Key Tax Reforms in Estonia: What You Need to Know

Key Tax Reforms in Estonia: What You Need to Know

General Guides Tax and Legal
23 January 2025

We have put together an update on tax reforms happening in Estonia from 2025 until 2028.

Since the start of the Russian inversion of Ukraine, Europe has drastically raised its security and defence spending, especially the eastern block. Estonian defence spending has been 2% over the NATO required threshold from 2015 when Russia first annexed Crimea in 2014.  Now other countries are also increasing their spending as well as raising taxes or cutting down on spending. Hopefully, this new increase will be used in property to ensure the safety of citizens using deterrence.

Estonian tax reforms have started in 2025 and further temporary changes are planned in 2026 with a temporary tax from 2026 until 2028. 

Tax Reforms for 2025

Value-Added Tax (VAT)

Increase to 24%: Starting July 1, 2025, the VAT rate will rise from 22% to 24%. VAT-registered companies will need to start using this rate from that date.

Personal Income Tax (within Estonia) 

Increase to 22%: From January 1, 2025, the flat personal income tax rate will increase from 20% to 22%. New rate applicable to payments received from 1st of January 2025 – i.e. salary for work done in December 2024 taxed with new rate if the payment date is in 2025.  

Corporate Income Tax / Dividend tax

Increase to 22%: From January 1, 2025, the corporate income tax rate on gross distributions will increase from 20% to 22%, i.e., 22/78 on net distributions.

Profits are taxed at the rate applicable at the time of the pay-out—i.e., profits generated during 2024 but paid out in January 2025 will be subject to a 22% tax rate. 

From the 1st of January 2025, the reduced tax rate of 14% on regularly distributed dividends will be abolished and all types of profit distributions will be taxed at the 22/78 tax rate.

New Motor Vehicle Tax

Introduction: From January 1, 2025, an annual motor vehicle tax and registration tax will be levied on vehicles registered in Estonia.

Calculation: Tax rates will depend on the vehicle’s weight, CO₂ emissions, and age. The taxation period is one calendar year, and tax will be paid in two parts – 50% by the 15th of June and 50% by the 15th of December. 

From the 1st of January 2025, tax exemption thresholds will be increased for the following (employee & board members-related) expenses:

  • Daily allowance abroad (first 15 days) – up to €75
  • Daily allowance abroad (following days) – up to €40
  • Compensation for Use of Personal Vehicle for Work Purposes – up to €0.50 per kilometre, for up to €550 per month
  • Cost of meals given to a crew member during voyage/flight – up to €20 a day per person
  • Representation costs – up to €50 per month plus 2% of the payroll subject to social tax.  For example, if a company has an employee from which it pays €825 of social tax per month, then the representation cost is €66.25 per month (825x2%) + 50) 

Planned Tax Changes for 2026–2028

Security Tax

The Estonian Government has introduced a three-year ‘security tax’ package. The objective of the package is to contribute to Europe’s security infrastructure, as well as ensure Estonia’s economic and business ecosystem remains resilient and sustainable. 

The package involves a tax-raising effort that will impact all Estonian tax-paying citizens, residents, and companies. This includes Estonian companies founded by Estonian citizens, residents, non-residents, and e-⁠residents.

A temporary security tax will be introduced from January 1, 2026, to December 31, 2028, to fund national security initiatives.

For Individuals

From 1st of January 2026 until 31st of December 2028, a 2% security tax will apply to the gross income of tax resident private persons or non-residents earning taxable income from Estonia, which is taxable with personal income tax, such as income earned through employment, business, sale of property, renting, dividends, pensions funds, etc.

Tax is applicable to gross income, which means that deductions that are available for PIT do not apply – such as basic exemption, training costs, made donations or contributions to third pillar pensions funds, etc.

Tax is also applied to income a resident person has received from abroad, from employment, business, dividends, etc.

Tax is not applied on dividends received from resident companies for which security tax has already been applied.

From the 1st of January 2026 until the 31st of December 2028, a 2% security tax will apply to non-resident private persons’ income to which personal income tax is applicable in Estonia.A non-resident is a natural person who is not a tax resident of Estonia. A non-resident will become a tax resident if they have stayed or plan to stay in Estonia for more than 183 days during a year. But if a non-resident receives income from Estonia where the income is subject to be paid in Estonia, e.g. Rental income and gains from transfer of property.

The right to apply security tax to non-residents’ income is limited by double taxation treaties, and only income for which the treaty allows taxation in Estonia can be subject to security tax. 

The tax will be withheld alongside personal income tax. 

For Corporations

From the 1st of January 2026 until the 31st of December 2028, 2% tax on annual profits for resident companies and non-resident companies operating in Estonia.

The tax base for calculating security tax is accounting profit shown in the annual report, if a company is operating at a loss, security tax obligation will not arise.

The first payments will be advance payments, which are due on the 10th of September 2026 and the second 10th of December 2026. The tax is based on ½ of the previous fiscal year’s accounting profit before income tax. The tax is paid in advance quarterly and then finalized after submitting the fiscal year’s report, allowing the tax burden to be spread out and paid in instalments. 

The company is required to declare to the Tax and Customs Board all profits subject to the security tax earned during the financial year or profit attributed to the permanent place of business and to pay security tax to the Tax and Customs Board’s bank account.

If we jump to a 2026 example, where a company with a financial year of 01.01.2026-31.12.2026, the deadline for filing an annual report is 30.06.2027, the deadline for filing a security tax declaration and making the tax payment is 10th of September 2027.

But since security tax is collected quarterly and in advance payments, then the following steps would have happened. 

  • The company would have an advance tax collection which is based on the financial year of 01.01.2025-31.12.2025, since the deadline for filing an annual report is 30.06.2026. Then in 2026, there will be two advance payments, which are calculated from ½ of the 2025 profit. The ½ will be paid in two parts, one on 10.09.2026 and the second on 10.12.2026. For example, if the company profit was €100 000 in 2025 then 2% security tax is 2 000 EUR. Of that ½ must be paid. Which means 1,000 EUR is paid in two parts. 500 EUR on the 10th of September 2026 and 500 EUR, the second part on the 10th of December 2026. 
  • In 2027 the same company will need to pay advance payments. In this case, the company will need to pay advance payments on the 10th of each of the following months, March, June, September, and December.  The advance payments are calculated from the 2026 profit. If we assume that the the 2026 profit is again 100,000 EUR, then the total security tax is 2,000 EUR, which means the company must pay 4x500 EUR.
  • With this example, we assumed the company profit is the same, if the company profit is lower or higher, the next year's advance payments will be higher and there would be settlement and netting of overpaid or underpaid income tax after when filing the corporate tax return.

If the financial year is different from the calendar year, security tax is assessed in 2026 on profit for the previous financial year, proportionally to the number of months that coincided with 2026. Similarly, at the end of the security tax, the profit for 2028 will be taxed proportionally to the number of months that coincide with 2028.

Example 1: Financial year is from 01.05.2025-30.4.2026, the deadline for filing an annual report is 31.10.2026. The security tax will be taken proportionally for the period 01.01.2026-30.04.2026 and must be filed by the 10th day of the ninth calendar month of the financial year, which means the deadline for filing a security tax declaration and paying the tax is 10.01.2027.

Example 2: Financial year is from 01.07.2025-30.06.2026, the deadline for filing an annual report is 31.12.2026, the deadline for filing security tax declaration and paying the tax is 10.03.2027, the taxable period is 01.01.2026-30.06.2026.

Example 3: Financial year is from 01.07.2028-30.06.2029, the deadline for filing an annual report is 31.12.2029, the deadline for filing security tax declaration and paying the tax is 10.03.2030, the taxable period is 01.07.2028-31.12.2028.

If the company has not submitted its annual report by the deadline, the advance payment must be paid based on the pre-tax profit of the last submitted annual report.

Preparing for the Changes

Businesses operating under Estonia’s jurisdiction should:

  1. Review Financial Plans: Update budgets and forecasts to account for higher taxes on profits and increased VAT.
  2. Ensure Compliance: Familiarize yourself with new tax filing procedures and schedules to avoid penalties.
  3. Speak and work with your accountant: Get familiar with the tax changes and how it will affect your business, and plan accordingly with your accountant. 

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