Significant tax changes in Estonia in 2025–2026

The compensation for using a personal car for the business purposes of the employer increased to 0.50 euros per km with a limit of 550 euros per month (until the end of 2024 these limits were 0.39 euros and 335 euros respectively).

The tax‑exempt daily allowance for employees in the case of business trips abroad increased from 50 euros to 75 euros. The limit of 75 euros applies for the first 15 days, after which the tax‑exempt limit of the allowance drops to 40 euros per day instead of the previous 32 euros.

The annual limit of 400 euros for tax‑exempt expenses related to employee health promotion is no longer split equally between quarters. The amendment also expands the range of health services that the employer can reimburse tax exempt. The expanded range includes services such as massages and dentistry, psychological therapy, speech therapy and nutrition counseling provided by a licensed person.

The tax‑exempt limits for covering certain accommodation expenses of an employee (whose place of residence is at least 50 km from the place of work and who does not own any residential real estate closer to the place of work) working on the basis of an employment contract increased from 200 to 500 euros per month in Tallinn or Tartu and from 100 to 250 euros elsewhere.

The tax‑exempt threshold for goods and services provided for advertising purposes, such as promotional gifts, increased from 10 to 21 euros (excluding VAT).

The fixed monthly limit of tax‑exempt representation costs increased from 32 to 50 euros. Tax‑exempt representation costs include payments related to catering, accommodation, transportation or entertainment of guests or business partners.

Non-profit entities in the list of entities with income tax incentives have higher tax‑exempt amounts (85 euros per participant) for providing souvenirs to participants in youth camps or sports events. 

Estonia and Pakistan have signed a convention for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance. The treaty is applicable in Estonia from 1 January 2025 and in Pakistan from 1 July 2025. Regarding double taxation relief, Pakistan applies the credit method. As a rule, Estonia applies the exemption method, but uses the credit method for dividends, interest, royalties and technical service income. For dividends paid by an Estonian company to a resident of Pakistan who owns at least 10% of the shares with full voting rights in the Estonian company, Pakistan will allow a deduction from tax (credit) equal to 12.5% of the gross dividends received.

Estonia has published a law in the State Gazette on 21 June 2025, to terminate the 1997 double taxation avoidance agreement with Belarus. The termination took effect on 1 July 2025, as stated in the State Gazette.

To terminate the treaty, notice must be provided to the other country at least six months before the year-end, meaning the earliest possible termination date is 1 January 2026.

This action follows Belarus's suspension of essential treaty provisions — Articles 10 (Dividends), 11 (Interest), and 13 (Capital Gains) — effective from 1 June 2024.

The aim of double taxation avoidance agreements is to encourage investments between the countries involved. To achieve this, the agreement limits the taxes that one party can impose on income earned in the other country. If the agreement is terminated, both countries will apply only their domestic laws, and income related to both Estonia and Belarus may be taxed in both countries. 

Estonia has published a law in the State Gazette to ratify the double taxation avoidance agreement with Botswana. This act entered into force on 27 June 2025. The tax treaty will be applicable as of 1 January 2026, in Estonia and from 1 July 2026, in Botswana.

Signed on 25 September 2024, this treaty marks the first agreement of its kind between the two nations. 

According to the already enacted amendments to the VAT Act, the standard VAT rate increased from 22% to 24% beginning 1 July 2025. It has now been decided that this tax rate increase to 24% will be permanent rather than temporary for three years. The VAT rate on accommodation services and accommodation services with breakfast were increased from [SR1] [RT2] 9% to 13% from 1 January 2025. The VAT for press publications (newspapers, magazines) from 5% to 9%.Until 31 December 2026, the users of cash accounting of VAT may continue to pay VAT at the rate of  9% on the supply of accommodation services or accommodation services with breakfast generated after 31 December 2024 if an invoice was issued to the recipient and the service was supplied before 1 January 2025.

In addition to the change in the VAT rate on accommodation services, press publications are taxed at a 9% VAT rate from 1 January 2025. The VAT rate is 9% (currently 5%) of the taxable value of press publications, both on a physical medium and electronically, excluding publications containing mainly advertising or private advertisements or mainly with erotic or pornographic content or video or music content.

Until 31 December 2026, the users of cash accounting of VAT may continue to pay VAT at the rate of 5% on the supply of press publications generated after 31 December 2024 if an invoice was issued to the purchaser and the goods (publication on a physical medium) were dispatched or the service (an electronic press publication) was provided before 1 January 2025.

Effective 1 January 2025, a procedure for the automatic exchange of information between member states is established. According to the amendments to the VAT Act, small enterprises in different member states are able to benefit from a single EU-wide special scheme for small enterprises. In other words, a small enterprise from one member state is able to benefit from the special scheme applicable in their member state in all member states. A small enterprise is a business whose total annual turnover in the EU is below 100,000 euros and turnover generated in another member state does not exceed the threshold for registering as a VAT payer in that member state. The amendments intend to reduce the administrative burden on small enterprises based in the European Union.

The amendments give a person engaged in business in another member state rights equal to those of Estonian small enterprises, enabling them to use the tax exemption for small enterprises if their turnover in Estonia does not exceed 40,000 euros per calendar year, provided that their turnover in the entire European Union does not exceed 100,000 euros per calendar year.

As small businesses is given the right to apply the special scheme for small enterprises in other member states, they lose their right to deduct input VAT for those goods and services used for the supply of goods or services taxed under the special scheme in another member state. If a company registers as a taxable person in a member state, they are also entitled to a refund of input VAT in that member state. However, if a company chooses to apply the special scheme for small enterprises, they are not liable to tax in that country, but will also lose their right to deduct input VAT on the goods and services used for the provision of services in that member state.

This amendment provides that those registered as a taxable person or a taxable person with limited liability are no longer subject to the reverse charge obligation if the services or goods (incl. goods to be assembled) are acquired from a foreign person engaged in business who has obtained from the tax authorities of the member state of their location the right to apply the special scheme for small enterprises in Estonia and has indicated on the invoice issued for the goods or services their special scheme registration number with the suffix “EX”.

The amendment specifies that the place of supply of events streamed or otherwise made virtually available is not the place where the event actually takes place. Services provided virtually are electronic and taxed accordingly.

Where a cultural, artistic, sporting, educational, scientific or entertainment event service or a service connected with a trade fair or exhibition is streamed or otherwise made virtually available to a person who is not registered as a taxable person or taxable person with limited liability or who is not a third country person engaged in business, the service is taxed at the location of the seat or residence of the recipient of the service, enabling the use of the OSS scheme.

The amendment stipulates that the transfer of new construction works is taxed if no more than one year has passed since commencement of use. The same principle also applies to significantly improved construction works that are transferred within a year of the post-improvement resumption of use. The amendment aims to reduce situations where new construction works are seemingly put into use and then sold without paying VAT.

According to the amendments, the calculation of the threshold giving rise to tax liability in Estonia only includes supply created in Estonia. According to the new regime, the turnover from insurance and financial services, as well as that from transactions involving the right of use or sale of immovable property, is added to the threshold calculation, except when such transactions are incidental. This means that if immovable property is being sold as goods, the sale is included in registration threshold calculations. The sale of fixed assets and investment property, however, is not included.

The obligation to register as a taxable person shall not arise if a person's supply consists only of supply either exempt from tax or taxable at the 0% VAT rate, except for the intra-community supply of goods.

Persons holding an online marketplace and enabling non-EU businesses to sell goods to persons not registered as taxable persons in the EU are required to register as a taxable persons as of the date on which the taxable supply is created.

Persons holding an online marketplace are liable for the performance of the tax obligation on behalf of non-EU businesses who are not subject to the 40,000 euro tax liability threshold.

Persons applying the special arrangements under which VAT is calculated on the basis of profit margin will be required to calculate the threshold for registering as a VAT payer according to the standard criteria, rather than the size of their margin. This means that all consideration received or receivable for goods or services is to be included in the turnover threshold calculation.

An additional condition was added to the Value Added Tax Act, stipulating that if a person's turnover has exceeded the 40,000 euro threshold in both the current and previous calendar years, they are not deleted from the register as a taxable person and must continue to carry out their activities as a taxable person until all the relevant conditions for their deletion have been met.

The amendment supplements the criteria for deletion of a person from the register as a taxable person to bring it into compliance with the new regulation that will enable persons to benefit from the exemption provided by the special scheme for small enterprises within the EU.

One of the amendments to the Value Added Tax Act incorporates the report on intra-community supply (form VD) into the VAT return (form KMD). Following the amendment, all data is to be reported on the VAT return and declared in euros, rounded to the nearest cent.

In addition to combining the KMD and VD forms, there are also plans to transition from the current declaration-based reporting to data-based reporting. This means that taxpayers will no longer be required to fill in the tax return themselves, but only send the necessary data to the tax authority, who will then review and organize the data appropriately.

These amendments should enter into force from 1 January 2027.

The amendment changes the accounting of input VAT on fixed assets. Should the actual use of fixed assets for the purposes of taxable supply differ from the estimated proportion upon their first use, the deducted input VAT is fully adjusted in accordance with how the fixed asset was first used. This helps to eliminate scenarios where a taxable person is initially allowed to deduct the entire input VAT amount on immovable property, but subsequently has to adjust the deducted input VAT yearly in 1/10 increments over a period of 10 calendar years when the property is used for supply exempt from tax. The initial adjustment shall be made in full upon first use based on the actual usage.

It became possible to apply special arrangements for the resale of original works of art purchased from the author or copyright holder, even if the piece has been sold to the reseller by another taxable person who has not utilized the special arrangements.