Estonia is implementing significant tax changes starting in 2025, affecting individuals, businesses, and investors. These changes include an increase in income tax, the introduction of a new vehicle tax, a temporary defence tax, and modifications to VAT rates. For businesses and individuals, understanding these updates is essential for financial planning and compliance.
New Vehicle Tax from January 1, 2025
From January 1, 2025, Estonia will introduce a tax on mechanical transport vehicles. This tax applies to both individuals and businesses that own vehicles. The exact tax amount will depend on factors such as vehicle type, emissions, and other technical characteristics.
Businesses operating vehicle fleets should assess the financial impact of this new tax and adjust their budgets accordingly. For individuals, understanding how this tax applies to their specific vehicle type will be important in estimating additional annual expenses.
The Estonian Tax and Customs Board provides an online tax calculator to help determine the tax amount: Official Tax Calculator
Increase in Income Tax Rates from January 1, 2025
From the beginning of 2025, the general income tax rate in Estonia will increase:
- Personal income tax will rise from 20% to 22%.
- Corporate income tax will change from 20/80 to 22/78.
- The preferential 14/86 dividend tax rate will be abolished.
- The 7% withholding tax on dividends paid to individuals will also be removed.
These adjustments will have a direct financial impact on businesses and individual taxpayers. Companies should review their tax obligations and evaluate potential restructuring options to manage higher tax costs effectively. For investors and business owners receiving dividends, the removal of preferential tax rates may require reassessment of profit distribution strategies.
More details on the changes can be found on the Estonian Tax and Customs Board website.
Temporary Defence Tax from July 1, 2025, to December 31, 2028
Estonia is introducing a temporary defence tax, which will be in effect from July 1, 2025, until December 31, 2028. The purpose of this tax is to strengthen Estonia’s national defence and security. The defence tax consists of three key components:
- From July 1, 2025, the VAT rate will increase by two percentage points to 24%. This follows a previous increase from 20% to 22% in the current year.
- From January 1, 2026, the personal income tax rate will increase further to 24%.
- From January 1, 2026, companies will be subject to an additional 2% corporate tax on profits.
The revenue generated from this tax will be allocated to national security and defence investments. The government elected in 2027 will decide whether to continue, modify, or remove the defence tax.
VAT Changes on Accommodation Services
From 2025, VAT on accommodation services, including bed and breakfast, will increase:
- The new VAT rate will be 13% instead of the current 9%.
This change affects hotels, guesthouses, and other hospitality businesses, which may need to adjust their pricing models to accommodate the higher tax burden.
What Businesses and Individuals Should Do Next
With these tax changes coming into effect, businesses and individuals should take proactive steps to minimise financial disruptions:
- Review corporate tax structures to adjust for the new income tax rates.
- Recalculate dividend distributions to consider the removal of preferential rates.
- Plan for higher VAT costs in industries affected by the rate changes.
- Assess vehicle tax obligations and factor them into annual budgets.
- Monitor updates from the Estonian government, as further tax modifications may follow.
By preparing in advance, businesses and individuals can ensure financial stability and compliance with the new tax regulations.