Estonia Tax Changes 2025 and 2026

Tax Changes Effective in 2025

1. Personal Income Tax Increase

   • The flat personal income tax rate increases from 20% to 22% starting January 1, 2025.
   • This applies to all taxable income, including employment income, business income, rental income, capital gains, and other sources.
   • The tax is cash-based, meaning the rate depends on the payment date.
   • The regressive tax-free allowance is replaced with a flat annual exemption of €8,400, but this change is likely postponed to 2026 due to budget constraints.
   • For pensioners, the tax-free threshold in 2025 is €776 per month (€9,312 annually).

2. Corporate Income Tax (CIT) Increase

   • The corporate income tax rate on distributed profits rises from 20% to 22% starting January 1, 2025.
   • The tax rate is applied to the net taxable amount divided by 0.78 (e.g., 22/78).
   • The preferential 14% rate for regular dividend distributions is abolished, eliminating the additional 7% withholding tax on dividends paid to individuals.
   • Estonia’s deferred CIT model remains, meaning no tax is levied on reinvested profits.

3. Value-Added Tax (VAT) Rate Changes

   • January 1, 2025:
     • The VAT rate on accommodation services (e.g., hotels, Airbnb) increases from 9% to 13%.
     • The VAT rate on press publications (e.g., newspapers, magazines, e-books) rises from 5% to 9%.

   • July 1, 2025:
     • The standard VAT rate increases from 22% to 24% and is now permanent, not temporary as initially planned.
     • Transitional provisions allow businesses using cash-based VAT accounting to apply the lower rates (9% for accommodation, 5% for press publications) until December 31, 2026, for services invoiced and supplied before January 1, 2025.

4. Motor Vehicle Tax

   • Effective January 1, 2025, a new motor vehicle tax is introduced, consisting of:
   • An annual tax for light vehicles (e.g., passenger cars, vans, motorcycles, tractors) registered in Estonia’s traffic register, payable in two installments (50% by June 15, 50% by December 15).
   • A registration fee for first-time registration or ownership changes, calculated based on vehicle weight, CO2 emissions, and age (reduced for older vehicles; electric vehicles exempt from CO2 component).
   • The tax aims to enhance environmental awareness and fund road infrastructure. A Motor Vehicle Tax Calculator is available from the Estonian Tax Authority.

5. Land Tax Adjustments

   • The basis for land tax calculations changes in 2025.
   • Agricultural land is taxed up to 1% of its value, while other land types may be taxed up to 2%, with rates set by local governments.

6. Excise Duty Increases

   • Excise duties on alcohol, tobacco, and gasoline increase by 5% annually from 2024 to 2026.
   • The excise rate for special-purpose diesel fuel is set at €21 per 1,000 liters, aligning with EU minimums.

7. Investment Account Changes

   • From 2025, the investment account regime is expanded to include cryptocurrencies purchased via regulated providers and investments through regulated crowdfunding platforms.
   • New deductions are introduced for losses from devalued cryptocurrencies or uncollectible crowdfunding loans, and management fees for securities accounts can be deducted from securities income.

8. E-Invoicing Updates

   • From July 1, 2025, buyers can choose to receive invoices in paper (e.g., PDF) or e-invoice format for B2B and B2G transactions. Companies registered as e-invoice recipients in the Estonian e-business register must issue e-invoices.

Tax Changes Effective in 2026

1. Defense Tax (Security Tax)

   • A 2% defense tax is introduced from January 1, 2026, to December 31, 2028, to fund defense capabilities and security investments.
   • Personal Defense Tax:
     • Applies to individuals’ taxable income, including salaries, pensions, parental benefits, business income, real estate sales, and securities profits.
     • The tax base is broader than the standard personal income tax, including tax-exempt foreign dividends and II/III pillar pension payments.
     • Non-residents are subject to the tax only on income taxable in Estonia under double taxation treaties.

   • Corporate Defense Tax:
     • A 2% tax on annual accounting profits (pre-tax) of resident companies and permanent establishments of non-residents.
     • Unlike the deferred CIT system, it applies to accounting profits, including unrealized gains (e.g., asset value increases in forestry or real estate), with no loss carryforward.
     • Dividends from subsidiaries and profits from foreign permanent establishments are deducted to avoid double taxation, but taxable profit is increased by transfer pricing adjustments and non-business expenses.
     • Payable quarterly in advance based on the previous year’s profits (e.g., 2025 profits determine 2026 payments). In 2026, companies pay twice (September 10 and December 10).

2. Personal and Corporate Income Tax Increase

   • Both personal and corporate income tax rates are proposed to increase from 22% to 24% starting January 1, 2026, per Bill No. 645 SE.
   • The temporary security tax component in income taxes is planned to be eliminated, but the overall rate increase remains. This is subject to parliamentary approval.

3. Tax-Free Allowance Confirmation

   • The flat tax-free income allowance of €700 per month (€8,400 annually) for residents is expected to be implemented in 2026, replacing the regressive system.

4. Pension Contribution Adjustments

   • The funded pension (II pillar) contribution rate is flexible at 2%, 4%, or 6%, based on individual applications by November 30 each year, effective from January 1.
   • The state continues to contribute 4% of social tax to the II pillar.

Additional Notes

• Purpose of Changes: Many of these tax increases, particularly the defense tax and VAT hike, are driven by the need to fund defense and security investments due to regional security concerns, notably Russia’s invasion of Ukraine.
• Transitional Provisions: Businesses can benefit from transitional rules for VAT (e.g., applying lower rates for pre-2025 contracts or cash-based accounting) and motor vehicle tax exemptions (e.g., for inherited or leased vehicles).
• Impact on Businesses: The corporate defense tax and VAT increases may reduce available resources, potentially affecting investment and competitiveness. However, Estonia’s deferred CIT model and minimal bureaucracy continue to make it attractive for entrepreneurs.
• E-Residency: VAT-registered e-resident companies must apply the 24% VAT rate from July 1, 2025, and the 2% personal defense tax applies to employee/board member salaries in Estonia from 2026. Most e-residents pay personal taxes in their home country, so the income tax hike may not apply.
• Unconfirmed Changes (28th June 2025): Some sources mention the corporate profit tax component of the defense tax being removed, but this is not consistently supported and requires legislative confirmation.

Recommendations

• Businesses: Review contracts and invoicing for VAT compliance, especially for accommodation and press publications. Use the Motor Vehicle Tax Calculator for planning. Consult with accountants to optimize dividend payouts before the 2025 CIT rate increase.
• Individuals: Prepare for the 22% income tax rate in 2025 and the additional 2% defense tax in 2026. Check pension contribution rates annually.
• E-Residents: Ensure VAT settings are updated by July 2025 and monitor employee tax obligations in Estonia.

For further details, consult the Estonian Tax and Customs Board or resources like EY, Grant Thornton, or the Ministry of Finance.