As of 01.01.2025, the standard income tax rate in Estonia will be 22% instead of the previous 20%. The corporate income tax rate is 22/78, or 28.21% instead of the previous 20/80 (25%), and the advance payment rate of credit organisations’ income tax is 18% instead of the previous 14%.
The lower dividend tax rate of 14/86 and the 7% withholding tax on dividends paid to an individual will disappear. Therefore, from 2025, dividends will only be taxed at a tax rate of 22/78.
From 1 January 2024, the global minimum tax for groups with a turnover exceeding €750 million began to apply in most EU member states, as well as in other countries such as the UK, Canada, Australia, Singapore and New Zealand. If the effective tax rate of group members in a particular jurisdiction is less than 15%, other countries have the right to tax understated group profits. The abolition of the 14% rate gives Estonian companies the opportunity to achieve an effective tax rate of 15% and avoid taxation of profits earned in Estonia in other countries, such as the country of the group’s head office, if the minimum tax applies there.
As the 14% income tax rate will be abolished from 2025, there will no longer be a need to withhold 7% income tax on dividends paid to individuals.
Under current law, a dividend regularly paid to an individual is taxed at the rate of 7% if, at the level of the company paying the dividend, the distributed profits were taxed at the rate of 14% or on a tonnage basis. With the amendment, Articles 18, Part 1 3, § 29, Part 7 1and Article 41, Part 72 of the Income Tax Act are invalidated.
In the case of companies taxed under the tonnage regime, the obligation to withhold income tax was added to the law based on the feedback received from the European Commission on Estonia’s state aid application, according to which the tax liability arising from dividends and profit distributions to an individual shareholder or partner should be retained even if the income from eligible activities of the company is taxed under the tonnage regime. Since the income tax withholding obligation is abolished in the case of dividends paid to an individual, it is also abolished in the case of companies taxed under the tonnage regime.
Transitional provisions
Article 54 of Part 4 of the Income Tax Act was amended and Article 61 was supplemented by Parts 68-70.
According to the amendment of section 54 (4)1 of the Income Tax Act, a resident credit institution and an Estonian branch of a non-resident credit institution may deduct from the income tax payable on the basis of section 50 (1) or ( 2) or § 50 (2)2 or § 53 (4) advance payments, 2paid in previous calendar years and in the current calendar year on the basis of payments § 471 When calculating the income tax payable on the basis of section 50 (1) or (2) or § 50 (2) or § 53 (4) advance payments paid in excess may be required to be refunded. Advance payments may be deducted to the extent not previously deducted.
In contrast to the current procedure, under which only advance payments paid in previous calendar years can be deducted from the income tax payable on distributed profits, from 2025 advance payments paid in the current calendar year can also be deducted. The change is necessary because under the current provision, in a situation where a bank distributes a significant amount of profit earned in the previous calendar year, when distributing dividends, fourth quarter profit is effectively double taxed as long as the dividends are paid in the following calendar year (income tax on dividends must be paid as well as advance income tax on the 4th quarter profit of the previous calendar year).
Importantly, under the transitional provision, the change does not apply to the advance payment made on fourth quarter 2024 profits, which cannot be deducted from income tax payable on profits distributed in 2025, but from income tax payable on profits distributed in 2026.
Amendments to section 61 of the Income Tax Act
Under section 61 (68) of the Income Tax Act, a resident company withholds income tax at a rate of 7 per cent on dividends or other distributions of profits paid to an individual if it is exempt from income tax under section 50 (11) of the Income Tax Act and if the profits underlying the dividends or other distributions of profits were taxable until 31 December 2024. under section 501 of the Income Tax Act, valid until December .
This transitional provision is necessary to avoid the possibility of paying dividends to an individual at the 14% rate without the 7% withholding obligation. From 2025, both the 14% rate and the obligation to withhold 7% income tax on dividends paid to individuals will be abolished. In a situation where an Estonian company has distributed profits to another Estonian company at the 14% rate, the exemption method applies if the other company distributes those profits to its shareholders. If the other company distributes its profits in 2025, when the 14% and 7% rates will no longer apply, in the absence of a transitional provision, the individual will only receive dividends taxed at the 14% rate. This would allow tax avoidance and encourage individual investors to set up a company before 2025 and transfer their interests in other companies to it. Thus, an individual could reduce the tax rate on dividends received from 20 per cent (from 22 per cent) to 14 per cent. In order to avoid such abuse, a transitional provision has been established which obliges a company to withhold income tax at a rate of 7% on a dividend paid to an individual if part of the profits underlying the dividend was taxed at 14%. %, and at the profit distributing company level, the exemption method applies to deferred dividends. As dividends received which are taxed at 14% are currently declared separately, the Tax and Customs Board already has data on dividends taxed so far, from which income tax should continue to be withheld at 7% in the future.
A resident credit institution and an Estonian branch of a non-resident credit institution pursuant to Paragraph 69 of the same Article may also deduct advance payments made in previous calendar years pursuant to Article 471 of the TUMS valid until 31 December 2024 from the income tax payable pursuant to Article 50 (1) or (2) or Article 53 (4) of the Income Tax Act.
The amendment clarifies that credit institutions may also deduct advance payments taxed at 14% from income tax paid on distributed profits.
Pursuant to paragraph 70 of the same Article, a resident credit institution and an Estonian branch of a non-resident credit institution shall pay the advance payment provided for in Section 471 of the Income Tax Act on profits earned in the fourth quarter of 2024. at the rate of 14 per cent.
The change is necessary to ensure that advance payments for the fourth quarter of 2024, which are due on 10 March 2025, are taxed at the rate in force in 2024. Advance payments made on profits earned in the fourth quarter of 2024 cannot be deducted from income tax payable on profits distributed in 2025.
Withholdings from the income of an individual
As of 01.01.2025 a resident individual is entitled to deduct a non-taxable income of EUR 8,400 per year from his or her taxable income (TuMS § 23 (1 )).
The amendment establishes a single non-taxable income of 700 euros per month or 8,400 euros per year from 2025, except for old-age pensioners whose non-taxable income is equal to the average old-age pension. The tax-free income applies to all residents of Estonia and the European Economic Area (residents of EU Member States, Norway, Iceland, Liechtenstein) regardless of the amount of income they receive.
Non-taxable income does not apply to a resident of a third country (e.g. a resident of Ukraine, Belarus, Uzbekistan, Kazakhstan).
As the entitlement to tax-free income does not depend on annual income, the person receives more money (700 × 22% = €154 per month). The income tax rate will increase by 2%, but all people with a monthly gross income of up to €7,700 will benefit from the change. According to simplified calculations, the income tax liability on €7,700 today is €1,540 (€7,700 × 20%), and thanks to the tax-free income from 2025 it will also be €1,540 (€7,700 – 700 = 7,000; 7,000 × 22.) %). In the case of a higher gross income, the income tax liability already increases.
Non-taxable income is an annual deduction. Non-taxable income can also be utilised in this amount by a person who has received taxable income, for example, in only one month in a year (in which case the amount of income may simply not be sufficient to utilise the full amount of non-taxable income). income). income).
The general purpose of the Income Tax Act is to determine the tax liability in the correct amount, if possible directly at the source of income, in order to reduce the need to file an income tax return for an individual. In order to calculate the tax-free income on a permanent basis, the person making the payment must submit a free-form application (TuMS § 42 para. 1 ). In each calendar month, no more than 1/12 of the tax-free income, i.e. EUR 700, can be deducted from the income (TuMS § 42, Sub-Clause 1). If for some reason the non-taxable income is partially or fully unaccounted for during the year, it is automatically taken into account when filing the individual’s tax return.
Pursuant to Article 61(71) of the Income Tax Act, the Ministry of Finance will analyse the repeal of Articles 231 , 234 and 25 of the Income Tax Act in force no later than 1 January 2024 , and in 2028 by amending Arts. 4 and 23 and cancelling the collateral consequences of Article 50 1
From 2025, the tax law will also make the following tax changes for individuals:
PIT :
The personal income tax rate is currently 20%, which is withheld from income taxed on a so-called gross basis. From 2025, personal income tax will increase to 22%.
Total tax-exempt income :
For an individual under retirement age, the non-taxable income is €7,848 per year or €654 per month, and for an individual of retirement age, €8,448 per year or €704 per month. month. month. The total non-taxable income of an individual below retirement age decreases as their annual income increases. From 2025, the regressive non-taxable income will disappear and there will be a single non-taxable income of €700 per month or €8,400 per year. The exception is old-age pensioners whose tax-free income is equal to the average old-age pension. The general non-taxable income applies to all residents of Estonia and the European Economic Area, regardless of the amount of income they earn.
From 2025, the following tax changes will come into effect in relation to legal entities :
Taxation of distributed profits :
Under current law, distributed profits (e.g. dividends) are taxed at an income tax rate of 20% calculated on the gross amount. However, an income tax rate of 14% can be applied to regularly distributed profits (e.g. dividends). When profits with a lower tax rate (i.e. 14%) are distributed to an individual (i.e. resident or non-resident), a 7% income tax is added and withheld from the individual’s income. In 2025, the corporate income tax rate will rise to 22%. In 2025, the favourable 14% rate for regularly distributed corporate profits will also disappear, and the 7% income tax withheld on profits paid to individuals will also disappear.
Part of the change is due to the fact that from 1 January 2024 the global minimum tax will apply to groups with a turnover of more than €750 million in most EU member states. Under the global minimum tax rules, other countries have the right to tax under-taxed group profits if the effective tax rate of group members in a particular jurisdiction is below 15%. The cancellation of the 14% tax rate in Estonia enables Estonian companies to achieve an effective tax rate of 15% and avoid taxation of profits earned in Estonia in other countries, e.g. in case of the introduction of minimum tax in Estonia. the country of the group’s head office. the country of the group’s head office.
There are also changes in the area of indirect taxation:
Currently, the standard VAT rate in Estonia is 20%. In 2024, the standard VAT rate will increase to 22%.
From 2025, bed and breakfast accommodation will be taxed at a VAT rate of 13 per cent instead of the current 9 per cent, and the VAT rate for press publications will increase from 5 per cent to 9 per cent.
A transitional provision has also been added to the VAT Law, according to which until 31 December 2025 a person liable to pay VAT is entitled to tax at the rate of 20% such turnover which is carried out on the basis of concluded contracts. until 1 May 2023. The transitional provision applies only if, under a contract, the price of a particular good or service is calculated with a VAT rate of 20%, without the possibility of revising this condition due to a change in the tax rate.
Changes related to excise duties are also coming:
Excise taxes on alcohol and tobacco will increase by 5 per cent each year between 2024 and 2026.
The excise duty rate on special purpose diesel will be €21 per 1,000 litres (according to Directive 2003/96/EC governing energy taxation in the European Union, the minimum allowable excise duty rate for agriculture). This cancelled a previously planned increase in the excise duty rate for special purpose diesel.
Tax changes await the gambling sector as well:
The current tax rate of 5% for remote gambling and toto will be increased in two phases. The tax rate will be increased to 6% in 2024 and 7% in 2026.
The tax rate on lotteries and commercial lotteries will be increased from 18 per cent to 22 per cent from 2024.
VAT in Estonia in 2025
VAT will rise by two percentage points from July 2025, personal income tax will also increase by two percentage points from the start of 2026, and excise duty on alcohol, tobacco and petrol will also increase under the new coalition agreement.
The agreement also stipulates that a two per cent corporate income tax will apply from the beginning of 2026 as part of a package of tax increases called the security tax.
The security tax will be temporary and will be in place until the end of 2028.
“The government that takes office after the Riigikogu elections in 2027 will decide whether the tax is needed or whether it will be changed,” the coalition agreement says.
The newly formed coalition promises to cover national defence spending by at least three percent of GDP, plus the cost of hosting allies.
With the new defence investments, the coalition wants to acquire long-range weapon systems and ammunition in order to eliminate the threat to Estonia’s security on enemy territory if necessary.
To counter hybrid threats and the spread of false information, the coalition strengthens Estonia’s information, media and digital space, and increases the digital defence and cyber defence capabilities of the e-state.
The new government promises to reduce the fiscal deficit from a projected 5.6 per cent to three per cent in 2025, keep it at the same level in 2026 and reduce it in 2027.
The new coalition will cut labour and management costs, as well as operating and earmarked subsidies, by 10 per cent over three years.
Excise duties on alcohol, tobacco and petrol will rise by a further five per cent a year.
The elimination of the income tax differential, known as the “tax hump,” scheduled for 2025 will be delayed by a year.
In addition to free higher education, the new Government also intends to allow universities to charge tuition fees for Estonian-language study programmes in certain cases and to seek to expand the opportunities for applied higher education.
The coalition agreement also provides for a reduction in regulation and a rule that any new requirement that imposes an administrative burden on companies requires the removal of an existing requirement.
To bring fiscal spending under control, the government promises to cut labour and management costs as well as operating and earmarked subsidies by 10 per cent over three years: five per cent in 2025, three per cent in 2026 and two per cent in 2027.
In addition to public authorities, the savings also apply to foundations and state-owned enterprises.