Tax changes in Estonia - 2025

As Estonia prepares to implement new fiscal measures from January 1, 2025, the nation is set to experience significant shifts in corporate and personal taxation, as well as value-added tax (VAT). These changes, motivated by a combination of fiscal adjustments and temporary defense funding, promise to impact individuals and businesses across the board. Below is a comprehensive overview of what lies ahead.

Key Tax Rate Adjustments

Corporate Income Tax

- The general corporate income tax rate will rise to 22%, up from the previous 20%. This rate is calculated as 22/78 on net distributions.

- The reduced 14% tax on regularly distributed dividends will be abolished. Consequently, all distributions will now be taxed uniformly at the new rate.

- For credit institutions, the advanced income tax rate will increase from 14% to 18%.

Personal Income Tax

- The standard personal income tax rate is set to increase to 22%.

Value-Added Tax (VAT)

- Until June 30, 2025, the VAT standard rate will remain at 22%. However, starting July 1, 2025, it will rise to 24%, reflecting an inclusion of the defense tax.

- Reduced VAT rates of 13% and 9% will remain unchanged.

Additionally, the VAT registration threshold will be set at €40,000, enabling businesses to plan their compliance strategies accordingly.

Introduction of the Defense Tax

To address a state budget deficit, a temporary defense tax will be implemented for a three-year period (2025–2028).

- Rate and Scope: A 2% tax will apply to taxable turnover, corporate profits, and personal gross income, affecting both residents and non-residents operating in Estonia.

- Corporate Implications: For resident companies and permanent establishments of non-residents, the defense tax will be levied on accounting profits, including unrealized gains, as reported in annual financial statements.

Businesses and individuals will be required to report and remit the defense tax alongside their existing tax obligations.

Corporate and Long-Term Contracts

For businesses, the changes in VAT and corporate taxation necessitate timely preparations:

1. VAT Adjustments: Businesses with long-term contracts signed before May 1, 2023, could retain the 22% VAT rate until June 30, 2025. Afterward, these contracts must comply with the new 24% rate.

2. Corporate Tax Planning: Companies must account for the abolition of the reduced dividend tax rate and the inclusion of unrealized gains in the tax base.

Compliance and Planning Checklist

For Businesses

- Revise financial systems to accommodate the 24% VAT rate and ensure all pricing strategies are updated.

- Review contract terms for long-term agreements affected by the VAT transition.

- Adapt accounting practices to report defense tax obligations accurately.

- Anticipate quarterly advance payments and ensure timely compliance.

For Individuals

- Reassess gross income projections to include the impact of the defense tax.

Looking Ahead

The 2025 tax reforms in Estonia represent a strategic response to both fiscal and defense-related challenges. While the higher tax rates and the introduction of the defense tax may initially strain businesses and individuals, these measures aim to stabilize the economy while addressing critical national priorities.

Stakeholders are advised to stay informed and proactive in adapting to these changes.

This article was created by Liisbeth Kiipus - Accountant at Gate to Baltics OÜ.