Estonia is in the midst of tax reforms. Hence, it is good to know what will change from 2025 and how it might affect your actions in Estonia.

Changes that have already been passed into law but are yet to come into force

A) Income tax 

  • The income tax rate will increase from 20% to 22%. This increase will apply both to legal and natural persons. Corporate income tax (CIT) will apply upon distribution of profits. The lower 20% rate of CIT will apply to payments made up to December 2024 at the latest. Payments made from January 2025 will be subject to the higher rate of 22% (meaning the rate from net payment is 22/78).
  • The lower CIT rate of 14% on regular profit distributions will be abolished. Hitherto, any profit distribution made by a legal person that qualifies as a profit distribution made on a regular basis has been subject to a lower rate of 14%. While payments to resident and non-resident natural persons has been subject to an additional withholding tax of 7%, the rate of 14% has been the final tax when regular profit distributions are made to legal entities. This was done with the purpose of incentivising distributing profits rather than accumulating them. This will be abolished, meaning profit distributions made from January 2025 will be subject to only the 22% tax rate.Be aware that it is likely that the regular profit distribution rate has been abolished a year too early, which could render it unconstitutional. So in case you wish and are able to make a profit distribution previously taxable at 14% also in 2025, it would make sense to pay the 22% tax rate, reclaim the difference of 22% and 14% and earn interest on the tax refund delay. While there is no guarantee this approach will hold up in court, there is a good change it could succeed.
  • The advanced CIT rate payable by credit institutions will increase from 14% to 18%. This applies only to credit institutions and Estonian branches of foreign credit institutions.
  • The regressive income tax allowance will be replaced by a flat EUR 8,400 annual income tax allowance. This concerns the income of natural persons to whom the regressive income tax allowance has applied so far. This means the richer you are, the smaller the amount of money you can keep without being subject to tax. From the coming year, the allowance will be a flat EUR 8,400 per year. Note that it is likely the application of the flat allowance will be postponed until 2026, since for now it seems too costly for the government.

B) Value-added tax 

  • Accommodation services will be subject to 13% VAT. Currently, the tax rate that applies to hotels, Airbnbs and similar services is 9%.
  • The lowest rate of 5% will be abolished. This rate has applied to certain media publications. By abolishing it, Estonia will return to applying only three VAT rates: the 22% standard rate, the 13% rate on accommodation services, and the 9% rate applicable to books, media publications and medicines.
  • The definition of new buildings in the VAT Act is changing. Previously, Estonia’s VAT Act did not define “new building,” meaning a building lost its status as new from the first day of use. However, under the VAT Directive, member states can define a new building as meaning one that is less than two years old. The VAT Act has been updated, setting a new limit of one year. If a building is sold within its first year of use, VAT must be added to the price. This change will take effect on 1 January 2025.

C) Motor vehicle tax 

  • From January 2025, a motor vehicle tax will be applicable to all motor vehicles registered in Estonia, with the exception of certain bigger vehicles that already fall under a different tax.
  • The tax will apply in two parts. Firstly, upon registration, as a registration fee. Secondly, as an annual motor vehicle tax payable by the person or entity that is the owner of the motor vehicle, due on 1 January.
  • The annual motor vehicle tax total for each internal combustion engine vehicle depends on the vehicle and is determined by different factors (the base amount (always EUR 50), the CO2 component and the part calculated based on the total mass).

Annual motor vehicle tax example for Skoda Octavia (M1, 2024, WLTP 129 g/km, 1,910 kg):

  • Base amount – EUR 50
  • CO2 component – 129 – 117 = 12 (12 * 3 = 36)
  • Total mass – 1910 – 2000= -90 (no tax)
  • Total annual motor vehicle tax = EUR 86

The registration fee amount varies for each internal combustion engine vehicle and is determined by different factors (the base amount (always EUR 150), the CO2 component, and the part calculated based on the total mass).

Registration fee example for Skoda Octavia (M1, 2024, WLTP 129 g/km, 1,910 kg):

  • Base amount – EUR 150
  • CO2 component – 5 * 117 = 585; 129 – 117 = 12 * 10 = 120; 585 + 120 = 705
  • Total mass – 1910 – 2000 = -90 (not tax)
  • Total registration fee = 150 + 705 = EUR 855

Changes the government plans to introduce – plans that are more than likely to come into force

Defence tax. The government has introduced a bill which, if passed, would mean that persons and legal entities subject to Estonian income tax would pay a 2% defence tax from 2026.

The tax base is similar to that which is taxable with income tax, with the very important exception that companies would need to pay a 2% defence tax on their annual accounting profits. As a result, Estonia would not be a country that implements a purely deferred CIT system. This is an issue especially for companies that earn accounting profits from increases in the value of assets (forestry, real estate, etc), without having a cash flow. We have described possible implications of the defence tax in an international tax setting HERE.

When calculating profit, losses from previous periods are not considered (no losses are carried forward), as it is based solely on annual profit taxation. While no specific exceptions have been announced yet, companies should be mindful of potential additions to the law. It is essential for organisations to strictly follow accounting rules and review their entries, such as the growth of biological assets and fair value accounting.

The bill of law is currently going through the parliament, and is planned to be adopted by the year’s end.