Accounting in Estonia
Most foreign business people operating an Estonian company consider Estonian accounting rules and taxation system very easy to understand. The costs of accounting and bureaucracy are generally rather low in Estonia.
The accounting rules in Estonia are don’t differ much from those applied in other EU countries, however there are a number of details which are important to notice.
Even though the corporate income tax charged on corporate profits is 0% (20% tax is applied when profits are distributed) there are some costs that are not eligible as business expenses. All company’s expenses need to be substantiated at some level as being related to the company’s enterprise. If the corporate bank card is used to pay for expenses and no invoice is presented to prove that the expense is related to business, such expense will be subject to the corporate income tax. All expenses need to be backed up by source documents.
The Accounting Act regulates basic accounting functions in all business entities registered in Estonia. This act does not regulate accounting for taxes that are regulated by other laws and acts. The law, in essence, is framed in compliance with International Accounting Standards.
Mostly all Estonian companies can choose whether to prepare their consolidated and annual accounts by International Financial Reporting Standards (IFRS) or by the Estonian accounting standards ('Estonian GAAP'). Companies and financial institutions are required to prepare their accounts in accordance with IFRS. Estonian GAAP is created by the Estonian Accounting Standards Board.
The length of a financial year in Estonia is twelve months. At the end of each financial year, an entity is required to prepare the annual report that consists of the annual accounts and the management report, the auditor's report and the profit distribution proposal for the financial year should be annexed to the annual report. The auditor's report doesn’t need to be added to the annual report if auditing is not compulsory.
Annual reports must be filed within six months following the closing of the financial year. There can be a penalty that could be charged if an annual report is filed late.No penalty is charged if the delay is short.
All annual reports must be filed to the register even if the company has had no transactions in the financial year.
In the case that the equity of the owner drops under 2500,- EUR or is less than 50% of the registered share capital then the owners must either restore the equity capital or dissolve the company. To avoid unnecessary waste of time it is advisable to ensure that the share capital is covered enough before filing the annual report.
If the company has salaried employees it is better to pay the salary at the beginning of the months following the month when the salary was earned, which is a common practice in Estonia. Too little time is left for tax accounting because payroll taxes are due at the latest on the 10th day of the month following the month when the salary was paid.
An Estonian company is obligated to file its annual report with the Central Commercial Register. The company is required to file the report within six months of the end of the financial year.
The fee for annual report depends on whether or not the bookkeeping has been done for the entire year.
An annual report typically includes the following:
- Management report
- Balance sheet
- Income statement
- Cash flow statement
- Statement of changes in equity
- Notes to the annual accounts
Registering as a VAT payer
If the taxable annual turnover of a company exceeds 16,000 EUR, it is required to register the company with the Tax and Customs Board. In such case the Tax and Customs Board issues a VAT number.
If a company´s taxable turnover is below 16,000 EUR per year, the company is still allowed to apply for the VAT number - to submit an application and explain why a VAT number is necessairy.