Significant Tax Changes in Estonia: Increase in VAT Rates

Dec 7, 2023 | Accounting, Estonia

In recent news, Estonia has announced significant tax changes that will come into effect in the coming years. One of the key changes is the increase in value added tax (VAT) rates. This article will provide an overview of the upcoming tax changes and their implications for businesses and individuals in Estonia.

Overview of the Tax Changes

The Estonian government has approved amendments to the tax laws, including an increase in VAT rates, excise duties, and gambling taxes. These changes aim to balance the state budget by increasing tax revenues. The amendments will be implemented gradually, with some changes taking effect from 2023, while others will be implemented in 2024 and 2025.

Increase in VAT Rates

One of the significant tax changes is the increase in the standard VAT rate from 20% to 22%. This change will come into effect on January 1, 2024. The increase in the VAT rate will apply to all taxable goods and services in Estonia. It is important for businesses to adjust their pricing and accounting systems accordingly to comply with the new VAT rate.

Transitional Measures for VAT

To ease the transition, the Estonian government has introduced transitional measures for VAT. Under these measures, invoices issued before May 1, 2023, that specify the use of the 20% VAT rate will continue to be valid until December 31, 2025. Additionally, businesses implementing special arrangements for cash accounting can continue to declare and pay VAT at the 20% rate for goods and services provided in 2023, even if the payment is received in 2024.

Changes in Reduced VAT Rates

Alongside the increase in the standard VAT rate, there will also be changes in the reduced VAT rates for specific goods and services. These changes will be implemented from January 1, 2025.

Accommodation Services

The reduced VAT rate for accommodation services, such as hotel rooms, will increase from 9% to 13%. This change aims to align the VAT rates with the overall increase and maintain consistency within the tax system. Businesses in the hospitality industry will need to adjust their pricing and accounting systems accordingly to comply with the new reduced VAT rate.

Press Publications

Another change in reduced VAT rates applies to press publications. Currently taxed at 5%, the VAT rate for press publications will increase to 9% from January 1, 2025. However, certain publications containing primarily advertising, erotic or pornographic content, or video and music content will be excluded from the reduced rate.

Changes in Corporate and Individual Income Tax

In addition to the VAT rate changes, amendments have been made to corporate and individual income tax in Estonia.

Corporate Income Tax

Starting from 2025, the preferential tax rate of 14% on regularly paid dividends will be eliminated. This change may have an impact on the dividend policies of companies operating in Estonia. Furthermore, the withholding tax of 7% on dividends paid to natural persons will no longer apply.

Individual Income Tax

From 2025, the individual income tax rate will increase from 20% to 22%. Additionally, the current tax exemption system, which depends on the amount of annual income, will be replaced by a uniform basic tax exemption of €8,400 per year. Certain tax exemptions and deductions, such as the deduction for housing loan interest, will also be abolished.

Implementation of ATAD2 Directive

The amendments to the Income Tax Act also include clarifications for the implementation of the Anti-Tax Avoidance Directive 2 (ATAD2). These clarifications relate to the anti-hybrid mismatch rules, which allow for certain hybrid mismatch situations to the extent that the deduction is set off against the dual inclusion income. Additionally, a retroactive exemption for collective investment vehicle hybrids will be introduced from January 1, 2023.

Other Tax Changes

In addition to the changes mentioned above, the Estonian government has approved tax rate increases for gambling and excise duties on alcohol and tobacco products. These changes will be implemented between 2024 and 2026.

Conclusion

Estonia is set to undergo significant tax changes in the coming years, including an increase in VAT rates, changes to corporate and individual income tax, and adjustments to reduced VAT rates. Businesses and individuals in Estonia should prepare for these changes by updating their pricing, accounting systems, and understanding the implications on their financial operations. It is crucial to stay informed about the latest updates and consult with tax professionals to ensure compliance with the new tax regulations.

Note: The information provided in this article is based on the reference articles and is subject to change. Please refer to the official announcements and consult with tax professionals for the most up-to-date information.

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