Does an Estonian company need VAT ID when doing business outside of the EU?
Preliminary legal opinion and comment from Tax authorities
Below you can find information of Estonian withholding tax and VAT position in a situation where a Singaporean company is going to provide services to an Estonian company (not registered yet for VAT purposes). The services may include marketing, marketing management, call centre, IT, IT development, back office, support (hereinafter services). The relationship between the companies is a business relationship, no mutual holding.
Preliminary legal opinion
1. Withholding tax position
Singapore Republic is included in the Estonian “white list” – i.e. in the list of territories which are not regarded as low tax territories.
Therefore, the payments to the Singapore company for services provided to the Estonian company will not be subject to Estonian withholding tax at the rate of 20% (which is applicable to the payments made to the companies situated on the low tax territories).
Secondly, there is an effective treaty between Singapore and Estonia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Therefore, the Singapore company receiving business profit from providing services to the Estonian company may be subject to Estonian income tax on business profit only in case it has a permanent establishment in Estonia through which the services are provided (Article 5 and 7 of the tax treaty).
If there is no permanent establishment (such as the branch or office) in Estonia, the business profit is not subject to Estonian income tax and accordingly, no withholding tax exists.
If there is a permanent establishment in Estonia through which the services are provided in Estonia, the Singapore company has to register in Estonia for income tax purposes and it is treated as taxpayer.
2. Estonian VAT position and possible registration
Estonian company which is not registered yet for VAT purposes has an obligation to register for Estonian VAT purposes with regard to the certain category of services received from the Singapore company.
According to the information provided, the most of the services that will be provided by the Singapore company, are listed in the Article 10 section 5 of the Estonian VAT Law (such as marketing or marketing management services, IT or IT development service, etc). Therefore, the place of supply of these services is located in Estonia and accordingly, the recipient of the services is liable to register as Estonian VAT taxpayer with limited liability (see Article 21 section 1 below).
Please note that there is no registration threshold and in case the Estonian company is registered as Estonian VAT taxpayer with limited liability, it has no right to deduct the input VAT (Estonian VAT calculated on the price of the purchased service will be the cost).
Therefore, instead of that it is advisable to register voluntarily as Estonian VAT taxpayer with full liability (i.e. ordinary VAT taxpayer) in case Estonian company purchasing the services has taxable supplies (20%, 9% or 0%) of goods or services, which allows to deduct the input VAT.
Relevant provisions of Estonian VAT Law:
§ 21. Registration as taxable person with limited liability
(1) For an Estonian person or a foreign person operating in Estonia through a permanent establishment who receives a service specified in subsection 10 (5) of this Act from a foreign person engaged in business who is not registered as a taxable person in Estonia, the obligation to register as a taxable person with limited liability shall arise as of the date on which such service was received. This provision does not apply to taxable persons and natural persons who are not engaged in business.
§ 10. Place of supply of services
(5) The place of supply is not Estonia if a taxable person provides to a third country person not engaged in business the following services:
1) grant of the use of intellectual property or transfer of the right to use intellectual property;
2) advertising services;
3) services of consultants, accountants, lawyers, auditors and engineers, translation services, as well as data processing or the supplying of information;
4) financial services, except for leasing safes, or insurance services, including reinsurance and insurance intermediation services;
5) allowing use of manpower;
6) the hiring or leasing of or establishment of a usufruct on movables, except means of transport;
7) electronic communications services, including assignment of rights to use transmission lines;
8) electronically supplied services;
9) allowing access to natural gas or electricity, heating and cooling energy network connections, and transmission of natural gas or electricity, heating or cooling energy through networks and services directly related thereto;
10) transfer of permitted limit values of emissions of greenhouse gases regulated by the Atmospheric Air Protection Act;
11) refraining from the services specified in clauses 1)-10) of this subsection, waiving the exercise of a right or tolerating a situation for a charge.
Comment from the Estonian Tax and Customs Board:
The appended legal opinion provided by the attorney is in conformity with the provisions of the Value Added Tax Act. Indeed, when an Estonian small business, who does not yet have a VAT registration number, purchases either an IT service, or another service referred to in subsection 10 (5) of the VAT Act from a Singaporean company, then such business will incur an obligation to register as a taxable person with limited liability as of the date on which such a service was received, regardless of the price of the service (Value Added Tax Act, subsection 21 (1)). The obligation to register as a taxable person with limited liability arises irrespective of whether the service referred to in subsection 10 (5) is provided by a company established in another EU Member State, or a non-Member State, because subsection 21 (1) reads: “from a foreign person engaged in business who is not registered as a taxable person in Estonia”.
Therefore, as the attorney writes, in such a case it would be advisable to register the company voluntarily as a taxable person liable to value added tax, because a taxable person with limited liability cannot deduct input VAT. Estonian law does not provide any possibilities for opting out from registration as a taxable person with limited liability, or a regular taxable person liable to value added tax.