Author: Tõnis Elling
Until the beginning of 2015, the procedure set forth in Section 43 of the VAT Act for imposing VAT on electronically supplied services applies only to third-country persons engaged in enterprise. In accordance with the rules valid up until the end of 2014, it is possible to apply special procedure for VAT taxation of electronically supplied services (referred to in this guide simply as “special procedure”) on condition that the service is supplied by a third-country person engaged in enterprise that is not registered in any Member State as a taxable person (referred to hereinafter as third-country taxable person) to an EU Member State person that is not registered as a taxable person or limited taxable person – i.e. to an end consumer, usually an individual.
Under the new rules that come into force on 1 January 2015, however, Estonian taxpayers will also fall, under certain conditions, within the scope of application of the special procedure – if they supply electronic service in another Member State to local non-VAT payers.
Pursuant to subsection 2 (4) of the VAT Act, the following are electronically supplied services: website supply; web-hosting; distance maintenance of programmes and equipment; transfer and updating of software transmitted by electronic means; images, text and information transmitted by electronic means, and making electronic databases available; music, films and games, including gambling games, transmitted by electronic means; political, cultural, sporting, scientific and entertainment broadcasts transmitted by electronic means; distance education and other services similar to the services specified above.
Starting in 2015, the definition of the place where electronic communication services and electronic services are supplied will change. This place will be the location of the customer regardless of whether the customer is a person engaged in enterprise or not. Thus the change will affect the provision of the above services to individuals. The definition of the place where the said services are supplied will not change in the case of persons engaged in enterprise; i.e. the general rule (B2B) specified in the VAT Act will remain valid; in the case of cross-border transactions, VAT will be accounted for and paid by the recipient of the service (inverse taxation).
To apply VAT on electronic communication service or electronically supplied service, Section 43 of the VAT Act will be amended effective 1 January 2015, which will simplify the compliance with VAT obligations on provision of these services in other Member States. The application of the special procedure is not obligatory for taxable persons. Taxable persons may also use general procedure for taxation of the services covered by the special procedure. In such a case, in order to supply electronic communication service or electronic service to a person not engaged in enterprise in another Member State, the taxable person must register itself as a VAT taxable person in the Member State of the customer’s location and comply with tax obligation in that Member State just like other taxable persons in that Member State. If the supplier of the said service wishes to apply special procedure, it shall declare and pay to the Estonian Tax and Customs Board the VAT imposed on services supplied in the other Member State; the tax board shall transfer the sum received to the tax authority of the other country.[1]
Determination of the customer’s location will become relevant in the case that electronic communication service or electronic service is supplied to a person from another Member State who is not engaged in enterprise. In certain cases, it is not possible for the service provider to determine the customer’s location. In such a case, other evidence is used to determine the location. The customer’s location shall be determined, for instance, according to the customer’s billing address or the IP address of the device used by the customer. If the customer uses a pre-payment on a SIM card to pay for the service, it is presumed that the customer’s location is the country identified by the country code on the SIM card. A customer’s location can also be considered to be the location of his or her landline telephone connection, if there is no other evidence of the customer’s location. If the customer uses a pay phone, WiFi hotspot or Internet café, a service provider has no way to verifying the customer’s actual seat or place of residence and the customer’s location is considered to be the country in which the service was used. [2]
In the case of electronic communication service or electronic service, Estonian taxable persons and third-country persons engaged in enterprise may apply the special VAT taxation procedure for services covered by the special procedure on condition that
According to the explanatory memorandum to the VAT Act amendment, a taxable person seated in the Community may choose the Member State in which it is seated to apply the special procedure. Thus a taxable person whose enterprise is located in Estonia may, regardless of whether it is registered in other Member States as a taxable person or not, choose solely Estonia (as the so-called registration Member State) for applying the special procedure. A taxable person whose enterprise is seated outside the European Union but who has a permanent place of business in Estonia as a taxable person, may select Estonia as the registration Member State for the application of the special procedure even if it has registered permanent places of business in other Member States as a taxable person or it is registered as a taxable person for some other reason. A third-country person who is not registered in the Community as a taxable person may select a country where it does not have to register in order to apply the special procedure. The application of the special procedure in Estonia means that Estonia is the so-called registration Member State and the person complies through the Estonian tax authority with the VAT obligation arising upon provision of services covered by the special procedure in another country.
A person may have one so-called registration Member State for applying the special procedure. If a person has selected Estonia as the registration Member State for applying the special procedure, it shall file a declaration to the Estonian Tax and Customs Board on provision of services covered by the special procedure in other countries and pay VAT to the Estonian Tax and Customs Board. If a taxable person applying the special procedure in Estonia is registered as a VAT taxable person in other Member States, the tax obligation related to provision of the services covered by the special procedure shall be complied with in accordance with general procedure in the Member States where the person is registered as a taxable person.
The special procedure is applied only if the services covered by the special procedure are supplied to a person not registered as a taxable person or limited taxable person (i.e. to an individual). An electronic system shall be created to apply the special procedure. A person who wishes to apply or applies the special procedure shall submit an application, changes to submitted data and VAT declarations for services covered by the special procedure via the electronic portal on the tax authority’s website.
A person applying the special procedure is obliged to apply the special procedure on all services covered by the special procedure that are taxed on conditions set forth in Section 43 of the VAT Act. The special procedure and general procedure are not to be applied simultaneously.
The special procedure is not applied in Member States where the person applying the special procedure is registered as a taxable person or where the company is seated.
Taxable persons who wish to apply the special procedure or third-country persons engaged in enterprise who wish to register in Estonia on the basis of the special procedure shall submit an application to that effect via the electronic portal on the tax authority’s website. No separate registration number shall be issued to a taxable person registered in Estonia for applying the special procedure. A third-country person who wishes to apply the special procedure in Estonia shall be issued a taxable person registration number.
The special procedure shall be applied by a taxable person for implementing the special procedure starting from the first day of the quarter following submission of the application to the tax authority or registration of a third-country person engaged in enterprise. Thus the special procedure shall generally be applied starting from the first day of the quarter following notification thereof or registration of a third-country person. If the services covered by the special procedure were started to be provided earlier, the taxable person may start to apply the special procedure before the first day of the quarter following the notification regarding application of the special procedure. In such a case, the application of the special procedure shall begin on the day of provision of the service covered by special procedure, on condition that the taxable person and the third-country person have submitted the application set forth in subsection 43 (4) of the VAT Act by the 10th day of the month subsequent to the provision of the service.
The person applying the special procedure shall provide notice via the electronic portal on the tax authority’s website of cessation of provision of services converted by special procedure, of changes to its activity that render it impossible to apply the special procedure and changes in the data submitted in the application specified in subsection 43 (4) of the VAT Act – by the 10th day of the month subsequent to the month of the change. If the person continues providing services covered by the special procedure in the Community, it must report cessation of application of special procedure at least 15 days before the end of the quarter in which it intends to end application of special procedure.
The tax authority shall cease application of special procedure with regard to the taxable person or delete the third-country person engaged in enterprise from the register if:
The decision on cessation of application of special procedure shall be sent electronically by the tax authority to the person applying the special procedure. The decision shall enter into force on the first day of the quarter following the day the decision was sent. If the cessation of application of special procedure is related to changes in the seat or permanent place of business of the company, the decision shall enter into force on the date of the change.
The person applying special procedure shall submit, via the electronic portal on the tax authority’s website, a VAT declaration on services covered by the special procedure, regarding every quarter. The VAT declaration for services covered by special procedure shall be filed by the 20th day of the month following the quarter. A person applying special procedure is obliged to pay the VAT amount payable by the date on which the VAT declaration is filed.
If the payment for the services covered by special procedure was made in a currency other than the euro, the euro exchange rate determined by the European Central Bank valid on the last day of the declaration period shall be applied to express the necessary data in the VAT declaration for services covered by special procedure in euros.
A taxable person applying special procedure may not deduct VAT paid upon acquiring goods or receiving services in another Member State for the purpose of service covered by special procedure as input VAT from payable VAT, but it does have the right to ask the tax authority of the relevant Member State for a refund.
Similarly to the provisions of the rules valid until the end of 2014, a third-country person engaged in enterprise who has opted to use the special procedure may not appoint a tax representative. The basis for the provision is Article 204 of the VAT Directive.
[1] Explanatory memorandum to Act to amend the VAT Act (506 SE). Available here >
[2] Explanatory memorandum to Act to amend the VAT Act (506 SE). Available here >