after 1 January 2024.
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