Growth of the tax-free minimum
Since 2023, Estonia has been increasing the income-exempt minimum and will compensate for the previously suspended payments to the second pension. The following is an overview of the significant legislative changes in the area of responsibility of the Ministry of Finance, which will come into force in 2023.
Tax-free income from this year increased from 500 to 654 euros per month or from 6,000 euros to 7,848 euros per year.
The tax-free minimum is calculated for a calendar year and employees earning up to 14,400 euros per year will be able to use it in full, i.e. deduct 7,848 euros from their taxable income. For those earning more than EUR 14,400 a year, the tax deduction is gradually reduced to zero for people earning more than EUR 25,200 a year.
For recipients of the old-age pension, the tax-free income is equal to the average old-age pension, which in 2023 will amount to 704 euros per month. For old-age pensioners, this tax deduction is retained regardless of their total annual income.
Fuel excise increase postponed
The reduced excise rates were extended until 30 April 2024 – this applies to diesel fuel, fuel oil, natural gas, liquefied gas and electricity.
The gradual increase of excise duties to the pre-crisis level is planned for the period from May 1, 2024 to May 1, 2027.
Until 30 April 2024, the agricultural and shale sectors will be able to use diesel fuel with special marking at a minimum allowed rate of 21 euros per 1000 litres (excise duty on conventional diesel is now 372 euros per 1000 litres).
Increased excise duty on tobacco products and re-introduced excise duty on nicotine-containing liquids
Reimbursement of suspended contributions to pension pillar II
At the end of January, participants in the second pillar will be reimbursed for the public portion of contributions that were suspended for 14 months in 2020-2021.
These are persons born since 1961 who did not leave the secondary level and who continued to pay 2 percent of their gross income between 1 July 2020 and 31 August 2021, despite the fact that the State has suspended payments of 4 per cent. State payments were not suspended for those born before 1961. Those who left the second stage will also not be compensated in January, as they have already been compensated.
If payments are made to the pension and investment account, the compensable amount will also be transferred to the investment account. Those leaving second pillar in January will simply receive an additional payment.
The compensable amount is calculated on the basis of contributions made by the person during the period of suspension of public payments. If in the period from July 1, 2020 to December 31, 2022, the average yield of pension funds II stage is positive, then the compensable amount is increased by this yield.
Second-tier payments made by debtors can now be seized
As of 1 January 2023, the bailiffs have the power to seize the second-pillar debtor. This means that the owner of the pension register withholds the amount of the debt from the debtor. If funds are held in a pension fund, in a pension investment account or have been invested in securities through a pension investment account, they can still not be recovered to cover debts.
Increase in VAT and personal income tax
New coalition agreement provides for an increase in VAT and income tax
will increase from 1 January 2024 by 2 percentage points, and personal income tax – by 2 percentage points from 1 January 2025. The tax-free minimum will rise to 700 euros.
“Yes, it is clear that these are unpopular decisions. But, unfortunately, in the current security situation, we have no other option. We must increase defence expenditures and be ready to defend Estonia, no one else will bear these costs for us. In addition, in recent years we have built a kind of welfare state, and maintaining such a state requires expanding the tax base,” said Prime Minister of Estonia Kaya Kallas.
Conclusion
As can be seen from the above, tax changes will affect only the permanent residents of Estonia and will not affect the international entrepreneurs opening a company in Estonia – the tax on the retained earnings of the company will remain 0%. Also, the investment profit of the company is not subject to taxation – the purchase of real estate, vehicles, office equipment and furniture for business needs will not be subject to additional taxes. An Estonian company may not have local employees and the use of a virtual office is allowed, and the profit of the owner of the company may be distributed dividends, to the size and frequency of payments which are also not strict obligations.
A more detailed analysis of Estonia’s tax advantages over other European countries is available here.