As Estonia moves forward with comprehensive tax reform, a range of changes will soon take effect, impacting businesses and individuals alike. Here, we provide a structured overview of the key adjustments to income, value-added, and motor vehicle taxes, along with a new defence tax proposal set to commence in 2026.
VAT adjustments for key sectors
From 2025, Estonia will see notable shifts in its VAT structure.
- Accommodation sector increase: The VAT rate for accommodation services, including hotels and rental platforms, will increase from the current 9% to 13%.
- Removal of the 5% VAT Rate: Estonia will eliminate the 5% rate applied to certain media, consolidating to three VAT rates: 22% as the standard rate, 13% for accommodation, and 9% for books, media publications, and medicines.
- New building definition: The VAT Act now defines a “new building” as one that is less than a year old. This means that VAT will apply to any property sold within its first year of use, a change aligned with the EU VAT Directive.
Changes to income tax rates and allowances
Significant changes to income tax rates will also take effect from January 2025.
- Increased income tax rate: Estonia’s income tax rate will rise from 20% to 22%, impacting both individuals and businesses. For corporate entities, this higher rate applies to distributed profits from 2025 onward.
- Abolition of 14% CIT rate for regular distributions: The preferential CIT rate of 14% for regular profit distributions will no longer apply. This change may lead some entities to explore options to reclaim the difference between the new rate and the previous 14% through legal channels.
- Flat annual income tax allowance: For individuals, the annual income tax allowance will be set at a flat €8,400, replacing the previous regressive structure. This adjustment may be deferred to 2026, given the anticipated cost to the government.
- Credit institutions’ advanced CIT: For Estonian credit institutions, the advanced CIT rate will rise from 14% to 18%, specifically affecting banks and branches of foreign credit institutions operating within Estonia.
New motor vehicle tax structure
2025 will also introduce a motor vehicle tax applicable to all registered vehicles in Estonia. The tax structure will involve two components: a registration fee upon vehicle registration and an annual tax.
- Annual motor vehicle tax example: A Skoda Octavia with a 129 g/km CO₂ rating and a mass of 1,910 kg will incur an annual tax of €86.
- Registration fee example: For the same vehicle, the registration fee will amount to €855, factoring in both a base amount and a CO₂ component.
Defence tax proposal for 2026
In addition to the above changes, the Estonian government has introduced a defence tax bill, aiming for implementation in 2026. The proposed tax would apply to entities and individuals already subject to Estonian income tax and is set at 2% of annual accounting profits. Notably, previous losses would not offset this tax, which could pose challenges for certain industries, particularly those relying on asset value appreciation rather than cash flow. If approved, this would mark a shift from Estonia’s current CIT deferral system.
The proposed defence tax law is expected to pass through parliament by the end of 2024, requiring companies to carefully monitor its progress and prepare for potential impacts.
These changes highlight Estonia’s shift towards a restructured and streamlined tax system, with implications across multiple economic sectors. Businesses and individuals should evaluate their financial strategies to ensure compliance and adapt to the new tax landscape.
