Significant tax changes in Estonia in 2025–2026

The parliament has adopted the Defense Tax Act, which introduces a temporary defense tax until 31 December 2028. The defense tax will consist of three components:

• 2% VAT from 1 July 2025
• 2% defense tax on personal income from 1 January 2026
• 2% defense tax on companies’ annual profits from 1 January 2026

For resident natural persons, the tax base for personal defense tax will be somewhat broader than the current personal income tax base. It will include income tax exempt foreign dividends and salary, as well as income tax exempt II and III pillar pension payments. The tax base for non-residents (both natural and legal persons) will also extend somewhat beyond the existing limited income tax base. The corporate defense tax will be calculated based on stand-alone annual profits, with advance payments determined by the previous financial year's profits. For example, the profit generated in 2025 will determine the advance payment amounts for 2026. The corporate defense tax will be paid by Estonian resident companies and Estonian permanent establishments of non-residents. Dividends from subsidiaries and profit from permanent establishments abroad will be deducted from the profit. Taxable profit will be increased, however, by transfer pricing adjustments and non-business‑related expenses and payments.

Effective 1 January 2025, a new law in Estonia establishes a motor vehicle tax, which consists of two parts. Vehicle owners will be required to pay an annual tax for light vehicles registered in the motor register. Additionally, a motor vehicle registration fee must be paid when registering passenger cars and vans in the motor register. The tax amount will depend on the weight, CO₂ emissions and age of the vehicle. The new tax will favor electric cars and plug-in hybrids, but also older cars to ensure that these are used until the end of their life.

Personal income tax will increase from a flat rate of 20% to 22% from 2025. The taxation is cash-based and the tax rate applied will therefore depend on the date of payment. Universal tax exemption has been postponed until 2026 and tax exemption will continue to depend on the income of the taxpayer. The 7% income tax withholding will remain applicable only to dividends that were taxed at the reduced Estonian corporate income tax of 14% (applicable until the end on 2024).

Corporate income tax will increase from 20% (of gross distributed profit) to 22% from 2025. The tax rate will be applied to the net taxable amount divided by 0.78 from 2025. The taxation of profit distribution (dividends) is cash-based and the tax rate applied will therefore depend on the date of the profit distribution. Estonia continues to have a unique corporate income tax system whereby resident companies and permanent establishments of non‑resident companies are not subject to tax on their income. They are subject to tax only on the gross amount of distributed profits and certain payments made (e.g., non-business‑related expenses and payments, gifts). A lower income tax rate of 14% is applied to regular dividends until the end of 2024. The advance corporate income tax for credit institutions (bank levy) will increase from 14% to 18% from 2025.

Amendments to the Income Tax Act and the Funded Pensions Act have been adopted, which will improve the investment account system for resident natural persons, allowing them to postpone taxation of their investment income until the income is taken into use. Starting from 1 January 2024, it has been possible to invest in regulated crowdfunding instruments, and starting from 1 January 2025, it will be possible to invest in regulated crypto-assets via an investment account. Additionally, the list of allowed financial assets will be expanded to include non-publicly traded financial instruments issued by credit institutions, such as bonds. However, starting from 1 January 2025, investment account system will no longer be applicable to units or shares of small funds without an operating license. There will be also new rules regarding the taxation of regulated crypto‑assets (incl. deduction of losses).

In addition, starting from 2025, accounts can be opened not only in credit institutions but also in payment institutions, e-money institutions and investment firms. These financial institutions do not need to be based in Estonia but must be residents of an EEA contracting state. The amendments also include a provision allowing accounts opened with an investment firm before 1 January 2024, to be declared as investment accounts. To defer tax liability on income or gains from financial assets acquired through such an account before this date, the cost of acquiring the assets must be declared as an investment account contribution for 2024.

On 4 December 2024, the Estonian Parliament approved several amendments to the Income Tax Act, which will be effective from 1 January 2025 and will increase the amounts of various tax‑exempt payments and expenses. 

The EU Minimum Tax Directive (2022/2523) was partially transposed in Estonia, as Estonia and other smaller countries with fewer than 12 ultimate parent entities of multinational groups within the scope of the Directive (i.e., with a consolidated revenue of over 750 million euros) may postpone implementing the minimum tax requirement until 2030.

An act amending the Tax Information Exchange Act, the Taxation Act and the Income Tax Act took effect on 12 May 2024, stipulating that the tax authority shall publish information about multinationals' country-by-country reports (CbCR) on its website in compliance with public CbCR requirements (pCbCR). The CbCR reporting requirement applies to companies with a consolidated revenue of at least 750 million euros in the previous financial year. The report is usually provided by the group’s parent or another entity designated by the group. An Estonian entity that is a member of a large multinational group but is not a parent entity or designated entity for CbCR purposes must inform the tax authority about the member of the group that is filing the CbCR and the jurisdiction where the reporting entity is resident for tax purposes. The tax authority will make use of the CbC reports and, without any further action required from the taxpayer, will publish the above information on its website by the 10^th day of the month following the month in which the data was reported. The disclosure requirement applies to financial years beginning on or after 22 July 2024.

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 applicable tax treaties with 63 countries.

From 2025, the maximum tax rate for residential and agricultural land will be increased from 0.5% to 1.0% of the taxable value of the land. The maximum rate on other land, such as commercial, production and transport land, will be increased from 1.0% to 2.0% of the taxable value of the land. In 2025, the annual increase in land tax will be subject to a uniform national ceiling of 50%, or 20 euros in cases where the 50% increase would amount to less than 20 euros. From 2026 onwards, local governments will be able to set their own limit for the annual increase in land tax, ranging from 10% to 100%. Land tax cannot exceed the amount calculated on the basis of the taxable value of the land and the applicable land tax rate.

The nationwide area-based tax relief for land under homes will be abolished from 2026, but local governments will be able to decide on the size of the amount-based tax relief for land under homes. The relief may be up to 1,000 euros and land tax will have to be paid for the part exceeding the tax relief. A higher land tax can be paid in two instalments: by 31 March and 1 October. 

According to the amendments to the Accounting Act, starting from 1 July 2025, sellers will be obligated to provide an e-invoice if a buyer requests it. The buyer has the right to demand an e-invoice from a seller in the private sector if the buyer is registered in the commercial register as an e-invoice recipient. If a buyer requests an e-invoice and no other format has been agreed upon, the European eInvoicing standard (EU EN16931-1) will be used by default. This amendment applies to all accounting entities registered in the commercial register as e-invoice recipients, including public sector entities.

According to the amendments to the Auditors Activities Act compulsory audit and review thresholds regarding sales revenue and assets will be increased.

An audit of the annual accounts is compulsory for accounting entities in whose annual accounts at least two of the below indicators of the financial year exceed the following conditions:

1. Sales revenue or income 5,000,000 euros (current 4,000,000 euros)
2. Total assets 2,500,000 euros (current 2,000,000 euros)
3. Average number of employees 50 (unchanged)

The audit is also compulsory for accounting entities fulfilling any of the following three conditions:

1. Sales revenue or income 15,000,000 euros (current 12,000,000 euros)
2. Total assets 7,500,000 euros (current 6,000,000 euros)
3. Average number of employees 180 (unchanged)

The review of the annual accounts is compulsory for an accounting entity in whose annual accounts at least two of the below indicators of the financial year exceed the following conditions:

1. Sales revenue or income 2,000,000 euros (current 1,600,000 euros)
2. Total assets 1,000,000 euros (current 800,000 euros)
3. Average number of employees 24 (unchanged)

The review is also compulsory for accounting entities fulfilling any of the following three conditions:

1. Sales revenue or income 6,000,000 euros (current 4,800,000 euros)
2. Total assets 3,000,000 euros (current 2,400,000 euros)
3. Average number of employees 72 (unchanged)

These criteria will be applied to all financial years beginning on or after 1 January 2024.

On 18 December, the Estonian tax authorities released the Debt-Push-Down Guidelines, offering an official interpretation on various corporate restructuring transactions, including those related to leveraged acquisitions and internal corporate restructurings. For instance, it has been a common practice to establish a Special Purpose Vehicle (SPV) for the acquisition of a target company in Estonia, which is subsequently merged with the acquired company. This results in assumption of the acquisition debt by the acquired company, serviced directly from its cash flows. This strategic move, which can lead to considerable tax benefits, is now under scrutiny by the guidelines, particularly in the cases where there is a lack of economic substance. The guidelines specify which restructurings are deemed aggressive tax planning,  potentially leading to scenarios where loan repayments or equity distributions are treated as taxable profit distributions. Conversely, the guidelines also set forth criteria for restructurings that are justified by business rationale rather than being tax-driven.