The Estonian government has recently announced several significant tax changes to impact corporate and personal income taxes over the next few years. From introducing a temporary “security tax” package to increases in corporate and personal income tax rates, these changes were deemed necessary to fund Europe’s broader security efforts. Below is a breakdown of what e-residents, business owners, and employees should expect.
Increased Corporate Income Tax on Distributed Profits
Starting 1 January 2025, Estonia’s corporate income tax (CIT) rate on distributed profits will rise from 20/80 (20 tax/80 net dividend) or 25% to 22/78 (22 tax/78 net dividend), making it a 28.2% corporate income tax rate.
100 euros of dividends distributed to shareholders in January 2025 results in a tax withheld of 28.2 euros paid in February 2025. This change also marks the end of the reduced CIT rate of 14/86, which currently applies to dividends regularly paid to corporate shareholders. With this adjustment, the 7% withholding personal income tax on 14/86 dividends received by natural-person shareholders will also be abolished. If the Estonian parent company received reduced rate dividends from the Estonian company before 31 December 2024, the 7% personal income tax would still be levied on dividends distributed from the parent company to natural-person shareholders.
For e-resident companies, this may prompt a review of dividend policies and extraordinary dividend payments in December 2024, as higher tax rates could affect the distribution plans. Parent companies that previously benefited from the reduced CIT rate may need to adjust their financial planning to accommodate the new tax rate.
Increased Personal Income Tax Rate
Another tax change effective from 1 January 2025 involves an increase in Estonia’s personal income tax rate from 20% to 22%. While this rate increase will apply to salaries, board member fees, and other earnings taxed in Estonia, it’s worth noting that personal income tax needs to be paid in the country of tax residency if it is not a director’s fee for work as a board member in an Estonian company. For e-resident companies with employees in Estonia, however, this change is essential to consider, as it will impact payroll costs and the total tax obligations for Estonian employees.
Introduction of the “Security Tax” Package
In addition to the tax rate changes, 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, each with unique implications for businesses and e-residents.
2% Tax on Corporate Profits 2026
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. The final amount is due after submitting the financial year’s annual accounts. A fiscal year that does not overlap with the 2025 calendar year, such as 1 July 2024 to 30 June 2025, would result in a proportional profit calculation applied to the months of the fiscal year that were already in the 2025 calendar year.
The first payment for this new tax will be due on 10 September 2026. Companies that do not generate profits will not be required to pay this tax, making it a variable contribution based on financial performance. This design aims to minimize the burden on businesses that may already be facing economic challenges.
2% Increase in Standard VAT Rate 1 July 2025
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.
2% Increase in Corporate and Personal Income Tax 2026
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.
Dividends would be taxed at 24/76 (24 tax/76 net dividends), making it a 31.58% corporate income tax rate. Thus, 100 euros of dividend distributed results in a withheld tax of 31.58 euros. This does not consider the 2% tax on corporate profits before distributing it to shareholders.
However, for most e-residents, personal income tax rate increases will not directly impact them, as they pay personal income tax based on the rates set in their country of tax residency. Nonetheless, e-resident companies paying dividends or having employees in Estonia should factor this change into their long-term financial planning and employee compensation structures.
What This Means for e-Residents and Business Owners
The proposed tax changes will impact Estonian companies founded by residents and e-residents, and companies may need to review and possibly adjust their dividend, profit distribution, and payroll strategies to align with the new tax requirements.
For e-resident companies with Estonian employees, the VAT and personal income tax increases will require adjustments in accounting practices, payroll systems, and financial planning. Furthermore, these changes underline the importance of staying informed about Estonia’s evolving tax landscape.
Stay Informed with Unicount
At Unicount, we’re committed to updating our clients on legislative changes affecting e-residents and Estonian business owners. We’ll continue to monitor these proposed tax reforms and provide guidance on adapting to the new tax structure. If you have any questions about these upcoming changes or need help navigating Estonia’s regulatory environment, please get in touch with us.
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