Estonia rescinds the temporary defense tax, boosts several tax rates instead
In a significant move, Estonia's Parliament, the Riigikogu, has published tax reforms that will take effect from 2026, following their approval on June 19, 2025, and publication in the State Gazette on July 8, 2025.
One of the key changes involves an increase in the corporate income tax rate from 22% to 24%. This adjustment, set to commence in 2026, will impact the net dividends distributed by Estonian companies. It's important to note that dividends distributed in 2025 will continue to be taxed at the current rate of 22%.
In a positive development for businesses, the temporary defense tax for the years 2026-2028, which was previously implemented, has been abolished. This means that Estonian resident companies and permanent establishments in Estonia are no longer required to maintain separate tax accounting for defense tax purposes.
However, the personal income tax rate will also see an increase, rising from 22% to 24% (flat rate) effective from 2026. This adjustment may have a negative impact on the net income of Estonian resident employees and taxpayers. It's worth mentioning that the taxable income of those whose income falls below the annual basic exemption will not be affected by this increase.
The standard VAT rate has also undergone a permanent increase, rising from 22% to 24% on 1 July 2025. This change may encourage companies to distribute their taxable profits in 2025 instead of 2026, as the taxation of profit distribution (dividends) is cash-based, and the tax rate applied will depend on the timing of the profit distribution.
For more detailed information on these changes, readers are advised to refer to the Tax News Update: Global Edition (GTNU) of this Alert. Ernst & Young Baltic AS, Tallinn, can provide further information on this matter, with contact persons including Ranno Tingas, Hedi Wahtramäe, and Tõnis Elling.
The Alert was published by NTD's Tax Technical Knowledge Services group, with Carolyn Wright serving as the legal editor. For comprehensive insights into Estonia's tax landscape, it's essential to stay informed about these updates.
