Changes in the Estonian Value Added Tax Act
There are provisions in the Estonian Value Added Tax Act since 1 January 2022 which make possible, if certain conditions are met, to reduce the taxpayer’s value added tax (VAT) obligation in the case of hopeless monetary claim.
Until the end of 2021, if the purchaser is insolvent – it has no influence to the amount of VAT payable on the goods or services, if the goods were actually transferred or the services were actually provided, but the purchaser has failured to pay for goods or services partially or in full. Change of the VAT calculation related to invoices which are partially or in full unpaid arises from the judgment of the European Court in case C-246/16. By this judgment, the European Court changed its earlier treatment of Article 90 (2) of the EU VAT Directive 2006/112/EC.
Taking into consideration this judgment, Article 291 is added to the Estonian VAT Act since 01.01.2022. Since this date, the taxable person can reduce his/her VAT obligation in following circumstances:
- the invoice is issued for the transfer of goods or provision of services in accordance with the requirements of Article 37 of the VAT Act;
- the amount of VAT from the sales transaction is calculated and declared in the VAT return concerning the taxable period during which the supply of the goods or services was created;
- the monetary claim is not transferred;
- no less than 12 months and no more than three years has passed from the due date of the payment of the invoice, except in case described in clause 6;
- the monetary claim is written off in accounting because there was impossible to collect the claim although the taxable person made all feasible efforts to collect the claim – or if the estimated reasonable costs of collecting the monetary claim exceed the claimed amount;
- if the monetary claim includes more than 30 000 euros of VAT, the monetary claim is cerfified by the judgment which has entered into force;
- the acquirer of the goods or the recipient of the services is not an associated person for the purposes of the Estonian Income Tax Act;
- the taxable person has, during the month when the monetary claim was written off in accounting, notified the acquirer of the goods or the recipient of the services thereof in writing, denoting the amount of VAT related to the monetary claim which was written off.
If all these conditions are met, the seller can reduce his or her VAT obligation in the amount of unpaid sum in the VAT return submitted concerning the taxable period during which the monetary claim was written off in his or her accounting. If the VAT obligation is reduced like this, but at some other time the claim, however, is paid partially or in full – in such case this claim is included in the taxable supply in the amount of paid sum in the VAT return submitted concerning the taxable period during which the claim was paid partially or in full.
The purchaser who did not pay for the goods or services because of insolvency must take into consideration that if he or she is also a taxable person and has deducted the input VAT according the invoice which he or she did not pay partially or in full – if he or she receives a notice from the seller that the monetary claim was written off in the seller’s accounting, he or she must increase his or her VAT obligation in the amount of VAT related to this claim in the VAT return submitted concerning the taxable period during which he or she received such notice.
If the abovementioned conditions are met, a taxable person can apply Article 291 of the VAT Act for hopeless monetary claims which are written off in accounting since 1 January 2022. Subsection 291 (2) stipulates: "(2) According to subsection (1) of this section a taxable person shall adjust the amount of VAT to be paid by amount of VAT calculated from the goods transferred or the services provided for which is partially or in full unpaid, in the taxable period during which the monetary claim was written off in accounting." If the monetary claim is written off at the time when the new provision of the VAT Act is not valid yet (before 01.01.2022), the seller cannot apply Article 291 yet and cannot reduce his/her tax obligation according to this new provision.
Thorough reforms will be carried out in the European Union (EU) in the area of value added tax (VAT) obligations concerning cross-border services provided to a person who is not registered as a taxable person or taxable person with limited liability (hereinafter end user), distance selling of goods and e-commerce. The correspondent amendments in the EU VAT Directive 2006/112/EC are already introduced and enter into force on 1 July 2021, all EU Member States must change their domestic VAT acts for the same time. Necessary amendments in the Estonian Value Added Tax Act were passed by Parliament in 10 February 2021 and were published in the Estonian State Gazette on 23 February 2021. The purpose of the changes is to reduce VAT fraud and to guarantee the equal competition conditions for EU businesses in comparison with the businesses of so-called third countries (i.e. non-EU countries or non-Community countries).
According to the EU VAT package for e-commerce which entered into force on 01.07.2021:
- special scheme for imposing VAT on telecommunications, broadcasting and electronic services (hereinafter digital services) which is in force today (mini One Stop Shop, MOSS) is extended also to other services where the place of supply is in the other EU Member State, as well as to intra-Community distance selling of goods and in certain cases also to the transfer of goods through the electronic interface (hereinafter e-shop). The extended special scheme is called OSS (One Stop Shop).
new special scheme called IOSS (Import One Stop Shop) is imposed on distance selling of goods imported from third country.
Distance selling of goods (both intra-Community distance selling and distance selling of goods imported from third country) is cross-border transfer of goods to the end user. Intra-Community distance selling is the transfer of such kind of goods, located in EU, which are transported in the course of transfer to the end user from the Member State of location to any other EU Member State. Distance selling of goods imported from third country is the transfer of such kind of goods, located in a third country, which are transported in the course of transfer to the end user from third country to EU Member State.
The implementation of the special schemes (both the OSS special scheme and the IOSS special scheme) is voluntary, not mandatory. If the seller of the goods does not wish to apply the special scheme, such person must register for VAT liability in all Member States where the end users are located (if he/she does not use the OSS special scheme) and must complete regular customs formalities for imported goods (if he/she does not use the IOSS special scheme).
The special schemes make possible to declare VAT for cross-border B2C (business to consumer) sales to all Member States in one single return and pay the whole VAT for these transactions in his/her own Member State without the obligation to register for VAT liability in the Member States where the end users are located.
The VAT return concerning the special scheme shall be submitted to the tax authority of the Member State of registration electronically. The information is possible to enter in the user interface or download from the file, in future the possibility to submit the declaration through X-tee (X-road) will be added. The return shall be submitted and VAT shall be paid according to the return by the end of the calendar month directly following the declared taxable period – even the due date is a day of rest or public holiday. The taxable period of the OSS special scheme is a quarter and the taxable period of the IOSS special scheme is a calendar month. The return shall be submitted even there were no transactions, covered by the special scheme, during the declared period. If a user of the special scheme doesn't create any transaction, covered by the special scheme, during the particular taxable period and has no corrections to make in respect of any previous return, a nil-VAT return shall be submitted. The amount of VAT shall be indicated in the return and shall be paid to the tax authority with one euro-cent accuracy, the amount shall not be rounded up or down to full euros to the nearest whole number. If the purchaser pays for the goods or services, covered by the special scheme, in any other currency but euro – the exchange rate of the euro as determined by the European Central Bank and applicable on the last date of the declared period applies.
The principles of amendments in the VAT returns concerning new special schemes are different from the principles of amendments in the MOSS VAT return which the taxpayers submitted until 30 June 2021. If the business who apply the OSS or IOSS special scheme has to amend the information in any previous OSS or IOSS VAT return, he/she must do it in the next submitted return – he/she does not amend the return which was submitted for the taxable period when the correspondent supply was created. It’s not possible to make amendments in a confirmed return – if the return is already confirmed, the taxpayer can amend the declared information only in the next return. Because of this we recommend to keep the return as “saved” until the due date of submission. If the taxpayer has to amend the declared information, he/she can do it in the running period. For example – if the IOSS VAT return for July 2021 was submitted on 21 August 2021 (although the due date is 31 August) and on 23 August the taxpayer finds out that some necessary information was not declared, he/she can make necessary amendments only in the return submitted for August 2021.
If the taxpayer or the intermediary who represents the taxpayer (if the taxpayer is a third country business who applies the IOSS special scheme) has not submitted the VAT return concerning the special scheme by the due date, the Member State of registration sends to the taxpayer or to the intermediary reminder about the submission of the return. The tax authority shall issue the reminder electronically on the tenth day after the due date of the submission of the return. Possible further reminders will be sent by Member States of consumption. The assessment of fines and other payments related to the belated submission of the return is in jurisdiction of the Member State of consumption according to its legislation and proceeding rules. If the tax authority has issued reminders to the taxpayer for three immediately preceding taxable periods, but the correspondent returns have not been submitted with regard to any relevant taxable period within ten days as of the sending of each reminder – the tax authority treats that non-compliance with the requirements established for the implementation of the special scheme is repeated, deletes the tax payer from the register of users of the special scheme and the taxpayer has no right to submit a new application for implementation of the special scheme within two years.
When an Estonian VAT payer provides services to a UK person engaged in business, it is not important any more whether the recipient of the service is registered in the UK for VAT liability or not – upon the provision of the service, when a so-called basic rule is applicable (the place of supply is the country of the recipient, irrespective of the country where the service was actually provided), to any third country person engaged in business it is always the service with 0% VAT for the Estonian VAT payer.
The difference in comparison with today’s situation – zero-rated service which is provided to a third country person shall be declared only in line 3 of the VAT return (Form KMD), such supply shall not be declared in line 3.1 of Form KMD and also shall not be declared in the report on intra-Community supply (Form VD).
- When an Estonian VAT payer or VAT payer with limited liability receives from a UK person engaged in business any service, taxable in Estonia through reverse charge, after Brexit the taxable value of the service shall be declared in the informative line 7 of Form KMD, not in line 6.
- When an Estonian VAT payer provides services to a UK person not engaged in business, there will be a change in relation to immaterial services, listed in subsection 10 (5) of the Estonian VAT Act – the provision of such services (including electronic communication services and electronically supplied services – hereinafter digital services) to a third country person not engaged in business is the supply with 0% VAT which shall be declared in line 3 of Form KMD. When the recipient of such kind of service is an EU person not engaged in business – any other immaterial service shall be taxed with 20% VAT and shall be declared in line 1 of Form KMD and upon the provision of digital services the special arrangements for imposing VAT are applicable.
In connection with the end of the Brexit transition period, one should have in mind that from the MOSS declaration for the 1st quarter of 2021, this declaration can no longer reflect digital services provided to the UK end-users and the United Kingdom cannot be identified as a country of consumption.
For the 4th quarter of 2020, the MOSS declaration shall be submitted and VAT shall be paid as usual (by 20 January 2021 at the latest), and this declaration can still include any digital service provided to non-taxable persons in the United Kingdom.
If you continue to provide digital services after the end of the transition period to the UK customers, you should be guided by the relevant rules which can be read on the website "VAT rules for supplies of digital services to consumers". Any service for which VAT should be calculated and paid in the country of origin by an Estonian taxable person who provided the service shall not be declared in the VAT return submitted in Estonia.
- When an Estonian VAT payer transfers the goods to a UK person together with the transport of goods from Estonia to the UK (excl. to Northern Ireland), after Brexit it’s always the export of goods which is taxable with 0% VAT and shall be declared in lines 3 and 3.2 of Form KMD.
The transfer of the goods to a UK private person together with the transport of the goods from Estonia to the UK (excl. to Northern Ireland) by or on behalf of the seller is not distance selling any more then but also the export of goods, taxable with 0% VAT.
The transfer of the goods to a UK natural person in Estonia is treated as the export, if all requirements listed in subsection 5 (2) of the Estonian VAT Act are met (so-called tax-free sales).
According to the exception, layed down for Northern Ireland, after the end of year 2020 the transfer of goods from Estonia to a VAT payer of Northern Ireland together with the transport of the goods to Northern Ireland is still treated as intra-Community supply of goods (not as export) and the transfer of goods from Estonia to Northern Ireland to a non-taxable person is still treated as intra-Community distance selling (not as export).
This specificity applies to goods only – any service provided to persons in the United Kingdom (including Northern Ireland) from 1 January 2021 shall be taxed and declared according to the rules for the taxation and declaration of services provided to non-Community persons.
- When an Estonian person purchases the goods in the UK together with the transport of goods from the UK (excl. from Northern Ireland) to Estonia, after Brexit it is the import of goods, not intra-Community acquisition, and the provisions of the VAT Act related to import of goods are applicable. See also "Brexit"
According to the exception, layed down for Northern Ireland, after the end of year 2020 the acquisition of goods by the Estonian VAT payer from Northern Ireland from a VAT payer together with the transport of the goods from Northern Ireland to Estonia is still treated as intra-Community acquisition of goods (not as import) and the transfer of goods from Northern Ireland to Estonia to a non-taxable person is still treated as intra-Community distance selling (not as import).
This specificity applies to goods only – the taxable value of a service received from any person engaging in enterprise in the United Kingdom (including Northern Ireland) and subject to reverse charge in Estonia shall be declared on the form KMD from 1 January 2021 as the taxable value of the service received from a non-Community trader, i.e. using the information line 7, not 6.
- If an Estonian VAT payer purchases the goods or services from a UK VAT payer after Brexit and VAT with the UK VAT rate is added to the price according to the UK VAT legislation, it is not possible any more to lay claim for refund of VAT, paid in the UK, through the EC cross-border VAT refund system, excluding upon the purchase of the goods with the UK VAT rate from a VAT payer of Northern Ireland (but not upon the receipt of a service with the UK VAT rate from a VAT payer of Northern Ireland).
VAT paid in third countries can be refunded to the Estonian entrepreneurs according to the reciprocal principle and it depends on whether the authorities of the correspondent third country have decided to start to refund the VAT to the Estonian entrepreneurs or not.
By now, we have received official confirmation from the UK tax authority that the UK will continue to refund VAT to taxable persons in the Member States of the European Union on the basis of reciprocity. When applying for a refund of VAT paid in the United Kingdom, an Estonian taxable person has to rely on the instructions of the United Kingdom tax authority. The deadline for submitting a VAT refund application relating to the UK for 2020 is 31 March 2021. By virtue of the decision of the UK tax authority, Estonia also will continue to refund VAT to the UK taxable persons. Guidelines of refund to foreign businesses of VAT, paid in Estonia »
The exception is Northern Ireland, where the provisions of the EU Directive are applied for a further four years after the end of the transition period to the refund of VAT paid on the acquisition of goods. The applications involving the VAT identification number of Northern Ireland (with the letter combination "XI") are subject to the same deadlines as for VAT refunds to other Member States: the deadline for applications for 2020 is 30 September 2021, and applications for 2021 can be submitted starting from 1 April 2021.
- If a UK person engaged in business will be registered in Estonia for VAT liability after Brexit, according to subsection 20 (6) of the Estonian VAT Act, a person of a third country engaged in business with no permanent establishment in Estonia shall appoint, upon registration as a VAT payer, a tax representative specified in the Estonian Taxation Act, who has been approved by the tax authority.
A UK person engaged in business who already has a VAT number in Estonia as of 1 January 2021, who wishes to continue in Estonia his/her business activities and retain his/her Estonian VAT number and who has not a permanent establishment in Estonia – such UK person shall appoint a tax representative approved by the tax authority by 1 February 2021 and also by that date shall notify the Estonian Tax and Customs Board about his/her choice and shall send the contract with the chosen tax representative by e-mail to address firstname.lastname@example.org.
- If a UK person engaged in business provides the digital services to the EU persons not engaged in business (incl. Estonian persons not engaged in business) after Brexit and wishes to follow the special arrangements for imposing VAT, the person must follow the provisions concerning the registration for VAT liability of third country entrepreneurs (it means, if the person wishes to follow the special arrangements, he or she registers for VAT liability in any freely chosen EU Member State).
Last updated: 01.12.2021