Taxation|Taxation will be significantly tightened in Estonia in the next few years. The background is the need for increased defense spending due to the increased threat from Russia. Has the war in Ukraine turned Estonia into a country that is no longer a tax haven close to Finland?
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The Estonian government agreed on tax increases of two percentage points in September 2024.
Value added tax will rise from 22% to 24% in July 2025.
Corporation tax and income tax will rise to 24 percent from the beginning of 2026, when the new temporary defense tax of two percent is also taken into account.
Tax increases are justified by increasing defense spending and supporting Ukraine.
Estonian government flagstone on September 17, to agree on new tax increases of two percentage points.
According to the agreement, taxes will be increased by two percentage points as a so-called defense tax in income taxes, corporate and corporate taxes, and value added taxes.
The temporary defense taxes are supposed to be valid until the end of 2028, although temporary taxes are often extended.
In Estonia, the introduction of the defense tax has been justified by increasing own defense spending in need in preparation for the rise of Russian aggression and the need to support Ukraine in the Russian war of aggression.
In Estonia, the share of defense spending this year is 3.4 percent of the gross domestic product, and in the next few years the share may reach up to five percent.
Temporary the agreed tax increases will start from the beginning of July 2025 with an increase of value added tax (VAT) by two percentage points, so that the current value added tax of 22 percent will be increased to 24 percent.
Estonia’s previous VAT increase is also recent. In January 2024, the value added tax was increased from 20% to 22%.
Community tax Estonia trundle along from the beginning of next year from 20 percent to 22 percent.
In addition to that, from the beginning of 2026, the defense tax increase of two percentage points will come into effect. In other words, then the corporate tax rate will already rise to 24 percent.
Estonia does not tax undistributed profits from the company, i.e. the 22 percent tax is collected only when profits are transferred from the company.
Instead, the two percent defense tax must be paid on the profit according to last year’s financial statements, regardless of whether funds are distributed from the company or not.
For comparison, Finland’s corporate and corporate tax rate is 20 percent.
In Estonia the income tax rate is also rising from 20 to 22 percent in 2025. It is known that income taxation will be further increased to 24 percent in 2026 government program in accordance with.
The income tax rates of Finland and Estonia are not directly comparable, because the social insurance contributions paid by the employer in Estonia are significantly higher than in Finland.
Janne Kalluinen
For high-income earners, the tax rate is more favorable in Estonia than in Finland, but the Taxpayers’ economist Janne Kalluinen Made for Taloustaito magazine calculations According to
Kalluinen says that in Estonia, the method of calculating the basic deduction is also changing to lighten taxation. Thus, in certain income categories, taxation can also be reduced even if the tax rate increases.
“Other tax extortions are also coming very widely in Estonia: on fuel, soft drinks, alcohol and tobacco. Vehicle tax and car tax are coming to cars.”
Is it So the Ukrainian war turned Estonia into a country that is no longer the nearby tax haven?
Tomi Viitala
“At least it’s quite a reputational scandal. In fact, taxation in Estonia is getting tighter now”, the leading tax expert of the Central Chamber of Commerce Tomi Viitala evaluate.
“If before it was thought that the Estonian tax model is one of the most competitive in the world, because only distributed profits are taxed, and it was also simple and predictable, now the situation is different.”
“It doesn’t look like paradise any more, except for the fact that if profits are not shared, only two percent of corporation tax is paid.”
However, Viitala considers it consistent that the tax rate for earned income, companies and value added would all be 24 percent after the reforms.
Anita Isomaa
Elinkeinoelämän tax director of the confederation (EK). Anita Isomaa states that Estonia’s tax increases and the defense tax slightly reduce the difference with Finland. “It slightly evens out the punts, but the difference is still in favor of Estonia.”
Isomaa reminds that Estonia’s taxation has been the most competitive among OECD countries for ten years. He thinks that the tax increases have been a bigger deal for Estonians than they are in terms of international tax competition.
“Although the defense tax is related to security policy, tax increases are also related to covering the deficit.”
“I would see that the Estonian tax system is still competitive, even though the increases have been big.”