Changes to the Value Added Tax Act Will Soon Take Effect, Simplifying Cross-Border Operations for Small Businesses

Starting next year, a special scheme for small businesses will be introduced, making it easier for them to operate in other EU member states. When a business generates revenue in another member state, it will no longer be required to register as a VAT payer there in certain cases.

The Current Regulation Treats Companies Unequally
Under the existing system, member states have established revenue thresholds up to which a business does not need to register as a VAT payer. This threshold only applies to companies based in that member state. In Estonia, the threshold is 40,000 euros.

A foreign business must register as a VAT payer from the day taxable revenue arises. This means that, compared to a business based in the member state, the foreign company does not have the right to operate without VAT registration until the revenue exceeds the established threshold in that member state.

To ensure equal treatment of both resident businesses and non-residents operating from other member states, a new scheme will be introduced. Under this scheme, a business will not be required to register as a VAT payer under the same conditions that apply to local businesses or those with a permanent establishment in the respective member state.

Two Conditions Must Be Met to Use the Special Scheme
The amendment allows a business to apply the special small business scheme for revenue generated in another member state. This gives the right to operate in that state without registering as a VAT payer, similar to a local business.

If a business generates revenue in another member state, it will not need to register as a VAT payer there if two conditions are met:

• The total annual revenue in the European Union, including Estonia, does not exceed 100,000 euros.
• The revenue in the member state where the business wants to apply the VAT exemption does not exceed the registration threshold for VAT payers in that state. These thresholds must not have been exceeded in the previous calendar year either. If these conditions are met, the business has the right to operate without VAT registration until it surpasses the threshold in the other member state.

Example: A business based in Estonia has an annual revenue of 5,000 euros in Estonia. Since this does not exceed Estonia’s 40,000-euro threshold, there is no VAT obligation. The same business has 10,000 euros of annual revenue in another member state. Thus, the total annual revenue in the EU is 15,000 euros (5,000 + 10,000 euros), which does not exceed 100,000 euros, allowing the special scheme to be used. The 10,000-euro revenue in the other member state does not exceed that state’s VAT registration threshold. Hence, the business can operate under the special scheme without registration or reporting obligations.

Applying the OSS Scheme Does Not Exclude Using the Special Scheme
Those applying or wishing to apply the special VAT scheme for services, intra-EU distance sales, and the sale of goods via online marketplaces (the so-called OSS scheme) must register as VAT payers. However, this does not prevent them from using the small business scheme in other member states if the required conditions are met. If a person is registered under the OSS scheme and simultaneously applies the small business scheme in another member state, they will declare only the revenue generated in states where the small business scheme is not applied under the OSS scheme.

The Special Scheme Is Voluntary
It is important to note that the special scheme is optional. If a business chooses not to use it, it must register as a VAT payer in another member state from the day taxable revenue is generated, according to that state’s rules.

Notification Requirement for VAT Exemption
An Estonian-based business that wants to apply the VAT exemption in another member state must submit a notification via the tax authority’s portal, specifying the countries where it intends to use the small business VAT exemption. The tax authority will forward these notifications to the relevant member states' tax authorities. Once the authorities confirm the right to use the exemption, a registration number with the suffix "EX" will be issued.

Termination of the Special Scheme
Since the scheme is voluntary, a business can discontinue its use by notifying the tax authority. If the business’s annual revenue in the EU exceeds 100,000 euros, it must notify the tax authority within 15 business days from the date of exceeding the threshold and report revenue from the start of the quarter until the threshold was surpassed. The tax authority will then terminate or adjust the scheme's use. The scheme will also end if the business ceases operations or if there is no reported revenue in other member states for several consecutive quarters, suggesting that operations have ended.

The amendments will take effect on January 1, 2025.