Few questions regarding VAT


  • Hello,

    I got my e-residency recently and now planning to open a company in Estonia, I have few questions regarding VAT.
    Situation:
    I’m in Russia and provide software developing services to my clients in US and planning to get few EU clients soon. I’m not going to work from Estonia so all services to my clients will be produced somewhere outside of Estonia (Russia, SEA, etc).
    My current plan is to not hire any employers in Estonia and do work by myself and sometimes pay to my friends in Russia for some additional work, but it seems there's few issues with that workflow.
    Issue 1:
    if I will pay to friends in Russia for software developing services I’ll have to pay additional 20% VAT in Estonia since I’ll import “electronically supplied services" (Value-Added Tax Act, § 10.  Place of supply of services, 12) into Estonia and it seems I will not be able to get VAT refund in case if I export these services outside of Estonia back to my clients in US and EU.
    Issue 2:
    if I don’t redistribute profits (I’m not going to get dividends) I still should be able to use company money for company needs, since I work alone I would love to periodically upgrade computer and other electronics (i.e. iPad) used for my mobile software development business, pay for hosting etc.
    Can I get VAT refund on these electronics if I’ll buy it outside of EU on company card?

    Issue 3:
    Do company need to register as a VAT payer in my case of selling services to US and EU countries (not Estonia)?

    TLDR Questions:

    1. Should Estonian company pay VAT for software developing services/consulting from Russia?
    2. Can I get VAT refund if I’ll buy electronics for company needs outside of Estonia?
    3. Should my company get VAT number in case of selling services outside of Estonia (EU, US)?

    Thanks,
    Ivan.


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  • Estonia and Russia don't have a tax treaty which is in force yet. A tax treaty has been concluded though, but it's not clear when this treaty will enter into force.

    I think you should take under consideration that most OECD model tax treaties use the so called 'management and control test' to determine where is legal entity is a tax resident. What matters here is the place of effective management of the company. If your company is in Estonia, but you are doing the effective management from another country, then under such a clause the tax authorities in the other country may claim the primary right towards tax liability.

    One important exception is the existence of a permanent establishment, profits attributed to such a permanent establishment are always taxed in the country where the permanent establishment is. The definition of 'permanent establishment' varies from treaty to treaty.

    Your situation sounds as if there is neither effective management in Estonia, neither a permanent establishment. Hence I wonder whether the Russian tax authorities aren't going to claim the primary right of taxation. At the moment there is no tax treaty in force, so it is even more unpredictable what will happen in your case.

    I am not a specialist on VAT, but I do sincerely wonder whether the place of supply of services is in Estonia in this case, as there is no permanent establishment in Estonia at all.

    Arjan van Eersel

    Eurocentive OÜ
    Web: www.eurocentive.ee
    Email: arjan@eurocentive.ee
    Tel: +372 6850055
    Gsm: +372 56065582



  • Hi Arjan,

    Thank you for your reply. This is indeed unclear case with taxation rights for Russia for this case. So I'm planning to stay away from Russia for more than 185 days a year and by that loose my tax residency in Russia (but it's still a good idea to find a way to stay in Russia and avoid double taxation).
    Also there's a problem with Russia in particular since we have income tax for companies which means if they'll count me as tax payer then I'm loosing Estonian great 0% income tax and getting Estonian distribution tax plus Russian income tax for residents.

    And it's still not clear what to do with VAT even if I'll solve danger of double taxation.

    Ivan.


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