Introduction
Taxation of intangible services is an important aspect that requires the attention of entrepreneurs and accountants in Estonia. In this article, we will review the main principles and VAT rates applicable to the provision of intangible services both within the country and abroad.
Concept of Intangible Services
Intangible services encompass a wide range of activities that are not related to physical goods. These can include consulting services, IT services, licensing fees, advertising services, management, and other types of services that do not have a material form. It is important to consider the specifics of providing such services and to properly document them for taxation purposes.
NB! This does not include digital services, which can encompass any digital product, such as the sale of a subscription service that does not require direct human involvement, like ChatGPT, Adobe Photoshop, and other similar products.
Main VAT Rates for Intangible Services
For the taxation of intangible services in Estonia, the following VAT rates apply:
If you sell intangible services to other Estonian companies or individuals:
- When providing intangible services to another Estonian taxable company, the VAT rate is 22%.
- When providing intangible services to another Estonian non-taxable company or individual, the VAT rate is also 22%.
If you sell intangible services to other companies or individuals from the European Union:
- If an Estonian taxable company provides intangible services to another VAT-registered company in the European Union, the VAT rate is 0%.
- If an Estonian taxable company provides intangible services to a non-VAT registered company or individual in the European Union, the VAT rate is 22%.
If you sell intangible services to other companies or individuals outside the European Union:
- When providing intangible services to a company or individual outside the European Union, the VAT rate is 0%.
Specifics of Providing Services to Companies in the European Union
When providing intangible services to companies in the European Union, the following points must be considered:
- A reverse charge comment must be added to the invoice: If the service is provided to another VAT-registered company in the EU and the 0% rate applies, the invoice must include the note "Pöördmaksustamine" or "Reverse charge". This indicates that the obligation to pay VAT shifts to the recipient of the service. This can be added as an additional comment on the invoice. NB! The obligation to pay VAT is virtual, meaning your client will not actually pay VAT in their own country.
- VAT Number Verification: If the company to which you are providing an intangible service is located in the European Union, make sure to check if they have a European VAT number. You can verify if the VAT number is European here. If the company has a VAT number but it is not found in the register, this means the company has a local VAT number, and services should be sold to such a company with a VAT rate of 22%.
Examples
Let's look at a few practical examples to better understand the taxation of intangible services:
Example 1: An Estonian consulting firm provides consulting services to another Estonian company (VAT-registered). In this case, the VAT rate will be 22%, and this tax will be added to the total cost of the services.
Example 2: The same consulting firm provides services to a company in Germany (VAT-registered). In this case, the VAT rate will be 0%, and the invoice will indicate "Reverse charge".
Example 3: An Estonian IT company provides software to an American company. Since the service recipient is outside the EU, the VAT rate will be 0%.
Example 4: An Estonian IT company provides a website development service to a Spanish company that is not VAT-registered. In this case, the VAT rate will be 22%.
Conclusion
Taxation of intangible services in Estonia requires a careful approach and knowledge of the specifics of applying VAT rates. Companies providing such services must consider the location of their clients and their tax status, properly issue invoices, and maintain appropriate documentation. Correct application of tax legislation helps avoid fines and issues with tax authorities, ensuring transparency and legality in business operations.