Estonian VAT and income tax rates increased

In the early hours of 20 June, the Estonian parliament voted to raise several taxes. The previously agreed coalition agreement signed by the Reform Party, Social Democrats and Eesti 200 foresaw increasing income tax and VAT to cover the budget deficit. A major part of the deficit was related to the Reform Party’s expensive campaign promise to raise tax-free personal allowance to 700 euros for taxpayers from all income brackets.

Here is what was passed on the second and final vote in the parliament on the 20 June night session. The tax raise for the 2024 tax year was already very close to the legally required 6-month advance notice to taxpayers.

In a nutshell

On 20 June 2023, the Estonian parliament voted in favour of tax increases linked to the vote of confidence. The standard VAT rate would be raised on 1 January 2024 and income tax on 1 January 2025. The income tax rate change would apply both to personal income tax paid on wages and the corporate income tax you pay when distributing dividends from your Estonian company.

An overview of the adopted tax changes:

Starting from 1 January 2024, the standard VAT rate will be 22 per cent. This means that all the VAT-included services you buy in Estonia will be 2% more expensive unless you can deduct outgoing VAT. This is possible when your company has an Estonian or EU VAT number.

Starting from 1 January 2025, the Estonian income tax will be 22 per cent. This means that all the income you earn from employment or dividends will be 2% more expensive.

Starting from 1 January  2025, Estonian residents will have 700 euros per month of income tax-free personal allowance. Currently, the income tax-free personal allowance is 654 euros per month, but it progresses to zero for people earning 2100 euros or more who have no tax-free personal allowance.

The lower VAT rate for accommodation service providers will be raised on January 1, 2025. This means that the VAT on your hotel stays in Estonia will rise from 9 per cent to 13 per cent.

14% reduced income tax rate on “regular” dividends paid to legal person shareholders stops on January 1, 2025.

Estonian VAT standard rate history

The Estonian standard VAT rate was last changed in the 2009 economic crisis turmoil. It used to be 18% until 2009. The current standard VAT rate of 20 per cent in Estonia is at the lower end of the average rates in the European Union.

Estonia ranks 18th-22nd place among the EU member states. Four other countries have the same VAT rate as Estonia – Bulgaria, Slovakia, Austria and France. Five EU countries have lower VAT rates than Estonia – Germany, Cyprus, Romania, Malta and Luxembourg.

Estonian income tax rate history

The Estonian income tax rate was last changed in 2015 when it was dropped by the Reform Party-led coalition government by 1%. It used to be 21% until 2015. Before that, it was even higher until 2008 when it was reduced to 21% from 22%. Historically, it was 26% in the nineties without the possibility to avoid paying tax on reinvested or retained profits, an innovation that got rolled out in 2000.

As a fun fact, the same 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 economic crisis at the then-standing 21% level. There was a half-hearted attempt to reduce the 33% social tax on employment income by half a per cent in 2017. This was unwinded before coming to force. To conclude, Reform Party-led governments traditionally have not aimed at increasing income tax and this was a surprise to the public. No word of it got mentioned before the elections.

Estonian income tax applies similarly to both personal incomes such as employment or capital gains when investing, and to dividends paid to shareholders by Estonian companies. Estonia still has no annual corporate income tax, a rare exception in the EU.

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