Estonia, a country known for its digital innovation and business-friendly environment, is set to make a significant change in its Value Added Tax (VAT) rate as of January 1, 2024. The standard VAT rate in Estonia, which has remained at 20% for some time, will undergo an increment to 22%.
This change will have far-reaching implications for businesses operating in the country. To help companies adapt to this shift, Estonia has introduced two crucial transitional provisions. In this comprehensive guide, we will take a look at the details of Estonia’s new VAT rate, its implications, and the transitional measures in place.
Transitioning with Estonia’s new VAT rate
As businesses in Estonia gear up for the VAT rate increase, it’s crucial to understand the transitional provisions that have been set in motion to ease the transition period. These provisions will play a pivotal role in determining how businesses charge and account for VAT during this period of change.
Transitional provision for invoicing and delivery timing
One of the primary transitional provisions relates to invoicing and the timing of delivery. Under this provision, businesses that utilize cash-based VAT accounting can continue to charge VAT at the old rate of 20% for goods or services delivered before January 1, 2024, as long as an invoice was issued to the buyer before that date.
Let’s illustrate this provision with an example. Imagine a company issued an advance invoice in December 2023 for goods that were scheduled to be delivered in January 2024. In this scenario, the revenue is considered to have occurred in December 2023, and thus, it is subject to the 20% VAT rate. This provision allows businesses to maintain continuity with the previous VAT rate for transactions that were initiated before the new rate came into effect.
Transitional provision for long-term contracts, especially real estate transactions
The second transitional provision is particularly significant for businesses that engage in long-term contracts, notably those in the real estate sector. According to this provision, taxable entities have the right to apply the old 20% VAT rate until December 31, 2025, for taxable goods or services provided under written contracts signed before May 1, 2023. This applies if the contract specifies that the price includes VAT or if the contract does not allow for a price increase due to a change in the VAT rate.
Suppose a written contract for the sale of goods specifies a 20% VAT rate and does not permit a price increase due to VAT rate changes. In this case, the 20% rate can be applied when the goods are transferred, provided it occurs before December 31, 2025. This provision serves as a lifeline for businesses with long-term contractual commitments.
Examples of VAT treatment related to the change in VAT rate
To provide further clarity on how the new VAT rate and transitional provisions will impact businesses, let’s explore some additional real-life examples:
Partial advance payment
Imagine a scenario where a partial advance payment was received in 2023, and the remaining payment was made in 2024 for a transaction. In such cases, the advance payment is subject to the 20% VAT rate, while the remaining portion of the revenue generated in 2024 is subject to the new 22% VAT rate.
If a product that was sold in 2023 is returned in 2024, the credit note for the return will still have a 20% VAT rate, in accordance with the original sales invoice.
For lease agreements, especially those related to real estate and equipment, the application of VAT can vary based on the timing of the agreement and payments. Let’s consider two scenarios:
- Capital lease agreements: For capital lease agreements signed before May 1, 2023, where the contract specifies a 20% VAT rate and does not allow for price increases due to VAT rate changes, the 20% rate can be applied for asset transfers occurring before December 31, 2025.
- Usage lease agreements: Similar to capital lease agreements, usage lease agreements signed before May 1, 2023, with a 20% VAT rate specified and no provisions for price increases due to VAT rate changes, can apply a 20% VAT rate until December 31, 2025.
For equipment rental spanning from December 1, 2023, to March 31, 2024, the applicable VAT rate for invoicing during this period depends on the invoicing method and timing of payment. Here are the scenarios:
- Single invoice: If a single invoice for the entire rental period is issued, and no advance payment is made, the VAT rate is 22%. This is because revenue recognition occurs in March 2024.
- Advance payment: If the full rent amount is paid in advance in 2023, the VAT rate is 20% based on the month of receipt.
- Monthly invoices: If separate invoices are issued for each month, and payment is made in the month following the rental period, the December rent is taxed at 20%, while rents for the following months are taxed at 22%.
Incorporate: your partner for professional accounting services
Navigating the complexities of taxation and financial compliance is a critical aspect of running a successful business in Estonia, especially in the light of the new VAT rate and transitional provisions.
It’s a task that demands precision, expertise, and an in-depth understanding of local tax regulations. This is where Incorporate comes into play as your trusted partner for professional accounting services.
How we can help you with Estonia’s new VAT rate
VAT rate compliance
We ensure that your business is correctly applying the new VAT rate to your transactions and invoices, keeping you in line with Estonia’s tax regulations.
Our experts will assess whether your business qualifies for the transitional provisions and help you make the most of the extended deadlines for certain transactions.
For businesses dealing with long-term contracts, especially in real estate, we review and update your contracts to align with the new VAT rate, ensuring compliance.
We provide you with accurate and timely financial reports, giving you the insights needed to make informed business decisions.
Take a look at our professional accounting services or contact us for more information on how Incorporate can assist you. Your financial success is our top priority, and we look forward to supporting your business every step of the way.
In conclusion, Estonia’s decision to increase the standard VAT rate from 20% to 22% starting January 1, 2024, will have wide-ranging implications for businesses operating in the country. However, these businesses can take advantage of two transitional provisions that allow them to continue using the old VAT rate until December 31, 2025.
These provisions apply to transactions initiated before January 1, 2024, and contracts signed before May 1, 2023. To ensure compliance with the new rate and transitional provisions, businesses should review and adapt their accounting systems and processes accordingly.
What steps should businesses take to prepare for Estonia’s new VAT rate?
Businesses in Estonia should first identify if their transactions fall under the transitional provisions. If they do, they can continue using the old VAT rate until the specified deadlines. Additionally, companies should update their accounting systems, invoicing processes, and contracts to reflect the new rate for transactions outside the transitional provisions.
Are there any penalties for non-compliance with Estonia’s new VAT rate?
Yes, businesses that do not comply with the new VAT rate and the transitional provisions may be subject to penalties and fines. It is essential for businesses to ensure they are following the updated regulations to avoid legal consequences.
Can I apply for an extension or exception to the transitional provisions if my business is unable to meet the deadlines?
Extensions or exceptions to the transitional provisions are typically not granted. However, in exceptional circumstances, you can seek guidance from Estonian tax authorities for specific situations.