Whether you already have a reputable brand and wish to sell your products online on the Estonian/European market or just kickstarting your new online store, establishing and managing your e-commerce business in Estonia might be just the best option out there.
Estonia offers the perfect mix of innovation and simplicity, which has become its hallmark for entrepreneurs across the world.
Since the creation of the e-Residency program in 2014, you can establish and manage an Estonian business completely remotely by authenticating yourself and signing documents online. Combining it with the fact that Estonia has a simple and transparent tax system and is a part of the European Single Market, is why there are already 100,000 e-residents and over 21,000 businesses established in Estonia.
E-commerce market in Estonia and Europe
E-commerce is defined by the sale of information, products or services over the internet, and it is one of the most rapidly growing sectors in Estonia and in Europe.
According to the Estonian Ecommerce Association, as of 2022, there are around 7700 e-commerce stores in the Estonian market, and there is a high number businesses that sell their products through Amazon and other last-mile delivery store platforms throughout Europe but are established in Estonia.
An estimated 76% of the Estonian population makes their purchases online, and in 2021 e-shopping turnover was €2,5 billion, which was an increase of around 50% compared to 2020. €1.1 billion of that was made in Estonian e-commerce stores and the rest €1.4 billion was spent in foreign e-commerce stores.
Only in the fourth quarter of 2021, Estonian residents made an average of 6 million purchases per month online, which was worth around €249 million. Comparing it to the same period of 2020, the e-shopping turnover increased by 59% and the number of purchases increased by 31%.
When looking at the European Union, the e-commerce industry is estimated to reach a combined revenue of €473,1 billion by the end of 2022. The most active e-shoppers in Europe are located in the UK, where 92% of the population buys online. Following the UK is the Netherlands with 91% and Denmark with 90%. From the Euro area, the least active e-shoppers are in Portugal with 56%, Italy with 54%, Cyprus with 52%.
As you can see, shopping online is an increasing trend and it will only continue to grow as already more than half of the populations of different countries are already doing their purchases online.
Establishing an e-commerce business in Estonia
The most common Estonian e-commerce businesses are where the main buyers are Estonian private persons, and some sales are made to other neighbouring countries. However, this does not necessarily mean that you can only target Estonian customers as you can use your Estonian business to sell across the EU.
When starting a business related to e-commerce, many e-resident entrepreneurs stumble upon one of the most important decisions regarding their strategy — that is, whether to start selling goods on Amazon or do it through their own online store.
In this section of the article, we will go over how you can open your business, open a bank account for your business, register for VAT, how to start an Amazon FBA business and how to open your own e-commerce store.
Opening a limited liability company for your e-commerce business in Estonia
Once you have some idea of how and where you will be selling your goods or services, you should proceed to establish your limited liability company in Estonia to have a body to conduct these activities.
If you and your business partners are already Estonian e-residents, then the business establishment process is quite simple. You can either establish the business by yourself or with the help of an Estonian corporate service provider like Incorporate.
The benefit of establishing a business with our help is the fact that they we will guide you throughout the entire process. In addition, if you will be managing your business from outside of Estonia, we will already help you to start using our contact person and legal address services which are required by law in such instances.
If you are not e-residents, then the business establishment process is a bit more complicated, especially if you do not have the time apply for e-Residency beforehand.
In that case, your business can be established by you and your business partners by making a visit to an Estonian notary together with one of our corporate advisors or by using Power of Attorney documents, which enable our advisors to establish a business on the founders’ names.
Opening a bank account for your business
Opening a bank account for an Estonian company that deals with e-commerce is luckily quite straightforward as there is really no need to open an account at a traditional bank in Estonia and payment service provider (PSP) solutions can be used.
PSP can offer much more flexibility than traditional banks as dealing with traditional banks can become very bureaucratic and complicated if you do not live in Estonia.
PSP accounts on the other hand can be opened over a distance and managing these accounts is simple.
However, if you still wish to open a business account in Estonia, and you can provide sufficient proof of having connections to Estonia, it is not an impossible task. Especially, if you will be having business operations in Estonia, which may be local employees, local warehouse, or local partners.
The most suitable banking solutions for e-commerce businesses in Estonia are:
- Payoneer (Register your account with Payoneer and receive a $50 reward)
- Wise (Register your account with Wise and save on your first 3 transactions)
Regardless of which option you choose, you will obtain a European IBAN number, which will enable you to send and receive payments with your Estonian company.
If you wish to make your business’ share capital contribution, doing it is nothing more than making a payment from your personal account and stating it in the description of the transfer.
After which you must ask for a certificate of proof of the share capital contribution which you will then have to forward to the Estonian business registry for them to confirm and change data regarding the share capital contribution in their systems.
Registering for VAT
Registering for VAT is a particularly important nuance when it comes to selling online as well as to having business partners who mutually buy goods and services from one another. This is since businesses can deduct VAT from total prices, making cooperation cheaper and more beneficial.
Per the Estonian law, you can register for VAT voluntarily before reaching the revenue threshold of €40,000 in Estonia or you can sign up for VAT OSS scheme which is especially directed towards online sale of goods and services within the EU. Per the OSS scheme, a business is required to register for VAT once they reach the revenue threshold of €10,000 in distance sales within the EU.
The VAT OSS scheme is beneficial because you can register for VAT in only one EU country, which in this case is Estonia, and to pay and declare VAT due to other countries in Estonia. This has made the system effective and doing e-commerce within the EU much simpler.
Starting an Amazon FBA business in Estonia
Fulfilment by Amazon (FBA) is a popular choice that many e-resident businessowners have opted for as it is a very low-cost set up and businesses can become operational quickly.
This is because the main characteristic of an Amazon FBA business is that the sold physical goods usually move from the supplier/manufacturer directly to an Amazon warehouse where they will be held for distribution. Once a customer places an order online on Amazon’s website, the goods are then shipped to the customer by Amazon or their shipping partner.
In addition to that, these Amazon FBA businesses are often completely online as operations related to handling of goods are conducted by partners and other parties, making it a perfect option for digital nomads and online entrepreneurs.
One important thing here is the decision whether you will choose to sell on Amazon across Europe on or only in a specific region. Here is a list of Pan-European Amazon FBA platforms where you can start selling your goods on simultaneously:
- Amazon.de (Germany)
- Amazon.it (Italy)
- Amazon.nl (Netherlands)
- Amazon.pl (Poland)
- Amazon.es (Spain)
- Amazon.se (Sweden)
If you do not wish to sell to different regions, you can sell on individual Amazon marketplaces as well.
Regarding banking, most PSP accounts are accepted by Amazon platforms when you create your Amazon seller account. This adds another layer of ease for creating an online e-commerce business in Estonia. Creating the seller account itself takes little time and it involves a few steps to complete.
Opening your e-commerce store in Estonia
In this section of the article, we will focus on new businesses that wish to set up a base for their e-commerce store in Estonia regardless of if you are targeting customers in Estonia or other EU countries.
The most critical aspect here is the product handling, fulfillment and shipping. However, if you are setting up a completely new brand, you must pay extra attention to developing your homepage and setting up your content management system to sell your products.
Setting up a new homepage
Setting up a new homepage might not seem to be one of the most challenging tasks, especially if you are a digital entrepreneur, however, doing it right from the beginning is critical to promote long-term growth and success in the market with your e-commerce business in Estonia.
If you are planning to sell you products specifically to customers located in Estonia and to have your homepage set up in Estonian, then the best practice is to buy a domain that ends with “.ee”.
This is beneficial for two reasons.
The first reason is that having “.ee” in your domain is relatable to local customers as most pages that locals use have just that ending and makes it more trustworthy. The second reason is for better Google SERP results, as it indicates that your page is meant for people residing in Estonia, thus having the potential to rank higher.
The most popular domain and web service provider in Estonia is Zone. With Zone, you can buy domains that end with “.ee” along with web hosting and email address services.
If you are planning to sell your products throughout the European Union, then it is better to choose a common ending for your domain, e.g. “.com” or “.eu”.
You can buy domains that do not end with “.ee” from Google Domains or other providers.
Content management system
Once you have your domain sorted out, you should proceed to selecting your page’s content management system which will be the touching point between your business and your customers.
Here you must pay special attention to selecting the right platform that has the necessary integrations with systems that can help you to streamline your operations.
Our general recommendation for entrepreneurs is to use either Shopify or WooCommerce as many other SaaS businesses have extensions and integrations made for e-commerce stores that are set up on using popular content management systems.
In addition, reputable platforms have extensive capabilities that allow you to manage your selling, marketing, email, customer service, payment and shipping activities all in one place.
Product handling and delivery
This is one of the most daunting aspects when it comes to setting up your own e-commerce business in Estonia that sells physical products while trying to remain location independent. It is also one of the most obvious reasons why businesses are opting to use Amazon FBA or other last-mile delivery solutions to sell and handle their products.
If you are setting up a business that will be performing on a larger scale and have the capabilities to have in-house storage and product handling in Estonia, then it is a bit less complicated. All you need to do is to find the suitable location and staff, which we can help you to do.
If you wish to keep your operations strictly online, there is always an option to use dedicated service provider that take care of the product fulfilment by storing your products in their own warehouses and that prepares them for shipping once an order comes in through your store.
Logistika Pluss is one of the service providers in Tallinn, Estonia that offers full e-commerce logistics.
Lastly, it is important to consider delivery solutions that are reasonable for your customers. If you are using a service provider that handles your fulfilment, then they usually have their own shipping partners to handle the deliveries and returns.
If you are handling your orders in-house, then you should opt in to use reliable and affordable shipping partners. One of the most known shipping providers in Estonia that also handle shipments to other countries are: Omniva, Smartpost and DPD.
In addition, if you would like to have some presence in Tallinn, we recommend considering the use of our virtual office services.
Accounting for an e-commerce business in Estonia
Once you have your business established and set up for operations, it is when the real work begins.
From this stage forward, you will have to be able to manage your e-commerce business’ finance and accounting correctly, report it correctly and manage other day-to-day activities related to your business to keep your customers happy.
All businesses established in Estonia and with intentions to sell goods over the internet need expert accounting practices to avoid any unnecessary loss of time and money. In other words, if you are establishing an e-commerce business in Estonia, make sure that you are choosing the right accounting service provider that has sufficient knowledge and experience in the area.
Every Estonian company must submit annual reports, pay taxes on local employees, make monthly VAT declarations if the company is VAT registered and pay taxes on distributed profits.
However, whether you are doing dropshipping, using Amazon FBA, selling on online platforms or have your own e-commerce store, there are some aspects that can make e-commerce bookkeeping complicated:
- the correct reporting of the cost of goods and inventories;
- reporting service fees of platforms and payment providers;
- reporting transportation costs;
- the obligation to issue sales invoices;
- reporting the time when revenue was generated;
- formation of a guarantee provision.
Now, let us dig a bit deeper on these aspects that make accounting for an e-commerce business in Estonia complicated.
Reporting the cost of goods and inventories
Generally, the sales revenue of your goods must be reported in the month in which a specific sale has taken place, and the corresponding cost of goods must also be reported in the same month.
If you sell goods through your warehouse and are using your own means to handle you’re the products, the accounting is straightforward. Things get much more complicated if the sale takes place through another warehouse or distribution centre, like Amazon for example.
Amazon usually provides a report on goods sold, revenue and service charges, as well as the number of goods sold by name, but does not provide data on the cost of goods sold. These numbers be removed from the stock records by an accountant and the cost of goods entry must be made separately.
If your goods are sold on several platforms at the same time as Amazon, Etsy, and own store on Shopify, it is important that the accounts have their own “warehouse” for each location of the sales channel or location of the goods to which data can be compared to. It is also important to show separately goods that are in transit, meaning the goods that have been shipped but have not reached the customer yet.
This practice can become complex very quickly as the number of outlets and product numbers increase. And if it is not done right, your business’ financial numbers will be wrong. A good tip here is to check at the end of the month whether the platform’s inventory and accounting balance match.
Reporting third-party service charges
If you sell your goods through a third-party platform, the fee that comes along with storage and handling of your goods is inevitable and must be taken into consideration when doing your books.
There are many positive aspects to selling your goods using a platform, but at the same time, you are charged money, which is often quite a lot.
When it comes to accounting, it is important to ensure that sales revenue and service charges are reported separately and not on a net basis. For example, Amazon will make the pay-out, but all service charges have already been deducted from the payment which they make.
In addition, payments on your e-commerce store are usually received through payment intermediaries and their service fees must also be calculated separately and monitored that your reported sales revenue is not reduced due to these fees.
It is up to you to compose a report where service charges are taken into account so that they can be monitored for a clearer understanding of your business’ financial situation and expenses.
Reporting transportation costs
There are separate rules for transportation costs for to the purchase and for the sale of goods.
The transportation costs related to the purchase of goods must be added to the cost of the goods in the warehouse and expensed together with the goods only after the goods have been sold to the customer. If you charge your customers for the transportation, it is important to keep in mind that you are asking the right price which can match what the shipping provider is really asking.
Also, transportation fees collected from customers are not part of your sales revenue, but rather a reduction in the transportation costs related to the your purchases.
In accounting, it would make sense to make two separate accounts for the cost of transportation for your goods. This means making a separate account for the shipping costs related to your purchases and logistics and revenue earned from shipping costs by selling to your customers.
This makes your bookkeeping much more transparent and easier for you to monitor whether the fees charged from your customers are high enough to cover the actual transportation costs as mentioned earlier.
Obligation to issue sales invoices
If products or services are sold in your e-commerce store, your system must be set up so that the customer receives the correct invoice/receipt after an order has been made.
In other words, your store must be set up in a manner that allows the customer to select a product from your online store, make the payment and receive an receipt or you issue an invoice which can be then paid manually by the client.
In both cases, you must issue an invoice/receipt to the customer after the payment, which meets the requirements of the original document according to the Estonian Accounting Act or any other applicable requirements in your specific case.
If your business in VAT registered, you must issue an invoice/receipt in conformity with the Estonian Value-Added Tax Act.
Once you have issued your sales invoices/receipts, you can store them electronically, which means that physical papers and print outs are not required, but you must be able to reproduce them later if required.
Reporting when revenue was generated
In accordance with Guideline 10 “Recognition of Revenue” of the Estonian Accounting Standards Board, revenue from the sale of goods is reported when all the following conditions have been met:
- significant risks and rewards of ownership have been transferred from the seller to the buyer;
- the seller has no control over the goods or product or no administrative responsibility for ownership;
- revenue from the sale can be measured reliably;
- the consideration received for the transaction is likely to be received;
- the costs associated with the transaction can be measured reliably.
If the buyer has the contractual right to return the goods within a certain period and the seller can assess the probability of return based on previous periods, the seller recognises sales revenue at the time of sale and makes a provision for any returned goods.
It is especially important to assess the need for and the amount of the provision as of the balance sheet date to report the sales revenue correctly.
According to the VAT Act, the time of revenue generation is a day when one of the conditions is met:
- when the goods are sent to the buyer, or the goods or services are made available to the buyer;
- partial or full payment is received for the goods or services.
Formation of a warranty provision
If your company provides a warranty for the products that you sell, you must form a provision in the company’s balance sheet in the amount that covers any warranty obligations for the products. The event that marks the creation of the provision is the sale of a product in conformity with the previous chapter.
The assessment of the provision is based on previous periods. A guarantee provision is not recognized in the balance sheet if the company that sold the goods is not responsible for fulfilling the warranty obligation itself, but mediates the warranty given by another company, e.g. manufacturer.
When a business sells inventories of another company, the inventories are recorded in the balance sheet of the business bearing the main risks. Therefore, the goods are recorded in the supplier’s balance sheet if most of the risks associated with the goods remain with him.
On the other hand, if the reseller assumes most of the risks associated with the sale of the goods, the goods are recognized in the reseller’s balance sheet.
In other words, if the risks remain with the supplier, the company operating the e-shop does not reflect the inventory sold by the intermediary in its balance sheet and only the commission is recognized as sales revenue, no cost of goods is incurred. The supplier recognizes them as its inventories until the goods are sold by the intermediary, and sales and cost of goods are recorded after the sale.
From a tax point of view, the supplier follows the same criteria when determining the time of turnover. A situation may arise where, for tax and accounting purposes, turnover may fall into different periods.
For the company’s internal control, it makes sense for the supplier to record the consignment goods in a separate warehouse, which gives a more accurate overview of the goods. While the intermediary should report to the supplier on the goods made available or transferred to clients during a tax period and the amount money received from the buyers.
You can rely on our expertise!
Incorporate can guide you throughout the process of setting up your e-commrece business in Estonia.
We work with companies that wish to operate in all kinds of industries and offer full support around the legislation and management for it to work as smooth as possible, while being compliant with the applicable laws.
Whether you need help with accounting or any other aspect related to your business in Estonia, please feel free to reach out to us!