Changes in the VAT rate in 2024

From 1 January 2024, the standard Estonian VAT rate will be increased from 20% to 22%.

Upon determining the applicable VAT rate, the tax point under the time of supply rules should be followed. If the time of supply takes place in 2023, then 20% standard rate should be applicable. If the time of supply will take place in 2024, then 22% standard rate will be applicable.

Generally, under the time of supply rules, the supply of goods or receipt of services has taken place the earlier of any following transactions:

1. the delivery or dispatch of goods to the buyer or rendering of services; or
2. the receipt of full or partial payment for the goods or services, upon receipt of services the full or partial payment; or
3. upon self-supply VAT, the sale of goods or rendering services or the use of company’s goods by the company itself, its employee, board or council member or the use for any other non-business purposes.

Long-term services, rendering of which lasts longer than the tax period, are generally deemed to be supplied and received during the tax period, when the rendering of such services is terminated.

It should be noted that apart from the above-described special time of supply rules apply to intra-Community supply of goods and intra-Community acquisition of goods. In such a case, the supply is deemed to have taken place the earlier of the 15th day of the month following the date when the goods were dispatched or delivered or the date the invoice is issued, if that invoice date is earlier than the referred 15^th day of the month.

The following transitional provisions will be applied in relation to that change in the VAT rate.

• Upon transactions relating to long-term contracts (for example, in case of real estate transactions), which have been concluded in written before 1 May 2023, a taxable person will be entitled to apply on the supply of goods or services the 20% VAT rate until 31 December 2025,   provided that the relevant contract provides that the price of the goods or services includes VAT or that the 20% VAT is added to the price and the contract does not provide for a change in the price resulting from a possible change in the rate of VAT.
• In addition, a second exception applies to the cash accounting of VAT, when the goods or services supplied are subject to a standard VAT rate. In such a case, until 31 December 2025 the user of cash accounting of VAT may pay 20% VAT on the supply of the goods or services generated after 31 December 2023, if an invoice was issued to the purchaser and the goods were dispatched or made available or the service was supplied before 1 January 2024.

In relation to the increase of the standard VAT rate, upon declaring the VAT the examples published on the webpage of the Tax and Customs Board (https://www.emta.ee/en/business-client/taxes-and-payment/value-added-tax#examples-01012024) may be followed:

1. In December 2023, the company issued an advance invoice for the total cost of the goods, which the buyer paid in December 2023. The goods were delivered to the buyer in January 2024.
   Supply was fully generated in December 2023 and is taxed at a 20% VAT rate.
2. A partial advance payment for the goods was made to the company in 2023. The seller declared it with a 20% VAT rate. The goods were delivered, and the remaining amount was paid in 2024.
   The advance payment is taxed at a 20% tax rate, the rest of the supply is generated in 2024 and is taxed at a 22% VAT rate.
3. The company sells the goods in 2023 at a tax rate of 20%. In 2024, the goods are returned.
   When returning goods, a specific previously issued invoice is credited, the credit invoice has a VAT rate of 20% as in the original sales invoice.
4. The capital lease contract was concluded before 1 May 2023. The contract states that 20% VAT is added to the price, and the contract does not provide for an increase in the price of goods in the event of an increase in the VAT rate. Goods are delivered after 1 January 2024 (but before 31 December 2025).
   Since a written contract has been concluded with a fixed VAT rate of 20% and the contract does not allow for an increase in the final price of the goods in the event of an increase in the VAT rate, the VAT rate of 20% can be used for the transfer of the item, if the transfer of the goods, which generates supply in an amount exceeding the advance payment, takes place before 31 December 2025.
5. The operational lease contract was concluded before 1 May 2023. The contract states that 20% VAT is added to the price of the service, and the contract does not provide for an increase in the price of the service in the event of an increase in the VAT rate.
   Until 31 December 2025, operational lease payments may be taxed with VAT at 20%.
6. An advance payment has been paid in 2023 on the basis of a capital lease contract and it is taxed at a rate of 20%, the goods are delivered in 2024. 
   Since, in this example, it is not known that the contract was concluded before 1 May 2023, it is necessary to take into account the time when the supply was generated. The advance payment generates supply in 2023 and is taxed at a rate of 20%, while the rest of the supply is generated in 2024 and taxed at a rate of 22%.
7. The VAT liable person using cash-based accounting provided a service and issued an invoice for it in December 2023, but the buyer paid the person for the service in January 2024.
   According to the transitional provision (subsection 24 of § 46 of the VAT Act), the service is taxed with 20% VAT, although the supply of the VAT liable person using cash-based accounting occurs in January 2024 according to the receipt of money. 
8. The services are provided during the period from 1 December 2023 until 31 March 2024. Which VAT rate applies to the billing during the given period? 
   If the invoice is issued for the entire period in total and no advance payment is paid, then the time of supply is in March 2024 and the entire service is taxed at a 22% VAT rate.

If the entire amount is paid in advance in 2023, then the time of supply is in the month of receipt of the advance payment and the VAT rate is 20%.

If a separate invoice is issued for each month, then the services rendered in December are taxed at a 20% tax rate and the services for the remaining months at a 22% VAT rate.

9.  The contract for providing services was concluded in August 2023. The contract states the price of these services and applicable 20% VAT, but the contract does not provide any option for an increase in the price of services in the event of an increase in the VAT rate.

As the contract has been concluded after 1 May 2023, then there is no right to apply the transitional provision and continue to apply the provision of services at 20% VAT rate until 31 December 2025, because upon the conclusion of the contract it was known that the VAT rate will be subject to change. From 1 January 2024, the services under that contract are taxed at a 22% VAT rate.

10. The private individual orders goods from e-commerce store in December 2023 and will pay for the goods upon receiving them at the parcel machine. The seller of goods dispatches the parcel in December 2023, the individual will receive and pay for the goods in the parcel machine in January 2024.
    The VAT supply takes place in December 2023, when the goods were dispatched and the 20% VAT rate applies.

11. The framework contract was concluded prior to 1 May 2023, in which the 20% VAT rate has been fixed. After 1 May 2023, the purchase contract has been concluded under the same terms. 
    As the framework contract is not fulfilled directly without the purchase contract to be concluded under the framework contract, then the VAT rate will be determined according to the conditions of the purchase contract. As the purchase contract has been concluded after 1 May 2023, then from 1 January it is required to apply the 22% VAT rate.

12. Invoice is issued in 2023, goods are delivered and the invoice is paid in January 2024.

No supply is created from issuing an invoice alone. If both the delivery and the payment take place in 2024, the transaction is taxed at the VAT rate of 22 %, and the VAT rate indicated on the invoice must also be 22%.

13. Invoice is submitted in November 2023; service is provided between November 2023 and February 2024 as one complete service; payment is made in 2024.

In this case, supply is created in 2024 and the whole transaction is taxed at 22% VAT rate, and the VAT rate indicated on the invoice must also be 22%.

14. Construction service is provided in December 2023. An instrument of delivery and receipt is signed by both parties in January 2023. In which month and at what VAT rate must the transaction be declared?

The time of supply must be determined according to the time of provision of the service. The time of provision of the service must be indicated on the invoice as well and the seller is obliged to reflect the supply in the period indicated on the invoice. Only if the buyer and the seller have agreed that the time of provision of the service is the period when the instrument is signed, the date of signature must be the period of provision of the service indicated on the invoice, and the seller is obliged to reflect the supply in that period. Therefore, if it has not been agreed in advance that the moment of supply is deemed to be the moment of signing the instrument, it is correct to include the supply of construction services in the December VAT return and apply VAT at the rate of 20%. If there is an agreement that the service is deemed to have been provided by signing the instrument, the applicable VAT rate is 22% and the supply must be declared in January 2024.

15. How to proceed as of 1 January 2024 if I sell cigarettes (the price on the package is fixed)?

Pursuant to § 85²¹ of the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act , cigarettes, cigars and cigarillos released for consumption before 1 January 2024 may be transferred or offered for sale at a price higher than the maximum retail price due to the increase in the rate of VAT, i.e. the retail price of these products is allowed to be increased by the amount of additional VAT payable (from 1 January 2024).

Source: Estonian Tax and Customs Board