Estonian Tax Rates explained to e-resident founders

Starting a business can be complex, but understanding Estonian tax rates does not have to be. This is a beginner’s guide written in the simple language we like at Unicount when helping e-resident founders navigate the Estonian ecosystem.

After reading this, you may want to move to Estonia to benefit from the Estonian tax rates available to individuals and companies. Estonia has a thriving startup scene and needs founders and top talent for technology companies.

Corporate Income Tax Only on Distributed Profits

Here is what makes Estonia unique among OECD countries. Companies pay tax only when profits are paid to shareholders and at a rate of 22/78, i.e. 28.2% of the net amount paid out as dividends. This incentivizes reinvestment and growth, aligning perfectly with the Estonian entrepreneurial spirit since this unique bill was introduced in 2000. To make it simple, every 78 euros of dividends distributed in 2025 to shareholders means 22 euros paid to the government by the company the next month.

Paying Estonian corporate income tax is a legal obligation when distributing dividends to any shareholder. Remember that your e-resident business may be subject to tax in the country you operate or reside in. In this video, the Estonian e-Residency programme explains how cross-border taxation works for e-residents.

Introduction of the “Security Tax” Package
The Estonian government has proposed a three-year “security tax” package to support Estonia’s contribution to European security. Although still pending parliamentary approval, the security tax package comprises three main elements.

Starting 1 January 2026, all Estonian companies, including those founded by e-residents, will be subject to a 2% tax on their corporate profits. This tax will be based on the previous fiscal year’s profit before tax and shall be paid quarterly in advance.

Effective 1 July 2025, Estonia’s Standard VAT rate will increase from 22% to 24%. VAT-registered e-resident companies operating in Estonia should prepare to adjust their pricing structures and update their VAT practices in line with this new rate.

In line with the proposed security tax package, Estonia’s personal and corporate income tax rate will increase from 22% to 24%, beginning 1 January 2026, if adopted in the parliament. This rate increase will affect all employee salaries and director’s fees taxed in Estonia, including those paid by e-resident companies to local employees.

Flat Personal Income Tax Rate

Even though personal income tax only applies to you after you become an Estonian tax resident or receive a regular director’s fee, you may still want to know that in Estonia, the personal income tax rate is a flat 22% since 2025.

The flat rate makes individual tax returns for individuals and sole proprietors a five-minute affair. And, of course, nearly all tax returns are submitted online.

Starting 1 January 2025, the Estonian income tax will be 22 percent. However, the annual basic exemption of 7848 euros per year may affect your effective tax rate as a resident taxpayer if you earn up to 25 200 euros annually. After that, your basic exemption drops to zero.

As a fun fact, the Reform Party promised to reduce income tax to as low as 12% by 2015 in the 2007 economic boom era elections. This was stopped by the 2009 financial crisis at the then-standing 21% level. The 20% income tax rate lasted from 2015, when the Reform Party-led coalition government dropped it by 1%, to 2025, when the same coalition raised it to 22%.

Annual Basic Exemption

Estonia believes in keeping a portion of your earnings tax-free to reduce the tax burden on lower-income earners. For 2025, this non-taxable income can reach up to 7848 euros annually, 654 euros per month. However, it’s regressive: the higher your income climbs above 14 400 euros, the lower this exemption dips and disappears entirely at 25 200 euros of income. It is a monument to a coalition government of 2017- 2019 based on the Centre Party’s vision of keeping society more balanced.  Opponents have called it a progressive income tax that disincentives earning more.

After the Reform Party won the 2023 elections, they had to live up to the promise to remove the regressive annual basic exemption so that top wage earners would also have a new higher basic exemption of 8400 euros per year from 2025. This very expensive campaign promise was dropped soon to save public finances.

Value Added Tax (VAT)

With a VAT registration threshold set at 40 000 euros of taxable supplies, Estonia gives small businesses room to grow before they need to calculate and submit monthly VAT returns. It’s one less thing to worry about as you start scaling up. You can check with your accountant if you are unsure what taxable supplies are. Unicount began providing accounting services to its virtual office clients at the beginning of 2023.

Starting from 1 January 2024, the standard VAT rate is 22%. On 1 July 2025, Estonia’s Standard VAT rate will increase further from 22% to 24%. This means that all the VAT-included services you buy in Estonia will be 2% more expensive unless you can deduct outgoing VAT as a VAT-registered company. Estonian companies can also register for VAT in their actual country of operations. This may mean you can get EC-reversed VAT invoices from your Estonian suppliers for certain services, such as consulting, but not virtual offices or office rent.

Paying Your Team and Yourself

When paying taxes on your employees or yourself as a director, we recommend hiring a professional accountant. Several taxes must be withheld, declared, and paid monthly by the 10th calendar date for payments made in the previous calendar month. Individuals cannot pay their taxes in Estonia, and legal persons are responsible for paying all the necessary taxes for their employees, directors, and contractors.

As a company director, you can receive a board member’s fee and pay Estonian personal income tax in Estonia while declaring and paying social tax in another EU member state or a country with a signed treaty for social security.

You are not required to pay a regular salary or board member’s fee. Salary and board member fees are taxed differently, so it is best to consult your accountant on the income you should get from the company. All resident employees and paid board members must be registered with the Estonian tax office.

Social Tax on Wages Paid to Resident Employees

Estonia’s social tax is 33% of the gross wage, covering universal health insurance and pensions. It’s a significant number, but think of it as investing in the country’s collective well-being. Considering the ageing population and soaring healthcare bills, the tax is the hardest to reform for any government without heavily subsidizing the underlying costs from other revenue sources. There was a half-hearted attempt to reduce the 33% social tax on employment income by half per cent in 2017, but it was unwinded before coming into force.

Unemployment Insurance for Employees

Employees contribute a modest 1.6% of their gross salary to unemployment insurance, with employers adding another 0.8%. It’s a small price for a significant safety net. Remember that company directors do not need to pay this, as they are not eligible for unemployment insurance when working under board member contracts.

Thanks to employer contributions, anyone who has lost their job in Estonia can apply for unemployment insurance benefits.

Contribution to funded pension

A contribution to the funded pension is withheld from the gross salaries of resident employees and board members when making payments to anyone who has joined the funded pension scheme. Anyone born after 1983 had to enter, while all the rest had a chance to do it voluntarily. Therefore, employers must withhold 2% of these persons’ monthly gross salary. The Estonian government will double that by adding 4% more to the funded pension. This 4% is taken from your social tax, so a person earning 3000 euros gross salary would get 60 euros from their employer and 120 euros from the government to their funded pension account each month. Starting from 2025, resident employees and directors can opt for a 4% or 6% deduction from gross salary to increase their income tax-free contributions.

Lending money to and from your company
Estonian Commercial Code does not allow lending company funds to shareholders and board members. As a shareholder, you can always finance the company with interest-free loans. When interest is applied, you should follow market terms, and the company needs to withhold income tax on interest payments made to individuals. All loans given to company employees should be made on market terms to avoid taxation. The base interest rate set by the European Central Bank has risen sharply, so it is worth reviewing any loan agreements to bring the interest rate closer to market conditions.

Deductible Business Expenses

Estonia rewards sensible business spending while fringe benefits are taxed heavily identically to wages. Investments in technology, operational costs, and some representational expenses are non-taxable. If your company has expenses that are not directly related to its business activity, it will be taxed with Estonian income tax. A pro tip is that income tax is also applied when you lose mandatory expense documents for any cost made.

Those e-resident founders who do not hire a professional accountant might miss out on the benefits and opportunities provided by Estonian tax laws because they lack sufficient knowledge.

The good news is that having tax-deductible business expenses is unrelated to your company’s sales turnover. Some companies may be unprofitable for years while developing their products and services. To make it even better, a board member without a monthly salary is entitled to similar tax-deductible business expenses as a company employee on a monthly payroll.

All the Estonian Tax Rates

While we did our best to write an easy article about taxes in Estonia, you may still benefit from seeing all the key tax rates in a table with annual comparisons. We will do our best to update it regularly. Please note that all the upcoming years may be subject to changes when something new gets passed in the parliament.

Our Conclusions on Estonian Tax Rates

Estonia’s tax system is designed to be simple and encourages reinvesting profits. An accounting professional should not take more than minutes to complete personal and corporate tax returns. However, individuals do not even hire an accountant for their annual tax return, as it is mainly prefilled with data from their employer and tax office.

It’s part of why we at Unicount believe in Estonia’s digital and entrepreneurial ecosystem and why we’ve made setting up here as simple as registering a domain name. So, whether you’re a seasoned entrepreneur or a budding startup enthusiast, Estonia’s tax system will welcome you with efficiency and clarity.

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