Next year, entrepreneurs will face several changes to the VAT Act.
From 01.01.2025, the VAT rates will change:
Accommodation services and accommodation with breakfast are taxed at 13% instead of the previous 9%. A transitional provision is provided: until 31.12.2026, the user of cash-based VAT accounting can continue to calculate 9% VAT, if the invoice was issued and the service was provided before 01.01.2025;
The VAT on press publications will rise again to 9%. VAT at the rate of 5% may be paid on sales made after 01.01.25 if an invoice was issued to the buyer and a paper publication was sent or an electronic press publication was made available before 01.01.2025.
From 01.07.2025 the VAT rate will increase to 24% due to the addition of 2% security tax.
This summer, the Riigikogu has taken up the amendments to the VAT Act initiated by the government, which are planned to be put on the agenda of the plenary assembly in September and will be enforced in 2025.
Special rules for small businesses
As a result of the amendments to the VAT Act, small businesses will receive fairer treatment and their administrative burden will be reduced. The Small Business Scheme (in English) is introduced in Estonia in connection with changes in European Union regulations. This relaxes the rules for small business taxation in a foreign country.
According to the previous rules, a small business whose turnover fell below the permitted limit in its country of residence, when selling goods and services to an end consumer in another member state, was still obliged to pay VAT from the day the turnover occurred. This has resulted in unequal treatment of small businesses.
What special rules apply to small businesses? A limit has been established for this purpose: the company's total turnover in the member states of the European Union cannot exceed 100,000 euros per year. It must also be ensured that the volume of transactions in a member state does not exceed the nationally established limit for tax liability.
If a foreign company has business operations in Estonia, has been granted the right to use special arrangements for small businesses in its country of residence, and its turnover does not exceed 40,000 euros per year, it is not obliged to register as a VAT payer, just like an Estonian company, and it can sell goods and services tax-free. It is characterized by a registration number with the suffix "EX", which the small business receives from the tax authority of its country of residence.
Therefore, a small business may not be obliged to declare and pay VAT in every member state where it does business. The implementation of the special arrangement makes it easier and more cost-effective to expand its business to other member states.
The special regime for small businesses is accompanied by restrictions on the deduction of input sales tax. If goods and services are acquired for turnover, in respect of which there is no VAT liability, input VAT on such acquisitions may not be deducted either.
In connection with the special arrangement, the obligation of reverse taxation is also reduced. A taxable buyer, who until now has calculated and paid VAT when acquiring goods and services from a foreign company, no longer has the obligation of reverse taxation if the seller of goods or services applies the special procedure for small businesses. This information can be obtained based on the registration number indicated on the buyer's invoice. A limited taxable person also no longer has to pay VAT on acquisitions for which he has received an invoice with the corresponding mark.
Real estate input tax
When acquiring real estate, the calculation of input sales tax is based on the estimated ratio of taxable and tax-free turnover related to the real estate. However, if the actual use of the immovable property differs from what was initially planned, then according to the currently valid rules, the deductible input sales tax is adjusted at the end of each year for 10 years according to the actual use of the immovable property. Therefore, only 1/10 of input VAT per year is subject to adjustment.
The proposed amendment to the law provides for the adjustment of the entire amount of input sales tax in the first year, if the primary actual use of the immovable property differs from the planned one. For example, if instead of providing accommodation services, living spaces are rented out, which results in tax-free turnover.
Example: In 2025, the construction of a building will begin, which is planned to be sold. From the construction costs, 100,000 euros of input VAT is deducted from the VAT calculated on the turnover. The building will be completed in May 2026, but the original plans have changed and it will be commissioned in June 2026 to provide residential rental services. Since the purpose of use has changed, a recalculation must be made regarding the input VAT deducted. Therefore, on the VAT return of June 2026, the deductible input sales tax will be reduced by 100,000 euros.
The concept of new construction
With the 2025 law amendment, the approach to new construction will change. KMS § 16 subsection 2 point 3 stipulates the sale of immovable property as a tax-free turnover. The exception is the sale of the building before its initial use - this is a turnover subject to VAT. The concept of a new building needed to be specified, because it is not always clearly defined. The question of when and how a new building becomes a used building has caused controversy. Therefore, and considering the fact that the European Union's VAT directive gives the member states decision-making room, at the initiative of the MTA, a clarification of the concept of a new building has been included in the draft amendments to the VAT Act: the sale of the building is taxed even if it takes place within the first year after its initial commissioning. Therefore, even though the building is already in use, it is still considered a new building for one year from the point of view of taxation. The same applies to a renovated (over 10%) building: it is treated as a new building for one year after it is put back into use.
Place of turnover rules for events
Special rules that apply to services related to cultural, sports, educational, scientific, entertainment and other similar events (such as fairs, exhibitions, conferences) are important in determining the place of turnover of event-related services. Such services are taxed in the country where the event takes place.
The change in the law concerns services provided to a private person via the Internet, in which the turnover is considered to have taken place in the person's life or place of residence, and no longer at the place of the event. The previous rules had already caught up with the times, because many events today take place completely or partially virtually. This change enables the use of the OSS special procedure for declaring and paying VAT, which simplifies the fulfillment of the tax obligation. However, if the seller's turnover to private individuals in the community does not exceed 10,000 euros, he may declare the turnover of services on the Estonian sales tax return.
Calculation of the turnover threshold for VAT registration
Based on the current legal provisions, an entrepreneur is not obliged to register as a VAT payer if his entire turnover is turnover with a rate of 0 %. The exception is the intra-Community turnover of 0% goods and the turnover of services, in which the foreign buyer (B2B) is liable for tax.
In 2025, this rule will become even simpler: the obligation to register as a taxable person will not arise if the entire turnover of the company consists of tax-free turnover and turnover taxable at the 0% rate, excluding intra-Community turnover of goods.
At the same time, it should be kept in mind that currently turnover in foreign countries is also included in the limit, but as a result of the change in the law, only turnover in Estonia is taken into account.
The sale of fixed assets is still not taken into account when calculating the limit. The exception is immovable property, the sale of which is included in the limit - regardless of whether it is recorded in the accounts as a fixed asset or as a real estate investment.