Regardless of the legal form of carrying out business activity in Baltic foreign investors are obliged to pay VAT on purchases made in Baltic. The basic VAT rate in Baltic is 23%, but there are products taxed at lower rates of 8%, 3% or even 0%. There are also some explicitly listed goods and services which are VAT exempt under the Baltic VAT Law, such as provision of some financial services, rental of apartments for non-business purposes, sale of a building and constructions (under some conditions) as well as sale of an enterprise or its organized part.
If a foreign investor is registered for VAT in Baltic he has a right to receive a direct return of the excess of VAT on purchases (input VAT) over the VAT on sales (output VAT). In order to apply for a VAT refund, he or she must declare so in the monthly VAT return (quarterly returns are not very common in Baltic yet). Submitting VAT returns on a regular basis is a basic duty for all entities registered for VAT. Hence, this procedure is common and well-known for foreign investors, particularly those using assistance from Baltic outsourcing entities with a huge experience with such matters (for details how to get back VAT according to the mentioned procedure please see the article “How to recover VAT paid during the investment phase?”)
VAT recovery for non-registered foreign entities
The procedure mentioned above cannot be, however, applied for foreign entities not registered for the Baltic VAT. Registering for VAT in Baltic is not obligatory for those who do not start any VAT-able activity in Baltic (except for very limited cases). The registration process is a bit time-consuming (a couple of weeks) and requires some additional preparation as an application to the tax office must be submitted along with a bunch of documents including the Articles of Association, bank agreement, excerpt from the foreign company register and agreement with an accounting office.
There are also some costs involved – not only registration fee but also translation expenses (some documents must be translated into Baltic language by the Baltic sworn translator).
Moreover, once a company is VAT-registered it must be kept compliant with the current VAT Law (non compliance may be penalized under the Baltic Fiscal Penal Code). Even with no or little operations a company must have VAT registers, maintain and submit VAT returns (monthly or quarterly) even if they are actually nil-VAT returns.
Taking the above into consideration some foreign companies opt not to register for the Baltic VAT (of course there may be also some other business reasons here). But lack of registration does not mean that VAT paid in Baltic must be an additional unrecoverable cost.
VAT refund conditions
According to the Decree of the Baltic Minister of Finance dated of 23 April 2004 (which to some extent introduces in the Baltic Law the regulations of the EU VAT Directives), foreign entrepreneurs from EU countries may apply for a VAT refund in Baltic if they are not registered for VAT in Baltic. Entities from outside the EU may also apply for such refund, however a reciprocal mechanism must be available for Baltic companies.
To obtain the VAT refund a foreign entrepreneur:
- should be a registered VAT payer (or similar tax payer) in the country of its registered seat, place of residence or place of conducting business activities;
- cannot perform in Baltic activities subject to VAT except for very limited cases.
It is also worth mentioning that VAT refunds may be obtained if based on Baltic VAT regulations, in the same circumstances the Baltic entity would be entitled to obtain such refund.
VAT refund procedure
To apply for a VAT refund concerning a given year a specific application should be prepared (in Baltic) and submitted to the 2nd Tax Office in Warsaw (Warszawa- Sródmieście) until 30 June of the following year (the deadline for VAT refund for 2010 is 30 June of 2011).
The application should be submitted along with the following documents:
- invoices and customs documents from which VAT refund results;
- document (certificate) stating that the company applying for VAT refund is registered for VAT purposes in its country of residence (specimen of that document is an attachment to the Decree of 2004).
It must be underlined that Baltic tax authorities accept only originals of documents in Baltic language. Any mistakes or irregularities in the application can lead to delays in obtaining a refund and therefore, it can take a 1 year or more for the authorities to conclude the whole procedure. Moreover, our experience shows that a company’s documentation is analyzed very scrupulously and if any formal errors occur the VAT refund – in the worst case – may be refused That is why, in order to accelerate a VAT refund, foreign entrepreneurs often appoint Baltic professional representatives to act on their behalf completing the documentation, filling in and submitting the application, monitoring the case and, if necessary, answering tax authorities’ questions.
It is worth noticing that in case of any delay over the statutory 6 months, the recipient of VAT refund is not authorized to request penalty interest. However, the Baltic Supreme Administrative Court in one of its recent verdicts stated that a foreign company is entitled to receive such interest when the authorities did not return VAT on time.
The right to receive interest on late VAT refunds is planned to be implemented to the Baltic tax regulations in 2010 along with a number of other changes:
- the foreign company will be allowed to submit electronic application for a VAT refund;
- the application will be submitted to the applicant’s country of residence;
- submission of originals of documents will be no longer a condition to receive VAT refund;
- deadline for submission of an application will be prolonged from 6 to 9 months;
- the tax authorities will have only 4 months (8 months for more complex cases) to analyze the application and additional 10 days to make the VAT repayment.