Executive summary

Estonia's Parliament, on 19 June 2025, abolished the planned temporary defense tax for the years 2026–2028, bringing relief to many businesses and individuals. The respective law has been announced by the President of Estonia and was published in the State Gazette on 8 July 2025.

Although an increase in the value-added tax (VAT) rate had been decided earlier, this and other major tax rate increases will be implemented permanently to ensure stable financing for the state's defense spending and to strengthen defense capabilities in the long term:

• Personal income tax rate increases from 22% to 24% (flat rate) from 2026
• Corporate income tax rate increases from 22% to 24% from 2026
• Standard VAT rate increased from 22% to 24% from 1 July 2025

This Tax Alert provides a high-level overview of these recent amendments in the Estonian tax laws.

Corporate income tax rate increase

The corporate income tax rate will increase from 22% (on gross distributed profit) to 24% effective 2026, establishing a permanent change. The tax rate will be applied to the net dividend, which is the taxable amount divided by 0.76 from 2026. The taxation of profit distribution (dividends) is cash-based and the tax rate applied will therefore depend on the timing of the profit distribution. Consequently, dividends distributed in 2025 will remain subject to 22% tax rate. 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.

Personal income tax rate increase

Effective 2026, the personal income tax rate will increase from 22% to 24%, with the change being permanent. The Estonian personal income tax rate is flat and therefore all taxpayers will experience a marginal increase in their income tax liabilities. The change in the income tax rate affects the majority of Estonian taxpayers receiving taxable income, with the exception of those whose income falls below the annual basic exemption.

VAT rate increase

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.

Implications

These amendments relieve Estonian resident companies and permanent establishments in Estonia from the requirement to maintain separate tax accounting for defense tax purposes, thereby preserving the simplicity and uniqueness of the Estonian corporate income tax system. The tax rate increase may incentivize companies to distribute taxable profits in 2025 rather than in 2026. Additionally, the personal income tax increase will reduce the net income for Estonian resident employees and taxpayers.