What are the accounting requirements for my Estonian company?

Xolo
Written by Xolo
on March 30, 2022

Estonian companies have accounting requirements, whether the directors are local or they’re Estonian e-residents. To manage your company effectively, you need to understand your obligations for financial reporting in Estonia, and choose select professional services which are fully compliant and experienced. This will help you manage all aspects of accounting for your Estonian company.

The good news is that if you maintain good bookkeeping and accounting practices, with the right professional support, then you’ll find the accounting requirements for your Estonian company are easy to follow — and you’ll have no problem remaining compliant and in good standing with all relevant professional bodies. 

It’s all about ensuring things are set up correctly from the start, and the right information collected accurately on an ongoing basis. Then all the data will be complete and accessible at the time when reporting is required. 

And you do not have to figure this out for yourself, or even deal with it in Estonian -— everything you need to do can be carried out by your business service provider. Your responsibility as a company director is to understand the legal stuff, and your own requirements to delegate this authority safely and smartly.

 

Accounting standards for Estonian companies

While the required standards are logical and straightforward in the digital-first Estonian system, they are compulsory, under the Estonian Accounting Act. The accounting principles in the new standards of Estonian generally accepted accounting practices (GAAP) are aligned with the principles of International Financial Reporting Standards (IFRS), and may even be simpler for very small businesses. 

So, accounting practices and standards in Estonia may be very similar to those required in your home nation, but where they differ you do need to follow the Estonian practice. For this reason, many non-Estonian e-residents prefer to work with a local service provider who will set up the company accounts and day to day bookkeeping to make the accounting cycle straightforward, and easy to extract required information in a timely way — as well as giving you good intuitive insight about what’s going in your e-resident business day-to-day.

Service providers like Xolo will be completely aware of every aspect of the financial reporting requirements for your Estonian e-business, and they’ll take the lead in each element of the required practices.

But just so you know what they’re doing, here are the accounting obligations you need to be aware of for your Estonian company:

Estonian Company accounting requirements you need to know:

 

Annual reporting for Estonian companies

Every Estonian business is required by law to submit an annual report of their financial activities, according to Estonian financial reporting standards, within 6-months of the end of the financial year. The financial year follows the calendar year in Estonia, which is different from the UK, US and various other nations, but actually makes a lot of sense and is very easy to follow and remember.

The exact requirements for the Estonian business annual report depend on the size and turnover of the company, and for micro/small enterprises the requirements are streamlined and quite simple. Only a balance sheet (assets, liabilities and owners’ equity, timestamped at year-end), and annual accounts income statement (income, expenses and profit or loss on goods and services, including all relevant currencies) are needed.

The requirements for larger businesses include a management reporting aspect, which covers areas of activity (products and/or services), and significant investments (historic and upcoming.) It also refers to significant events or externalities which are not covered within the annual accounting period, but may impact on the economic performance in the future (such as an intention to make a major investment, or do a new kind of activity.)

This report has an expected form of words to indicate that due diligence has been carried out and responsible attitudes to risk and other factors are being observed, alongside the standard accounting requirements for e-resident companies and general good bookkeeping practice. And this report may be submitted even if not (yet) required by your turnover, as part of your anticipated growth intention and to establish a consistent reporting practice for the future.

Don’t worry though, because your service provider will prepare everything well ahead of the due date, and ask you for any missing information in good time.

Once the annual report is prepared by your accountant or service provider, it must be digitally signed by the owner/CEO (using the e-Residency card or authentication service), and submitted to the e-Commercial Registry. So, even if you are outsourcing the creation of the report, you are signing it off as complete and correct, and assuming responsibility for its accuracy. As such, you must understand the legal implications of it, and the basics of how to keep accounts as an e-resident — as well as choosing your professional advisors with care.

If your e-resident Estonian business pays no salaries in Estonia and is not subject to VAT registration (income below €40,000pa), then this may be your main accounting requirement for your company. 

 

Monthly accounting for your e-resident Estonian business

However, many e-resident businesses do business across borders both within Europe and further afield, and will be registered with a VAT number (this is also needed for any Estonian company with EU turnover of more than €40,000 in any case). Once your business reaches this point, your accounting obligations include monthly reporting, in addition to the annual report.

This need is mainly driven by the requirement to collect the value-added tax (VAT) every month. VAT is like sales tax in the US and other jurisdictions, and declared to the Estonian Tax Department on the 20th day of the month after it is billed. There are penalties for late payments, and the declaration has to go in every month, even if you don’t have any VAT transactions or payments due in that period.

 

Bookkeeping for your e-resident Estonian business

In addition to VAT collected and paid, your monthly financial reporting requirements need to include a number of standard items, which are part of any best practice in business bookkeeping:

  • Purchase receipts and invoices: these include subcontracting services, marketing costs, business trip expenses, etc.
  • Bank transactions, including use of company credit and debit cards
  • Sales receipts/invoices issued by your Estonian business, which must include specific information:
    • Company details (including address/contact information, registration, VAT)
    • Payment details (including bank IBAN or any other options/payment gateways in operation)
    • A unique sequential invoice number
    • Date of issue and payment due
    • An identified payee, that is the business or person you’re invoicing
    • A description of the product or service your business has provided
    • Itemized and total cost, with and without VAT or any other taxes/retentions, where applicable

 

What about "VAT with Limited Liability" and my Estonian company?

Auditing for your Estonian business

While your professional business services company in Estonia will prepare all the monthly and annual reporting for your e-resident business, you may also be subjected to external auditing requirements, if you operate with significant income, assets, or personnel.

This is unlikely to apply to you in the early stages of your e-resident business, unless it is a public limited company or foundation. But you should be aware that once you reach turnover of €4m, assets of €2m, or hire 50 employees, then the auditing requirement may be triggered (the thresholds vary according to the combination of conditions met, and your professional services company will be sure to advise you in good time of any change in your auditing requirements status.) 

There may also be an audit review obligation triggered by lower limits, but again, your accountant will advise and help you prepare.

As such, it’s good to manage the accounting for your Estonian company with the needs of auditors in mind, even if you don’t anticipate reaching any of these milestones in the present financial year. Once again, it all points back to setting yourself up for success from the very start - then it’s no problem to scale up as you grow.

 

How do I manage accounting for my Estonian company online?

Professional service providers like Xolo operate accounting services using secure, bespoke cloud-native software applications, which offer many advantages over traditional spreadsheets and ledgers:

These include:

  • Compliant, professional invoices, which are pre-completed with all the required business information in the right places, along with automatic calculation of itemized billing. You can customize these with your brand logo to create a consistent and professional appearance, and send them straight from within the portal in seconds.
  • Verification of VAT status - including the checking of your recipient’s registration against the live VIES database, and automatic calculation of the applicable rate to add to the total on each invoice you create and send.
  • Simplicity and streamlining of monthly and annual reporting (assuming you comply with all document and information requests in a timely manner), often without your even needing to be aware of it: The data needed is extracted automatically by your service provider and filed at the correct time with the relevant authorities.
  • Preparation of management accounts, preparation for audit, tax inspection responses, and any other such documentation as may be needed, promptly and accurately by your service provider.
  • Easy paperless digitization of receipts for expenses — which can be uploaded electronically, even from a photo on your phone, or forwarded to a dedicated mailbox, and then accurately accounted for within the business portal.
  • Management of things like business travel and related subsistence, and out-of-pocket payments, simply by forwarding in receipts and invoices - which can then offset against a directors’ loan ledger for later reconciliation.
  • Compatibility with a range of online payment gateways, such as PayPal, Amazon KDP or Stripe - so you can sell your goods and services digitally, without having to handle merchant credit card accounts, international payments, and all those complications.
  • Location-independent operation for digital nomads and international entrepreneurs, who may bank and operate their business in multiple currencies and countries. Day-to-day bookkeeping and cashflow management can take place in a multi-currency environment easily, while legal reporting can account for all transactions in the necessary framework for Estonian company accounting standards (euros, reconciled on date of sale/purchase).
  • Self-service operation from anywhere in the world, 24/7 — via secure access using your Estonian digital identity, wherever you are. Integrated authentication services like Smart ID make it even simpler to take care of business — from anywhere, at any time.

 

However, the greatest advantage of using an online service portal like Xolo’s self-service portal, is the management of your total business finances in a single database.

Not only does this provide the streamlined administration experience that makes it easy to operate your business without pain or friction, it means a single source of truth for all your business accounting requirements. 

This means no errors or inaccuracies happen when copying and pasting data from one spreadsheet to another or having multiple copies of information in different versions — the kind of thing which has always caused mistakes. 

Accounting mistakes would undermine the accuracy of your financial reporting (from reconciliation errors to auditing inaccuracies). Instead, every aspect of the financial reporting for your Estonian company is a report from the same set of linked datasets, accurate and totally up-to-date, as it extracts real-time data directly from the business ledger.

All you need to do is maintain up-to-date submission of expenses and receipts, and respond to queries from your accountant (for example, if there is a payment in to the account without an obvious invoice or source.)

Provided you offer this information promptly and accurately, you don’t need to understand anything more about the accounting requirements for your e-resident Estonian company, and you don’t need to operate spreadsheets or crunch numbers yourself.  

So put that calculator away, and close the spreadsheet tab. All your admin is streamlined and automated, so that you can get on with what's most important: doing the work, and earning income for your business.