Complete Accounting Guide for EU Digital Businesses

Every Estonian company must maintain proper accounting records according to the Accounting Act (Raamatupidamise seadus). This applies whether you're a local or e-Residency company.

What's Required by Estonian Law

• Record all business transactions within 30 days
• Keep receipts and invoices for 7 years (digital or physical)
• Use double-entry bookkeeping system
• Submit annual report to Commercial Register
• File VAT returns if registered (quarterly)

Monthly Bookkeeping Requirements

Estonian law requires monthly bookkeeping. Here's what you need to do each month:

• Record Income: Log all invoices sent, payments received, and bank deposits
• Record Expenses: Categorize all business expenses with proper receipts (software, travel, equipment, services)
• Reconcile Bank Accounts: Match accounting records with bank statements to catch errors
• Review & Approve: Check for missing transactions, duplicate entries, or miscategorizations

Time required: 10-30 minutes/month with automated tools (Xolo), 2-4 hours/month with DIY software, or €150-300/month for a local accountant.

Quarterly VAT Returns (KMD)

If your company is VAT-registered, you must file quarterly VAT returns (Käibemaksudeklaratsioon - KMD).

Filing Deadlines:

• Q1 (Jan-Mar): Due by April 20
• Q2 (Apr-Jun): Due by July 20
• Q3 (Jul-Sep): Due by October 20
• Q4 (Oct-Dec): Due by January 20

Penalty for late filing: €64 minimum + 0.06% of VAT amount per day. Xolo automatically prepares and files your VAT returns on time.

Annual Reports & Tax Deadlines

Annual Report (Majandusaasta aruanne): Must be submitted to Estonian Commercial Register by June 30 following the financial year. Includes balance sheet, income statement, notes, and management commentary.

Income Tax Return (TSD): Due by March 31 for previous calendar year (personal income tax).

Corporate Income Tax (TSD): Filed when distributing dividends or profits. Due by 10th day of the following month after distribution.

Estonia's unique tax system is designed to encourage business growth and reinvestment.

0% Corporate Tax on Retained Profits

Estonia's most famous feature: companies pay 0% corporate income tax on profits that remain in the business.

• Profit €50,000, keep it in company account → Pay €0 tax
• Reinvest in equipment, marketing, hires → €0 tax
• Build cash reserves for growth → €0 tax
• Tax only applies when you distribute profits as dividends

20% Tax on Distributions

When you distribute profits to yourself (dividends), Estonia applies a 20% corporate income tax.

Example calculation:

• Company profit: €50,000
• Distribution (dividend): €50,000
• Corporate tax (20%): -€10,000
• You receive: €40,000

VAT System (20%)

Estonia's standard VAT (käibemaks) rate is 20%. You must register when turnover exceeds €40,000.

When to Register:

• Mandatory: Annual turnover exceeds €40,000
• Voluntary: Register earlier to reclaim VAT on business expenses
• EU digital: VAT MOSS for selling to EU consumers (B2C)

VAT Scenarios:

• B2B within EU: Reverse charge - client pays VAT in their country (you charge 0% with their VAT number)
• B2C within EU: VAT MOSS - charge VAT based on customer's country (handled via quarterly MOSS return)
• Outside EU: 0% VAT (export of services)

Personal Income Tax for Salary

If you pay yourself a salary (instead of dividends), you'll pay:

• Personal Income Tax: 20% (tax-free allowance: €654/month)
• Social Tax: 33% (employer pays on top of gross salary, includes health insurance and pension)

Note: Most e-residents take minimal salary (€654/month for social benefits) and distribute remaining profits as dividends (20% tax only). This avoids the 33% social tax on higher salaries.

Understanding VAT is crucial for EU businesses. Here's everything you need to know.

When to Register for VAT

Mandatory Registration:

• Your annual turnover exceeds €40,000
• You expect to exceed €40,000 in the next 12 months
• You sell goods/services in Estonia that are subject to VAT

Voluntary Registration:

• You want to reclaim VAT on business expenses (software, equipment, travel)
• Your B2B clients prefer working with VAT-registered suppliers
• You plan to exceed threshold soon

VAT MOSS for Digital Services

VAT MOSS (Mini One Stop Shop) simplifies VAT for digital businesses selling to EU consumers (B2C). Instead of registering for VAT in every EU country where you have customers, you:

1. Register once for VAT MOSS in Estonia
2. Charge VAT based on customer's country (19-27% depending on country)
3. File one quarterly MOSS return covering all EU sales
4. Estonia distributes VAT to other EU countries automatically

Who Needs VAT MOSS?

You need VAT MOSS if you sell these digital services to EU consumers (B2C):

• SaaS subscriptions
• Online courses and training
• Digital downloads (ebooks, templates, audio)
• Streaming services
• Mobile apps with EU users
• Website hosting or cloud services

Reverse Charge Mechanism (B2B)

When selling services to EU businesses (B2B), you use the reverse charge mechanism.

How it works:

1. Verify client VAT number on VIES (EU VAT validation system)
2. Invoice with 0% VAT stating "Reverse charge - Article 196, EU VAT Directive"
3. Client pays VAT in their own country (not your responsibility)
4. Report in VAT return under "EU sales to businesses"

VAT Compliance Checklist

• Register before hitting €40,000 (monitor monthly revenue)
• Verify EU client VAT numbers on VIES
• Charge correct VAT rates by country (Xolo handles this automatically)
• File quarterly returns on time (April 20, July 20, October 20, January 20)
• Keep VAT invoices for 7 years

• Missing the June 30 deadline: €64-€1,200 fine + risk of company closure. Set calendar reminders for May.
• Not keeping receipts: Tax authorities can audit back 7 years. Missing receipts = disallowed expenses + penalties.
• Mixing personal and business expenses: Use separate bank accounts. Personal expenses paid from business account = taxable benefit.
• Incorrect VAT treatment: Not understanding reverse charge (B2B EU) vs VAT MOSS (B2C EU) can lead to double taxation or fines.
• Late bookkeeping: Transactions must be recorded within 30 days. Don't wait until end of year - you'll forget details.