Overview of 2025–2026 tax changes

Many tax changes are coming to Estonia from 1st of January 2025, affecting value-added tax, corporate income tax and personal income tax. In addition, a new motor vehicle tax will become into force. We have compiled an overview of the adopted changes that will enter into force in 2025 and we will also provide an overview of the planned changes. The information has been updated as of 18.12.2024.

2025 tax rates at glance?

• Corporate income tax rate 22% (22/78)
• Personal income tax rate 22%
• Non-taxable income (basic exemption) is up to €654 per month and up to €7848* per calendar year depending on individual’s annual gross income
• Fixed non-taxable income (basic exemption) in retirement age is up to €776 per?month and up to €9312 per year
• Social tax rates:

Employer’s liability?33.8% (consists of 33% social tax and 0.8% unemployment insurance premium)

Employee’s liability 1.6% unemployment insurance and 2%/4%/6% voluntary contribution to second pillar pensions fund

• VAT standard rate 22%, until 30th June 2025, and 24% from 1st July 2025**, reduced rate 13% and 9%
• VAT registration threshold €40.000
• The minimum wage is €886?per month, €5.31 per hour

2025 changes – approved

Defense Tax

A new temporary tax type to address state budget deficit - a defense tax of 2% would be applicable to taxable turnover, corporate profits, and personal gross income.?

To implement defense tax following changes are made in: ?

Value-Added Tax

• From 1st of July 2025 until 31st December 2028, standard VAT rate will increase from 22% to 24% to include new defense tax.

As of 1st of July 2025, taxable persons will no longer have a right to apply VAT rate of 20% in case of long-term contracts concluded before 1st of May 2023, if the contract provides that the applicable VAT rate is 20% and did not provide for a change of price due to changes in VAT rate.

This transitional measure, introduced in relation to VAT increase from 20% to 22% in 2024, was originally planned to be in force until 31st of December 2025.

Corporate Income Tax

• From 1st January 2026 until 31st of December 2028, 2% defense tax will be applicable to earned profits of resident companies and profits non-resident companies have earned through permanent establishment located in Estonia.

Tax base for calculating defense tax is accounting profit shown in annual report, if company is operating at a loss defense tax obligation will not arise. There will be no possibility to carry forward losses from previous periods.

NB! Unlike traditional corporate tax systems, unrealized gains are included in the tax base for defense tax.

• To avoid double taxation, received dividends are excluded from the tax base if the underlying profits from which said dividends were paid out have already been taxed with defense tax, or have already been taxed in foreign country and the recipient holds at least 10% of the share capital of payee. Similarly, profits received from resident company’s permanent establishment located in foreign country are excluded from tax base.

Only dividends that have been included in the accounting profits of the reporting period can be deducted, thus attention should be paid how received dividends are reflected in the accounting.

• Taxation period is company’s financial year and taxable person is obligated to provide information to Tax Authority and pay defense tax by 10th day of ninth month following the end of financial year.

Taxable persons must make advance payments to Tax Authority by the 10th day of last month of each quarter.

Credit institutions, insurance providers and listed companies must make advanced payments based on previous quarter profit.

• In addition, the companies will have an obligation to withhold defense tax on payments made to private persons and non-residents. The defense tax is withheld from the taxable payment in parallel with the income tax, and withholding is based on the rules applicable to the withholding of income tax.

For more in depth overview please see the article.

Personal income tax

• From 1st of January 2026 until 31st of December 2028, 2% defense tax will be applicable to gross income of resident private persons 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 which 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 applicable to income resident person has received from abroad, from employment, business, dividends etc.
• Tax is not applied on dividends received from resident companies for which defense tax has already been applied to.
• From 1st of January 2026 until 31st of December 2028, 2% defense tax will be applicable to non-resident private persons’ income to which personal income tax is applicable in Estonia.

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

Motor Vehicle Tax – a new tax type

• From 1st of January 2025 a new annual motor vehicle tax will be applicable to motor vehicles registered in traffic register.

The tax will be applicable to following vehicle categories:?passenger cars (M1, M1G);?vans, wagons, and pickup trucks (N1, N1G);?motorbikes (L3e, L4e, L5e, L6e, L7e);?off-road vehicles (MS2);?wheeled tractors (T1b, T3, T5).?

The taxation period is one calendar year and tax will be paid in two parts – 50% by 15th?of June and 50% by 15th of December.?

Tax Authority will issue a tax notice to the taxpayer by 15th of February for motor vehicles already in the traffic registry. A tax notice will be issued within 15 working days after registration in traffic register for motor vehicles registered for the first time during tax period.?

• From 1st of January 2025 a registration fee will be applied to a first registration of a vehicle in traffic register in Estonia or upon first owner change after 1st of January 2025, unless registration fee for that vehicle has already been paid.

Registration fee will not apply to purchase of leased vehicles from leasing company after lessee becomes the owner nor upon the registration of the inherited vehicle. The registration fee will apply to next sales transaction and owner change.

• Both annual tax and registration fee are calculated from following components - base rate, CO2 emissions, full weight, and vehicle age.

Vehicle age will gradually reduce the amount of motor vehicle tax.

For fully electric vehicles CO2 emissions component is not used.?

• To be better prepared for upcoming changes and assess your tax liability, the Tax Authority has created a Motor Vehicle Tax Calculator, available here.

Changes in Corporate Income tax

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

Estonia implements a cash-based calculation, and profits are taxed with 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 22% tax rate.?

• From 1st of January 2025, reduced tax rate of 14% on regularly distributed dividends will be abolished and all type of profit distributions will be taxed at 22/78 tax rate.
• From 1st of January 2025, the corporate income tax (gross) rate on advanced income tax paid by credit institutions will increase from 14% to 18%.?
• The business expenses scope is broadened to include all reasonable and necessary expenses made by the employer to create and ensure a safe work environment and to comply with occupational health and safety requirements and may also include expenses not explicitly required by Occupational Health and Safety Act.

Currently only expenses arising from Occupational Health and Safety Act are seen to be related to business.

• As of January 1st, 2025, massage, dental care, nutritional therapist services, and psychological therapy will be added to the list of tax-exempt expenses related to improvement of employee health.?
• From 1st of January 2025 tax exemption thresholds will be increased for following (employee-related) expenses:?

• The tax exemption amount for expenses related to improvement of employee health will remain the same from an annual perspective (€400), but the quarterly limit (€100) will be abolished allowing for more flexibility.?Additionally, massage is added to the list of covered expenses.

Changes in Personal Income Tax

• Fixed basic exemption of €700 per month i.e., €8400 per year, will be postponed to 2026. Previously meant to come to force from 1st of January 2025.?
• From 1st of January 2025, the 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. ?

• From 1st of January 2025, resident private persons can increase the contribution rate to mandatory funded pension from 2% of gross salary to either 4% or 6%.?

Selected contribution rate is valid for at least one calendar year.?

Application to change the applicable rate can be submitted any time within the year, however the new rate becomes active from 1st of January following year if the application is submitted before 30 November. For application submitted in December, new rate becomes active from January in the year following the next year – e.g., application submitted in December 2024 will become active from January 2026.?

In order or the new rate to become active from 1st of January 2025, an application needs to be submitted by 30th of November 2024.?

• Retroactively from 1st of January 2024, the following will be treated as financial assets under the Income Tax Act:

Covered bonds as defined by the Covered Bonds Act or by the European Parliament and Council Directive (EU) 2019/2162.

Granted loans or shares acquired through crowdfunding service providers licensed under EU Regulation 2020/1503.

• From 1st of January 2025, cryptocurrency assets acquired from authorized service providers are recognized as financial assets.
• Recognition as financial assets enables:

Deduction of losses from the transfer of crowdfunding loans or cryptocurrency transactions against gains, or

Inclusion of these assets in the investment account system to defer income tax liability.

• Retroactively from 1st of January 2024, transaction fees and platform fees are no longer treated as withdrawals from investment account.
• From 1st January 2025 a definition of investment account is expanded to include:

An account in a payment institution or e-money institution, or their permanent establishment, in Contracting States or OECD member states.

An account with an investment firm of a Contracting State, opened on behalf of the taxpayer, provided investment firm clearly separates taxpayer’s funds from own and other clients’ funds. ?

• Furthermore, income tax liability can be deferred from income derived from financial assets if it has not been withdrawn from a platform managed by a crowdfunding service provider or a crypto-asset service provider.

Changes in Value-Added Tax

• From 1st of January 2025, a reduced VAT rate on accommodation services (hotel and short-term rent) or accommodation services with breakfast, excluding any goods or services accompanying such services, is increased from 9% to 13%.
• From 1 January 2025, the VAT rate on press publicattions, both on physical media and in electronic form, will increase from 5% to 9%. The exception is publications that contain mainly advertising or classified ads or mainly erotic or pornographic content or video or music content, which will remain subject to a VAT rate of 22% (planned to be 24% from 1 July 2025).
• Special scheme for small enterprises will become applicable from 1st of January 2025, it will allow for taxable persons established in Estonia to operate in other Member States without having to register there for VAT.

Companies can apply special scheme for their turnover in other Member States if their turnover in EU as whole does not exceed €100k within calendar year.

If company exceeds the registration threshold in another Member State, but not the €100k threshold for the EU, they must register in that Member State, but special scheme is applicable to turnover in other Member States where registration threshold has not been exceeded.

If the turnover of €100k for the EU is exceeded special scheme is no longer applicable. NB! Domestic Estonian supply is included in the EU threshold calculation.

Special scheme is also applicable for companies who are not registered in Estonia for VAT reasons, i.e. they have not exceeded the local registration threshold of €40k but have turnover in other Member States.

A person will have to notify Tax Authority of implementing the special scheme via web portal.? Purchases received from a person registered for a special scheme do not create reverse VAT obligation for the recipient.

Similarly, such purchases will not create an obligation to registered as VAT taxable person with limited liability.

Users of special scheme cannot deduct input VAT from goods and services used for supply under special scheme.

• Obligation to register for VAT will arise based on equal conditions for resident and non-resident persons.

In relation to this, from 1st of January 2025, insurance and financial services (not of occasional nature) will be included in the taxable supply threshold calculation.

• From 1st of January 2025, VAT will be applicable to the first transfer of real estate within one year after the first commencement. Currently VAT is applied to the sale of real estate prior to its first commencement, after which transfer of real estate is VAT exempt.
• Change to principle of fixed asset input VAT deduction which will mainly affect real estate.

Currently, input VAT on fixed assets is deducted based on the estimated proportion of how the asset will be used for the purpose of taxable supply. The input VAT is then adjusted gradually at the end of each calendar year based on the actual usage of the asset during that year.

Under the new changes, if the actual use of the fixed asset differs from the initial estimate the input VAT will be adjusted immediately in full during the taxable period asset is first put into use. ?

• From 1st of January 2025, mental health services provided under the conditions specified in the Social Welfare Act will be exempt from VAT.

Changes in excise duty

• From 1st of January 2025, the excise duty rate on alcohol, cigarettes, smoking tobacco, and tobacco liquids will increase by 5%, and again by 5% in January 2026.?
• From 1st of January 2025, the minimum amount of excise duty payable on cigars and cigarillos will increase by 5%, and again by 5% in January 2026.
• Additional increase of excise duty rate by 5% on alcohol, and tobacco products from 1st of January 2026.

As increase of 5% is already set from 1st of January 2026 with proposed changes the total increase of excise duty rate will be 10% in January 2026.

• The excise duty on alcohol and tobacco products will be increased by 5% in both 2027 and 2028.
• The excise duty rate of unleaded petrol and other fuels taxed at the same rate as unleaded gasoline, primarily aviation spirit, will be increased by 5% annually for the next four years, from 1st of July in 2025, and from 1st of May in 2026–2028.?

Article by: Jaana Sild