09 January 2025 Estonia | Significant tax changes apply in 2025-2026
Changes were made to almost all Estonian tax laws in 2024. These changes will become applicable from 2025–2026.
This Global Tax Alert provides a non-exhaustive, high-level overview of the major amendments in the Estonian tax laws. 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:
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.2 The tax base for nonresidents (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 nonresidents. 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 utilized until the end of their useful lives. 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). The 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 under which resident companies and permanent establishments of nonresident 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% was 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 (including 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 a European Economic Area (EEA) contracting state.3 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. Compensation for using a personal car for business purposes of the employer will increase to €0.50 per kilometer (km) with a limit of €550 per month (until the end of 2024 these limits were €0.39 and €335 respectively). The tax-exempt daily allowance for employees taking business trips abroad increases from €50 to €75. The €75 limit applies for the first 15 days, after which the tax-exempt limit of the allowance drops to €40 per day, instead of the previous €32. The annual limit of €400 for tax-exempt expenses related to employee health promotion will no longer be split equally between quarters. The amendment also expands the range of health services that the employer can reimburse tax exempt. The expanded range will include 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 will be increased from €200 to €500 per month in Tallinn or Tartu and from €100 to €250 elsewhere. The tax-exempt threshold for goods and services provided for advertising purposes, such as promotional gifts, will increase from €10 to €21 (excluding VAT). The fixed monthly limit of tax-exempt representation costs will increase from €32 to €50. Tax-exempt representation costs include payments related to catering, accommodation, transportation and entertainment of guests or business partners. Nonprofit entities in the list of entities with income tax incentives will have higher tax-exempt amounts (€85 per participant) for providing souvenirs to participants in youth camps or sports events. The European Union (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 €750m) 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 (CbC) reports on its website in compliance with public CbC reporting (CbCR) requirements. The CbCR requirements apply to companies with a consolidated revenue of at least €750m in the previous financial year. The CbC 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 CbC report 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 10th 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 that an Estonian company pays 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 (i.e., a tax credit) equal to 12.5% of the gross dividends received. Estonia has applicable tax treaties with 63 countries. According to the already-effective amendments to the VAT Act, the VAT rate on accommodation services and accommodation services with breakfast will be increased from 9% to 13% from 1 January 2025. The VAT for press publications (e.g., newspapers, magazines) is increased from 5% to 9%. From 1 July 2025, the general VAT rate will be 24%. Until 31 December 2026, those who use cash accounting for 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 will be taxed at a 9% VAT rate from 1 January 2025. The VAT rate shall be 9% (currently 5%) of the taxable value of press publications, both in a physical medium (i.e., hard copy) 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, those who use cash accounting for 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 EU Member States is established. According to the amendments to the VAT Act, small enterprises in different Member States will be able to benefit from a single EU-wide special scheme for small enterprises. In other words, a small enterprise from one Member State will be able to benefit from the special scheme applicable in their Member State when doing business in any of the Member States. A small enterprise is a business that has total annual turnover in the EU below €100,000 and turnover that does not exceed the VAT registration threshold in the other Member State(s) where it does business. The amendments are intended 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 per calendar year, provided that their turnover in the entire EU does not exceed €100,000 per calendar year. As small businesses will be given the right to apply the special scheme for small enterprises in other Member States, they will lose their right to deduct input VAT for the 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, the company is also entitled to a refund of input VAT in that Member State. However, if company that chooses to apply the special scheme for small enterprises will not be liable for tax in that country but also loses its right to deduct input VAT on the goods and services used for the provision of services in that Member State. This proposed amendment provides that those registered as taxable persons, or taxable persons with limited liability, will not be subject to the reverse charge obligation if the services or goods (including goods to be assembled) are acquired from a foreign person engaged in business who has obtained from tax authorities in their own Member State 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 for events that are streamed or otherwise made available virtually 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 available virtually 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 one-stop shop (OSS) scheme. The proposed amendment stipulates that the transfer of new construction works will be taxed if no more than one year has passed since commencement of use. The same principle will also apply to significantly improved construction works that are transferred within one year of the post-improvement resumption of use. The amendment aims to reduce situations in which new construction works are seemingly put into use and then sold without paying VAT. According to the planned amendments, the calculation of the threshold giving rise to tax liability in Estonia will only include supply created in Estonia. Compared to the current regime, the turnover from insurance and financial services, as well as that from transactions involving the right of use or sale of immovable property, shall be added to the threshold calculation, unless the transactions are incidental. This means that if immovable property is being sold as goods, the sale will be included in registration threshold calculations. The sale of fixed assets and investment property, however, will not be included. The obligation to register as a taxable person shall not arise if a person's supply consists only of supply that is 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 will be required to register as 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 that are not subject to the €40,000 tax liability threshold. Calculating the threshold for registering as a VAT payer for companies that use profit margin accounting 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 based on 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 will be added to the Value Added Tax Act, stipulating that if a person's turnover has exceeded the €40,000 threshold in both the current and previous calendar years, the person (i.e., an entity or legal person) will not be deleted from the register as a taxable person and must continue to carry out his/her activities as a taxable person until all the relevant conditions for 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; instead, they must send the necessary data to the tax authority, which will then review and organize the data appropriately. The proposed amendment will change the accounting of input VAT on fixed assets. If the actual use of fixed assets for the purposes of taxable supply differs from the estimated proportion upon their first use, the deducted input VAT will be fully adjusted in accordance with how the fixed asset was first used. This helps eliminate scenarios in which a taxable person is initially permitted to deduct the entire input VAT amount on immovable property but subsequently must 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 will become possible to apply special arrangements for the resale of original works of art purchased from the artist or copyright holder, even if the piece has been sold to the reseller by another taxable person who has not utilized the special arrangements. 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 if the 50% increase would amount to less than €20. From 2026 onward, 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 on which homes are situated 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 and land tax will have to be paid for the part exceeding the tax relief. A higher land tax can be paid in two installments: by 31 March and 1 October. According to the amendments to the Accounting Act, starting from 1 July 2025, sellers must provide an e-invoice upon a buyer's request. 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 e-invoicing 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 with annual accounts in which at least two of these indicators is present for the financial year:
The audit is also compulsory for accounting entities fulfilling any of the following three conditions:
The review of the annual accounts is compulsory for an accounting entity with annual accounts in which at least two of these indicators is present for the financial year:
The review is also compulsory for accounting entities fulfilling any of the following three conditions:
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 strategy is now under scrutiny in light of the Guidelines, particularly if a case appears to lack economic substance. The Guidelines specify which restructurings are deemed "aggressive" tax planning, potentially leading to scenarios in which 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.
Document ID: 2025-0186 | ||||||||
