What you need to know about the status of a limited VAT payer

Any organization, including non-profit associations and sole proprietors, that is not a VAT payer may unexpectedly become a limited VAT payer. This can happen, for example, if the company purchases e-books from Germany, orders advertising from platforms like Facebook, or buys software from the USA.

Companies that are already registered as VAT payers do not face this issue. However, for small businesses with an annual turnover that does not exceed the threshold of 40,000 euros, this topic may become significant.

What does the status of a “limited VAT payer” mean?

A limited VAT payer is required to submit a partial VAT return (only in the months when relevant transactions have occurred), declare purchases made abroad, and pay 20% VAT on them. This includes:

1. Goods from European Union countries, if the total amount of purchases exceeds 10,000 euros (this can also be done voluntarily earlier, but once decided, it cannot be changed)

2. “Virtual” services obtained from both the EU and other countries, starting from the first transaction.

The process is not too complicated, and the amounts are usually small, so there is no reason to be concerned. It is important to be aware of this obligation and to submit the application on time.

Limited VAT payers receive a special VAT number, which allows them to receive invoices from suppliers within the EU without VAT. If the VAT rate is higher in the supplier’s country, this may even be beneficial. Purchases from non-EU countries often do not include VAT, so the cost of these goods and services may increase.

In theory, companies in the USA that provide “virtual services” to private individuals in the EU should register as VAT payers within the EU. However, in practice, many of them are not even aware of this requirement.

It is important to note that a limited VAT payer continues to issue invoices to their clients without VAT and cannot claim back VAT from purchases made in Estonia.