The Tallinn Circuit Court (Court) upheld the Tax and Customs Board’s (Board) decision to retroactively register a Czech-based car sales company for VAT in Estonia. The case began in 2023, with a tax audit that initially focused on whether the company had a permanent establishment in Estonia. However, the tax authority expanded the audit to determine whether the company was actually carrying out its economic activities in Estonia and should therefore have been registered as a taxable person for VAT purposes.

Key Facts of the Case and the Court’s Reasoning

The Board found that the company conducted its real business operations in Estonia despite its formal registration in the Czech Republic. Its activities were closely connected to an Estonian company operating from the same premises, whose employees were effectively working on behalf of the Czech entity. 

Specifically, the Board concluded that the company handed cars over to customers in Estonia, that most customers were Estonian legal entities, that contracts were prepared in Estonian and used the Estonian company's contact details, and that the Czech company maintained an Estonian bank account. In contrast, the company’s activities in the Czech Republic were largely limited to purchasing vehicles and filing tax returns.

The Czech company argued that the Board should first have established whether it had a fixed establishment in Estonia, claiming that this was a prerequisite for VAT registration. The Court rejected this argument, clarifying that the existence of a fixed establishment is not necessarily required for a company to be registered as a taxable person in Estonia. The Court added that the primary basis for VAT registration is the amount of taxable turnover generated in Estonia.

In this case, the company’s taxable turnover exceeded the EUR 40,000 registration threshold. The Court also found that the evidence supported the Board’s conclusion that the company had a fixed establishment in Estonia, providing an additional basis for the registration requirement. Additionally, the Court clarified that the reverse charge mechanism does not remove the supplier’s own VAT registration obligation.

Conclusion

Foreign companies operating in Estonia should assess their VAT registration obligations based on their actual activities, taxable turnover, and overall circumstances. Neither reliance on the reverse charge mechanism nor the lack of a formally established presence in Estonia is, on its own, enough to avoid the obligation to register for VAT.