What Are Common Services from a Taxation Perspective?
Common services, according to Estonian legislation, are services that are subject to value-added tax (VAT) in accordance with the so-called general rule. This rule is established in KMS § 10 lg 1 and KMS § 10 lg 4 p 9 of the law. It states that services provided within the territory of Estonia to taxable legal entities registered in Estonia or to non-taxable legal and physical persons from Estonia are subject to taxation at the standard VAT rate, which currently stands at 22%.
Common services include those that do not fall under specific categories requiring a separate approach to taxation. These are generally physical services provided directly within the territory of Estonia and intended for final consumption. Examples of such services include hairdressing services, massage services, cosmetic procedures, clothing repairs, carpet cleaning, furniture assembly, shoe repair, lawn mowing, and so on.
Exceptions from the Category of Common Services
To gain a deeper understanding of what the category of "common services" entails, it's important to note which services do not fall under this definition and, consequently, are not taxed under the general rule. Such services include:
- Real estate services: This includes construction services, real estate rental, accommodation services, and equipment rental. These services are taxed according to specific rules related to the location of the property.
- Services Related to Event Organization: These include services for organizing conferences, exhibitions, concerts, and other events, which may be taxed under specific conditions.
- Educational Services: Educational services, such as training, courses, and seminars, also have separate taxation rules.
- Passenger Transportation: Passenger transportation services, such as taxi or bus services, are taxed depending on the route and other factors.
- Catering Services: Restaurants, cafes, and other food service establishments do not fall under the category of common services.
- Services Related to Movable Property: This includes the rental and repair of movable property, such as vehicles or equipment.
- Intermediary Services: Intermediary services, where a company acts as an agent or broker, are taxed according to specific rules.
- Intangible services: These include services related to intellectual property, consulting, software development, and other similar services.
- Digital services: These include services provided over the internet, such as digital content, software, and similar services.
- Financial Services: Banking operations, loans, investments, insurance, and other financial services also do not fall under the category of common services.
- Transportation Services: These include freight transportation and other services related to the shipment of goods.
Taxation of Common Services Depending on the Type of Client
Estonian tax legislation clearly regulates the taxation rules depending on whether the services are provided to a taxable person or not, and whether the client is located in Estonia, within the European Union, or outside of it. Let's consider a few key scenarios:
- Sale of Services to Another VAT-Taxable Person in Estonia: in this case, the service is taxed at a rate of 22%. This is the standard VAT rate applied throughout Estonia.
- Sale of Services to Another Non-VAT-Taxable Person in Estonia: similar to the first scenario, the service is also taxed at a rate of 22%.
- Sale of Services to a VAT-Taxable Person from the EU: when the service is provided to another business registered in another EU country, a zero VAT rate (0%) is applied. This is because the service is considered exported, and the tax liability arises in the client's country, not in Estonia.
- Sale of Services to a Non-VAT-Taxable Person from the EU: in this case, the standard VAT rate of 22% applies, as the service is taxed in Estonia.
- Sale of Services to a Business Outside the EU: if the client is a business from outside the EU, a zero VAT rate (0%) is applied, as the service is considered an export, and taxation occurs at the place of consumption of the service.
- Sale of Services to an Individual Outside the EU: in this case, the service is taxed at a rate of 22%, as the place of service provision is considered to be Estonia.
Examples of Taxation of Common Services
To better illustrate how these rules work in practice, let's consider a few examples.
- Hairdressing ServicesIf an Estonian hairdressing salon provides services to both an Estonian resident and a non-resident who does not have VAT-taxable status in the EU, a 22% VAT will be applied to these services.
- Clothing Repair Services: Similarly, if a clothing repair workshop serves clients who are legal entities or individuals from Estonia, the applicable VAT rate is 22%.
- Furniture Assembly: Furniture assembly services provided within Estonia to Estonian legal and physical persons are subject to VAT at a rate of 22%.
Conclusion
A proper understanding of the taxation of common services in Estonia is crucial for any entrepreneur operating in this field. The Estonian tax system is characterized by its flexibility and clear rules, allowing businesses to operate successfully and avoid tax risks. Key aspects include understanding which services fall under the category of "common" and how VAT is applied depending on the client's location and status. As a result, adherence to these rules not only ensures compliance with the law but also contributes to more effective business management.