With the development of the digital economy, digital services and their taxation are becoming increasingly important. In Estonia, as in other EU countries, there is a taxation system that regulates the provision of such services both within the country and beyond its borders. In this article, we will examine what constitutes a digital service, what taxes apply in different situations, and what is important to consider when providing digital services in Estonia.
What is a digital service?
A digital service is a form of service provided over the internet or other electronic networks with minimal human involvement. The key characteristic of such services is their high level of automation, which makes them available at any time and with almost no human intervention. The provision of digital services requires modern technological infrastructure, without which they cannot be delivered.
Common examples of digital services include:
- Subscriptions to web content
- Educational courses in the form of pre-recorded lessons
- Cloud computing
- Software as a Service (SaaS)
- Access to electronic trading platforms
- Web hosting, VoIP, and other internet services
- Game downloads and online gaming
- Music, cinematic, as well as photo and video materials
- E-books and other digital publications
The main feature of digital services is that their provision is almost impossible without information technology. They require process automation and provide the user with constant access to content or functionality via the internet.
Taxation of digital services in Estonia
Digital services provided in Estonia or exported to other countries are subject to Value-Added Tax (VAT) depending on who the buyer is and where they are located. Let’s look at some common scenarios.
1. Services between Estonian companies
If an Estonian company, liable for VAT, provides a digital service to another Estonian company also registered for VAT, the standard VAT rate of 22% applies to such services.
Example: Company A in Estonia provides cloud computing services (SaaS) to Company B, which is also registered for VAT in Estonia. In this case, Company A is required to issue an invoice with VAT at a rate of 22%.
2. Services from an Estonian firm to a non-taxable Estonian company
If a digital service is provided by an Estonian firm liable for VAT to another Estonian firm that is not a VAT payer, the VAT rate of 22% also applies.
Example: Company C provides a web content subscription to Company D, which is not liable for VAT. Company C must include VAT at the rate of 22% in the invoice.
3. Services for an EU company with a VAT number
When an Estonian company, liable for VAT, provides a digital service to a company in another EU member state that is also a VAT payer, VAT is not charged in Estonia. The service is taxed at a 0% rate if the purchasing company has a valid VAT number.
It is important that the VAT number is verified, which can be done on the website VIES.
Example: Company E from Estonia provides cloud computing services to French company F, which is registered for VAT. Company E can issue an invoice without VAT but must ensure that the buyer’s VAT number is valid.
4. Services for a company or individual from the EU without a VAT number
If an Estonian company provides a digital service to a company or individual in the EU who is not registered for VAT, the Estonian VAT rate of 22% applies, provided the sales volume does not exceed the threshold of €10,000 per calendar year. Once this threshold is exceeded, the Estonian company must register for VAT in the recipient's country and charge VAT at the rate applicable in that country.
NB! There is an option to avoid registering in each country where clients are located by using the special OSS (One Stop Shop) taxation scheme, which helps reduce bureaucracy. Read more about this in our article.
Example: Company G provides a subscription to e-books to an individual in Germany. As long as the sales volume does not exceed €10,000, Company G charges Estonian VAT at a rate of 22%. If the sales volume exceeds this threshold, the company is required to register for VAT in Germany.
5. Services for a company or individual outside the EU
If an Estonian company provides a digital service to a company or individual outside the EU, Estonian VAT is not charged. In this case, a 0% rate is applied.
Example: Company H from Estonia sells software products to a company in the USA. In this case, the Estonian company is not required to charge VAT, as the buyer is located outside the EU.
Conclusion
The taxation of digital services in Estonia depends on the client's location and their status as a VAT payer. For companies operating in the digital services sector, it is important to understand the taxation rules both in Estonia and in other EU countries. Incorrect application of VAT can lead to fines and other negative consequences, so it is crucial to stay vigilant and keep track of changes in legislation.