Estonian tax system
The Estonian tax system has attracted entrepreneurs and investors for many years due to its transparency, flexibility, and the absence of tax on retained earnings. In 2025, significant legislative changes have been introduced that may impact businesses.
In this article, we will cover:
– Key principles of Estonia’s tax system, that you may already be familiar with
– Updates and changes in 2025
You’ve probably heard that income tax in Estonia operates uniquely: companies do not pay taxes until profits are distributed. This means that corporate income tax is only levied when profits are distributed. Most commonly, this involves dividend payments, though profits may also be distributed in other ways, such as share buy-backs, capital reductions, liquidation proceeds, or other recognized profit distributions.
So Estonia’s tax system works as follows: your company generates profit, and that profit is not taxed. However, once you decide to distribute dividends or liquidate the company, a 22% tax is due on the profit, paid to the Estonian government.
According to Income Tax Act § 50, a resident company, including both general and limited partnerships, is required to pay income tax on profits distributed as dividends or other profit distributions at the time of payment, whether in monetary or non-monetary form.
If you’re trying to avoid paying taxes in Estonia and plan to classify these payments as loans, be cautious: the legislation has already accounted for this situation. According to the Estonian tax legislation, a resident company pays income tax if a loan granted to a shareholder, partner, or member of the company is considered a hidden profit distribution. If the loan is granted to a parent company or another subsidiary of the same parent group (excluding a subsidiary of the lender), and the repayment term exceeds 48 months, the taxpayer is required to prove, upon request by the tax authority, the ability and intention to repay the loan. The tax authority grants the company at least 30 days to provide such proof.
Let’s dive into the legislative changes expected in 2025.
Estonia has introduced several important tax updates for 2025 that will impact both businesses and individuals. If you own a business in Estonia or are considering establishing one, here’s what you need to be aware of.
- As of January 1, 2025, the corporate income tax rate on distributed profits will rise to 22%. This rate is applied when the profits are actually distributed, such as through dividends or other profit distributions.
- The personal income tax rate has also been raised to 22% starting January 1, 2025. This change primarily affects e-resident companies with employees in Estonia and applies to board member fees as well.
- Additionally, the preferential 14% tax rate on regular dividends for corporate shareholders has been eliminated. Starting January 1, 2025, all distributed dividends will be taxed at the standard 22% rate.
- A new 2% defense tax has been introduced, which will apply to both personal income and corporate profits. This is a temporary tax, effective from 2026 to 2028.
- Moreover, the standard VAT rate will rise to 24%, effective July 1, 2025. This change is partly driven by the introduction of the defense tax.
What you need to know about the new defense tax is that a 2% defense tax on personal income will start January 1, 2026. A 2% defense tax on company profits will also begin January 1, 2026. The defense tax has directly contributed to the increase in the VAT rate.
It is important to note that the 2% defense tax on company profits will be calculated based on the company’s annual profits. Advance payments for this tax will be calculated using the profits from the previous year. For example, profits from 2025 will determine the advance payments for 2026.
If you need help with Estonian tax system, Fidustria will assist you.