Most of us are familiar with value added tax (VAT) as a fee added to the cost of goods and services when we purchase them. It's a way for the government to generate revenue. Unlike sales tax in the US, VAT is usually included in the total price we pay at the checkout so we don’t really need to think about it. In fact, unless we are in business ourselves, we may not be aware of the responsibility that businesses have in collecting and reporting VAT.
However, once you do own a business, like an Estonian e-Resident private limited company for example, it's crucial to understand VAT obligations, in order to meet Estonian accounting requirements. VAT is all about consumption, and special rules apply to transactions between businesses and different EU members. Whether your customer is a VAT-registered entity or an end consumer also affects VAT rates, which can vary by country.
As a Xolo customer, most of the VAT-related tasks are automated, including the calculation and addition of the correct VAT rate and amount to each invoice. However, as the business owner, you still hold legal responsibility for compliance. Therefore, it's important to understand how VAT works within your company.
Overview of VAT in Estonia
In Estonia, as in the rest of the EU and other countries, VAT is a consumption tax. So everyone pays the same rate on goods, regardless of their personal wealth or income.
It is charged equally on all products, although some items regarded as essentials for life are exempt (like healthcare, education etc.) There are other categories of purchases, which include books, teaching/learning materials, newspapers and magazines, accommodation services, medical equipment, sanitary and toiletry products, that are subject to a discounted rate.
Everything else is subject to VAT at a flat percentage, and when you invoice a business within Estonia, you will collect the VAT payment on top of your fee. Then once a month you will pay it to the government.
If you have paid VAT within Estonia (such as your Xolo subscription fee, if nothing else) that will be netted off against the VAT you have collected, in your monthly VAT accounting.
If you buy or sell goods and services within other EU countries to VAT registered businesses, you will usually be able to trade on a zero rate basis.
Do I have to register for VAT as an Estonian e-resident?
Assuming you use your Estonian e-Residency status to start a business, you will usually end up having to register for a VAT number, and engaging in VAT collection and reporting.
Your Estonian e-resident company will become liable for VAT in any case as soon as you earn more than €40,000 in one tax year, which coincides with the calendar year. (You also need to register if you are selling imported goods to buyers in the EU under the Import One-Stop Shop (IOSS) scheme, but this would not normally apply to Xolo customers, and there are also exceptions if you are selling exclusively outside the EU.)
As soon as you reach the €40,000 threshold you only have 3 days to register yourself as a taxable person with the Estonian Tax and Customs Board, so in practice it makes more sense to get ahead of your anticipated earnings and register in good time voluntarily.
While this means you will need to comply with monthly reporting (even in months when you may have nothing to report) this is included in your Xolo Leap fees anyway, and you will be able to enjoy any refunds you may be eligible for. Whether you benefit overall from VAT registration in terms of retained income will depend on the VAT you pay for goods and services, and whether your clients are mostly individuals or VAT registered businesses themselves.
You should be aware that voluntary registration is at the discretion of the Tax Authorities, who may refuse VAT registration if you have no transactions with customers located and operating in Estonia. A business plan confirming your intentions and projected income above the qualifying threshold will support your registration in most circumstances.
What are the steps to register for VAT payment in Estonia?
Your Xolo representative will help you register for VAT payment as soon as it is appropriate; however, you can of course do it yourself online - like almost all personal and business administration in Estonia!
The procedure to register as an Estonian VAT payer is as follows:
- Go to the Tax and Customs Board website, which you can choose to navigate in English, Estonian or Russian.
- Log in, using your e-Residency ID card, or Smart-ID as preferred
- Select Registers and Inquiries, followed by Registration of the VAT liable person
- Look for the blue ‘+New application’ button in the top right of the screen and select registration as a person liable to VAT
- Select the relevant reason for application, either ‘voluntarily’ or ‘registration obligation has arisen’, according to where you are at regarding the €40k income criteria.
- Hit submit, and wait up to 5 working days. Be sure to submit any supplementary information that is requested, like a business plan, promptly.
That’s it! On successful application, you will be issued an Estonian VAT number, which starts EE and is followed by 9 digits. This is distinct from your personal and business ID numbers.
What are the VAT rates for e-residents in Estonia?
For most business goods and services in Estonia, VAT is applied at a rate of 22%, unless any of your offerings fit the special categories indicated above. Those items are charged at 9%, apart from ad-free press and media, which recently got reduced to 5%.
VAT is applied and added up automatically in your Xolo business portal when you register a customer in the database who has an Estonian address. So even though the arithmetic at prevailing rates is pretty simple, you don’t have to give it any thought anyway. This smart accounting benefit applies to invoices in Xolo Go, as well as Xolo Leap - so all Xolo customers can invoice with their VAT correctly accounted for.
Of course, when you are setting and quoting rates with your customers for goods and services you should always think and speak in net terms, that is before VAT. While it gets added on to the total that they pay, and may even sit in your business bank account for a while before each monthly payment, it is never your money! Your clients will expect the VAT to be added at the point of invoicing.
What about VAT rates for non-Estonian VAT registered customers?
If your customer is registered for VAT in another EU country (or others who use VAT) the rate applied to the invoice will be 0%, because that business is collecting and filing VAT in its own country of permanent establishment. As such it is regarded as offset. Each country has its two letter prefix, such as ES for Spain or DE for Germany. The UK still uses GB for VAT numbers, but the status of businesses there can no longer be validated in VIES.
VIES is a special European Commission tool to validate VAT registration status against its own register. When you enter a VAT number in the appropriate field in the Xolo database, this check is run in real time - you will see a green confirmation tick appear, to confirm validation in the VIES database, and then the zero rate is applied to the invoice. You can also check a VAT number yourself directly if you'd like to.
Incidentally, it can occasionally be challenging to find a valid VAT number in the first place, for some businesses. Indeed, it’s important to establish with your contact exactly which business entity you are in fact contracting with and invoicing, if they are multinational!
If there is no VAT number on a business’ contact page, you can use tools like VAT search in the EU, or the Companies House website in the UK. Also, if the business has a ‘terms and conditions’ page or data protection statement, frequently buried in a tiny link in the website footer section, that will usually state the fully registered address and VAT number of the underlying enterprise.
It is important to note that the zero-rating is a specific intra-community status, and is NOT the same as being VAT exempt or VAT not being charged on something. As such, you should only use it /state it when it is definitely applicable, that is when transacting with a compliant VAT-registered entity. That’s why the Xolo system checks this in real time for you. If you mistakenly somehow manage to raise an invoice without VAT when it should have been charged, then you effectively lose 20% of your fee…
VAT reporting obligations for Estonian e-resident businesses
One reason that a business may try to stay under the VAT registration threshold at first if income is low, is because it immediately creates a new monthly accounting obligation. This is a big step up from the single annual report filing that might be the only requirement for a low-income business.
The VAT accounting requirement does not create any problems for Xolo customers, but for anyone operating on a DIY basis it can be challenging, because any mistakes or delays can involve costly fines.
To file for yourself, you can submit form KMD and any required annexes through the customs board website, detailing all invoices containing taxable goods and services (broken down by the different rates as applicable, of 22%, 9%, 5%, 0% or exempt.) This must be submitted and paid by the 20th of each month, in respect of transactions in the month immediately preceding it.
You can submit by uploading simple spreadsheets; otherwise there are a range of business softwares that are compatible with the Tax and Customs board, so that the VAT return and its annex can be automatically submitted from one machine to another.
VAT reporting for Xolo Leap customers
For Xolo Leap customers, you don’t have to worry about that, because your representative will stay on top of it for you.
They will run the calculations in good time ahead of the 20th day of the month cut-off, and advise of you of the exact amount to be paid with appropriate references. They may even be able to set this up in your integrated business bank account, so you merely have to log in and sign it off.
If you don’t have any customers in Estonia during any given month, you won’t have any VAT to pay. Xolo will still take care of the reporting obligation, and offset any VAT paid in Estonia on account, though you probably won’t even be aware of this - it’s just one of the compliance mechanisms which are automated away for you.
If you are paying VAT in Estonia, to Xolo or anyone else, that will add up to a negative VAT liability in the end - so from time to time, Xolo will support you to request a refund of that payment from the tax authorities.
Xolo Leap: Worth it for the VAT simplification alone!
As you can see, the VAT environment in Estonia and the wider EU does create specific obligations for e-residents. While these are not complicated or designed to catch anyone out, they are quite precise, and highly time sensitive.
Therefore one of the big benefits customers appreciate from all three levels of the Xolo Leap plan, is the VAT reporting and accounting service which goes on behind the scenes. All you have to do is make sure your expenses (and any non Xolo invoices) are uploaded in a timely way, and your lovely support team will do the rest - including giving you clear warning and instructions on what has to be paid when.
This is just one more way that Xolo makes the business admin fade away, so that YOU can concentrate on the important stuff: doing your core activity, so you can raise the next invoice. You don’t even need to think about that 20%, because business with Xolo is as frictionless and straightforward as it gets.
About Maya
Maya Middlemiss is a freelance journalist and author, excited about the future of work, business, money, and technology. She operates her e-resident business through Xolo Leap, so that she can work frictionlessly with brands and publications all over the world, and she is the host of the Future is Freelance podcast. Exploring the social impact of technology on our changing world, and bringing those stories to life in an accessible and inclusive way, is her passion — because all of this is far too exciting to leave it to the geeks. Maya is a 'digital slowmad', originally from London, presently living with her family in Eastern Spain.