Value added tax

From 1 July 2025, the standard rate of VAT in Estonia is 24% instead of 22%.

In connection with the amendment, the length of the transition period will be shortened for persons who had entered into a contract with the 20% VAT rate before 1 May 2023, but the contract did not provide for a change in price due to a change in the VAT rate. For such contracts, the 20% VAT rate can be used until 30 June 2025. In the explanatory memorandum, the amendment is justified as follows: “As regards the security tax, in the case of a long-term contract meeting these conditions, the period of application of the 20% VAT rate will be shortened to 30 June 2025 in order to ensure the uniform implementation of the tax applied to all transactions subject to the standard rate for the purpose of contributing to security.”

From 1 January 2025, accommodation services and accommodation services with breakfast are taxed at 13% VAT rate instead of the current 9%, and the VAT rate for press publications will rise from 5% to 9%. 

Here too, there are transitional provisions for users of cash accounting of VAT.

Until 31 December 2026, the users of cash accounting of VAT may:

• pay VAT at the rate of 9% on the supply of accommodation services or accommodation services with breakfast generated after 31 December 2024 if an invoice was issued to the recipient and the service was supplied before 1 January 2025;
• pay VAT at the rate of 5% on the supply of press publications generate after 31 December 2024 if an invoice was issued to the purchaser and the goods (publication on a physical medium) were dispatched or the service (an electronic press publication) was provided before 1 January 2025.

From 1 January 2024, the standard rate of VAT in Estonia is 22% instead of the current 20%.

In connection with this amendment, the VAT Act contains two transitional provisions.

• Until 31 December 2025, provided that the goods or services supplied are subject to a standard VAT rate, the user of cash accounting of VAT may pay VAT at the rate of 20% on the supply of the goods or services generated after 31 December 2023 if an invoice was issued to the purchaser and the goods were dispatched or made available or the service was supplied before 1 January 2024.
• The second transitional provision concerns transactions relating to long-term contracts, in particular transactions relating to immovables. Until 31 December 2025, a taxable person will be entitled, on the basis of a written contract concluded before 1 May 2023, to apply the 20% VAT rate applicable on the supply of goods or services until 31 December 2023, provided that the relevant contract provides that the price of the goods or services includes VAT at a rate of 20% or VAT at the rate of 20% is added to the price and the contract does not provide for a change in the price resulting from a possible change in the rate of VAT.

On 18 May, the Riigikogu passed an Act amending the Value Added Tax Act, which will establish the rate of VAT on press publications, both on a physical and electronic medium, at 5% instead of 9% as of 1 August 2022.

The 20% VAT rate will continue to apply to press publications containing mainly advertising or private advertisements or mainly erotic or pornographic content or video or music content.

Exclusion of collector coins from VAT exemption

Under the EU VAT Directive, only coins and banknotes normally used as means of payment are exempt from VAT.

The exemption does not apply to coins and notes which, although they are legal means of payment in the issuing country, are not intended to be used as a means of payment and are not normally used as means of payment (so-called collector coins and investment coins which, for tax purposes, are not treated as means of payment, the transactions of which are not taxed, but they are taxed as goods). Investment gold within the meaning of subsection 10 of § 2 of the VAT Act will remain exempt from VAT even after 1 July 2022.

The European Commission drew Estonia’s attention to the fact that the Estonian VAT Act is not in conformity with the VAT Directive with regard to the exemption of collector coins and informed Estonia of the possibility of initiating infringement proceedings.

Therefore, from 1 July 2022, import, intra-Community acquisition and domestic supply of collector coins will be excluded from the VAT exemption and transactions in collector coins from the exemption for payment services.

Amendments related to cash-based VAT accounting and deduction of input VAT upon purchase from user of cash-based VAT accounting

In its judgment in Case C-169/12, the Court of Justice held that a Member State which, in accordance with Article 66(b) of the VAT Directive, allows to establish the time when domestic supply is effected on a cash basis based on the receipt of the payment for the goods or services, may not, in certain exceptional cases (for example, where the payment has not been received by a given date or is paid in instalments in accordance with a contract), set any other date for the VAT to become chargeable.

Subsection 5 of § 44 and clause 5 of subsection 11 of § 44 of the Estonian VAT Act are in conflict with that judgement and will therefore be declared invalid with effect from 1 July 2022.

Under the VAT Directive, the right to deduct input VAT arises at the time when the tax becomes chargeable. Therefore, a new subsection 10 of § 31 of the VAT Act is added, according to which a taxable person has the right to deduct input VAT on the purchase of goods or services from a taxable person applying the special arrangement for cash accounting for VAT in accordance with the payment for the goods or services, in the extent of the amount of input VAT calculated on the amount paid.

Clause 10 is added to subsection 8 of § 37 of the VAT Act in such a way that a person applying the special arrangements for cash accounting is required to indicate “Cash accounting” on the sales invoice. The obligation to mention it on the invoice arises from Article 226 (7a) of the VAT Directive, which provides that such an indication must be added to an invoice where VAT becomes chargeable at the time when the payment is received and the right of deduction arises at the time the deductible tax becomes chargeable.

Clarification of the composition of the taxable value of imported goods

According to the current regulation of the Estonian VAT Act, the costs related to the transport of goods imported in Estonia which have been incurred in connection with the transport of goods from Estonia to another destination in the European Union, if that place is known at the time of import, are not included in the taxable value of the imported goods.

This is not in line with the VAT Directive and therefore the Estonian law is amended, as a result of which these costs must be added to the taxable value of the imported goods.

Specification of the list of goods exempt from VAT upon import in § 17 of the VAT Act

The wording of clause 7 of subsection 1 of § 17 is specified by references to the maximum limits and conditions for exemption from excise duty on alcohol and tobacco products provided for in the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act (ATKEAS). In this case, the VAT exemption is also applied on the grounds set out in ATKEAS. Clause 12 of subsection 1 is also added and provides tax exemption for fuel delivered by a traveller from a third country and in the course of international transport to Estonia to the extent and on the conditions provided for in ATKEAS.

The amendment to clause 10 of subsection 1 of § 17 specifies VAT exemptions for consignments of a non-commercial nature sent from one natural person to another natural person from a third country to a Member State.

As a result of the amendments to subsection 1 of § 17, the references in subsection 2 of § 17 to the articles of Council Regulation No 1186/2009 in which the import of the goods referred to is not exempt from VAT are clarified (subsection 2 excludes the exemptions listed in subsection 1).

In subsection 2 of section 17, the word “customs preferences” is deleted as such a term is no longer used in customs legislation.

Changes to the list of transport services subject to a 0% VAT rate

The amendments provide that the following services are taxable at a rate of 0% only if the services are supplied directly to the consignor or consignee:

1. a transport service for the conveyance of goods out of the customs territory of the EU or to a third country which is part of the customs territory of the EU;
2. a transport service for the import of goods;
3. transport service for the conveyance of non-Union goods into the customs territory of the Union where the goods are placed under a customs warehousing procedure, a free zone, an inward processing procedure, a transit procedure or a temporary admission procedure with total relief from import duties or under temporary storage;
4. organisation of transport services referred to in the preceding points and ancillary services relating to such conveyance of goods.

The reason for the amendment is the position of the Court of Justice in Case C-288/16.

Extension of tax exemptions for goods sold to the armed forces

According to the amendment, as of 1 July 2022, the VAT exemption on the import of goods and a 0% VAT rate on the transfer of goods can also be applied to goods necessary for the performance of the duties of the armed forces of other Member States or the civilian staff accompanying them, provided that those forces participate in defence activities implementing Union measures under the common security and defence policy.

Prior to 1 July 2022, the tax exemption on imports and the 0% VAT rate on transfers can be applied only to goods necessary for the performance of the duties of the armed forces of NATO member countries or the civilian staff accompanying them within the framework of NATO’s common defence effort.

Specification of the procedure for the payment of VAT on excise goods and goods placed in a tax warehouse

If a person who is not registered as a taxable person acquires excise goods from another Member State or removes goods from a tax warehouse or from an excise warehouse under an excise duty suspension arrangement without a transfer transaction, the person does not have the option to declare it in the e-services environment of the tax authority and it is unclear to whom and how to submit the data.

The purpose of the amendment is to specify the procedure for declaring and paying VAT in respect of such operations. The amendment of the VAT Act gives the Minister of Finance the power to establish, in such a case, the composition of the data to be declared on goods and the procedure for payment of VAT.

Although it has not yet occurred in practice that a person who is not a taxable person discharges tax warehousing or that excise goods under an excise duty suspension arrangement are removed from the excise warehouse without the transfer of the goods, it is important to lay down the rules of procedure in order to comply with the tax liability and prevent fraud.

Seller's right to reduce tax liability in the case of irrecoverable debt

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, the insolvency of the purchaser has no influence on 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 not paid 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 the following circumstances:

1. 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;
2. 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;
3. the monetary claim is not transferred;
4. 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;
5. 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;
6. if the monetary claim includes more than 30 000 euros of VAT, the monetary claim is certified by the judgment which has entered into force;
7. 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;
8. 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 (deleted from balance sheet). 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 to 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 (reduce the deductible input VAT) by the amount of VAT related to this claim in the taxable period during which he or she received such noticef 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 (reduce the deductible input VAT) by the amount of VAT related to this claim in the taxable period during which he or she received such notice. In the case of write-off of irrecoverable claim in the accounts, no credit invoice is issued to the debtor.

This provision can be applied in case of irrecoverable debts written off as from  1 January 2022. If the claim was written off at a time when the new provision of the VAT Act was not yet in force (before 01.01.2022), the seller cannot apply section 29¹ and reduce the tax liability on the basis of this new provision.

If, after 1 January 2022, the taxable person reduces his VAT liability under section 29¹ of the VAT Act, the reduction in the taxable amount should be reflected in line 1 of the VAT return for the corresponding taxable period, which in turn reduces the amount of VAT in line 4. A purchaser subject to VAT should record the reduction of input VAT in line 5 of the VAT return.

If the VAT liability is reduced under section 29¹ of the VAT Act and the invoices relating to the respective transaction partner must be recorded in the Annex KMD INF to the VAT return, the seller should declare in Part A of KMD INF and the purchaser subject to VAT should declare in Part B of KMD INF either for the first time or again (if the corresponding invoice was declared in KMD INF in the taxable period when the supply was generated) also the fully or partially unpaid invoice relating to which the irrecoverable claim had been written off in the accounts. In both cases, the usual details of the invoice (invoice date, number, details of transaction partner) and the figures for the unpaid part of the invoice with a minus sign should be declared.

A person who has already been deleted from the VAT register will be able to submit a corresponding VAT return with parts A and B of form INF from May retroactively for periods starting from January 2022.

Extension of tax exemption to the payment of work ability allowance by post

The Work Ability Allowance Act has established a new type of allowance — work ability allowance. Percentage of loss of capacity for work and work incapacity pensions are no longer granted under the State Pension Insurance Act. Therefore, the VAT Act is supplemented in such a way that the payment of state pensions, monetary compensations, allowances and benefits by postal service in accordance with the procedures laid down in both the State Pension Insurance Act and the Work Ability Allowance Act is exempt from VAT.

Amendments to VAT rules on reusable packaging

Until the end of 2021:

1. the turnover of reusable packaging to which a deposit has been assigned on the basis of the Packaging Act and which has not been included in the taxable amount of the goods and not been returned to the producer that is a taxable person during the calendar year shall be deemed to have arisen on 31 December of a calendar year; 
2. the value of the reusable packaging shall not be included in the taxable amount of the turnover of the goods if the taxable producer does not transfer the reusable packaging.

The amendment omits the word “producer” from the wording of the provision. The reuse of packaging and the use of reusable packaging have expanded and are no longer limited to beverage producers. In addition to beverage producers, also operators who are not engaged in production, such as retail traders who use reusable packaging with deposit under the Packaging Act when selling goods, can use reusable packaging with deposit set out in the Packaging Act.

Amendment of the special arrangements for second-hand goods, works of art, collectors' items and antiques

Pursuant to subsection 41 (3) of the Value Added Tax Act, in the case of the resale of second-hand goods, original works of art, collectors’ items or antiques, the taxable value of supply shall be the difference between the sales price and purchase price of the goods, which means that under the rules in force, when using the special arrangement, the taxable amount must be determined on a transaction-by-transaction basis according to the difference between the selling price and the purchase price of each individual good.

The VAT Directive 2006/112/EC of the European Union authorises a Member State, after consulting the VAT Committee of the European Union, to determine the taxable amount on the basis of a taxable period when implementing the special arrangements for taxable dealers for certain transactions or, for certain categories of taxable persons.

The Ministry of Finance consulted the VAT Committee in the second half of 2021. As a result of the consultation, section 41(3) is amended to include the possibility for the person applying the special scheme provided for in that section to calculate, with the consent of the tax authority, the taxable amount to be declared for the resale of the second-hand goods during the whole taxable period, on the basis of the difference between the selling price and the purchase price of the second-hand goods which are subject to the special arrangement. Therefore, with the consent of the tax authority, as from 1 January 2022, the taxable person applying the special arrangement is not required to determine the taxable amount separately for each item. Instead, the taxable amount may be determined on the basis of all the sales and purchase transactions during the entire taxable period. Such a calculation of the taxable amount is justified in cases where normal accounting is too complex.

Specification of the place of importation of the goods

The amendment to section 6 (3) of the Value Added Tax Act specifies that the import of goods takes place in Estonia if a customs debt has been incurred in other cases than the placing of non-Union goods under the customs procedure of release for free circulation or the temporary importation customs procedure with partial relief from import customs duties and the goods have been delivered to Estonia. If a customs debt has been incurred differently from the cases provided for in section 6(1) of the VAT Act, and the goods have been delivered to another Member State or to a non-Community country, the import of the goods does not take place in Estonia and no VAT liability arises in Estonia if the customs debt is incurred.

New VAT exemptions related to the COVID-19 pandemic

As from 1 January 2022, no VAT shall be charged on:

1. the importation of goods to the European Commission or to an agency or body established under Union law for the purpose of carrying out the tasks conferred on it by Union law in response to the COVID-19 pandemic, unless those goods are imported for resale against payment;
2. goods transferred to the European Commission or to an agency or body established under Union law for the purpose of carrying out the tasks conferred on it by Union law in response to the COVID-19 pandemic, unless those goods are acquired for resale against payment (the VAT rate applicable to such a transfer is 0%);
3. services provided to the European Commission or to an agency or body established under Union law for the purpose of carrying out the tasks conferred on it by Union law in response to the COVID-19 pandemic, unless the services are received for further provision against payment (the provision of such services is subject to a 0% VAT rate). 

If the conditions for the application of the exemption or the 0% rate of VAT no longer apply, the European Commission, the agency or body which imported goods exempt from VAT or acquired goods or services subject to a 0% rate of VAT shall notify the tax authority thereof and shall pay VAT upon the importation if the conditions for the application of the exemption or the conditions for charging the 0% rate of VAT on the goods or services cease to apply in accordance with the procedure and conditions established in section 39 (3) of the VAT Act.

VAT paid in Estonia by the European Commission or an agency or body established under Union law to perform tasks assigned to it by Union law in response to the COVID-19 pandemic on goods acquired or services provided or goods imported in 2021 shall be refunded unless those goods have been acquired or imported for resale or the service have been provided for further provision against payment. VAT shall be refunded in accordance with the procedure and under the conditions established in section 39 (3) of the VAT Act. If the conditions for the refund of VAT no longer apply, such goods or services shall be subject to VAT.

Application of value added tax incentives to agencies and bodies established under European Union law

As from 1 January 2022, the VAT Act specifies that the VAT incentives granted to the institutions of the European Union also apply to agencies and bodies established under European Union (EU) law. Agencies and bodies established under EU law are bodies other than the EU institutions, which are separate legal entities set up to carry out specific tasks under EU law. EU agencies and bodies are international organisations to which the EU Protocol on Privileges and Immunities applies. They must benefit from tax incentives to the same extent and on the same basis as the EU institutions.

Appointment of a tax representative for the registration of a non-resident as a taxable person

The amendment clarifies that, when registering for VAT purposes in Estonia, there is no obligation to appoint a tax representative for a non-Community economic operator who does not have a permanent establishment in Estonia and with whose country of establishment the European Union has concluded a mutual assistance agreement on administrative cooperation, combating fraud and recovery of claims in relation to VAT.

Clarification of the conditions for refunding VAT paid in Estonia to a non-EU entrepreneur

In general, VAT paid by a non-Community trader on the acquisition of goods and services in the European Union is refunded to the trader of a non-Community country on the basis of the principle of reciprocity — that is to say, if an Estonian trader has also the right to obtain a refund of VAT in the country of establishment of the person of a non-Community country.

When applying the special scheme for imposing VAT on the transfer of goods through services, intra-Community distance sales and online marketplaces (OSS special scheme) a person from a non-Community country creates supply in the European Union. The amendment clarifies that persons from a non-Community country are entitled to a refund of input VAT relating to such supply, whether or not Estonian persons in their country of establishment are entitled to a refund of VAT and whether they are liable to VAT in the country where they are established.
 

Clarification of the list of persons who can apply the IOSS special scheme in Estonia

The amendment clarifies that through an intermediary, taxable persons from other Member States can also apply the special scheme for VAT imposed on distance sales of goods imported from a non-Community country (IOSS scheme) in Estonia.