Tax reform in Estonia 2024-2025: what should businesses prepare for?

On June 20, 2023, the Estonian Parliament passed a new law that significantly changed the amount of taxes and fees, affecting companies doing business in the country. The updated norms of tax legislation significantly affect the financial policy of enterprises that set their prices for goods/services. It also affects the accounting support and economic indicators of companies that must consider the updated tax rates and update their strategies for pricing and conducting business in Estonia.

In this article, we will consider several changes that have already been introduced in connection with the adoption of the law and will be introduced in 2025, the adoption of which will significantly affect the conduct of Estonian enterprises’ businesses.

Changes to the standard value-added tax (VAT) rate in Estonia

This law changed the VAT rate, which was last updated in 2009 (from 18% to 20%) during the economic crisis in Estonia. So, from January 1, 2024, the standard VAT rate has increased to 22%. Therefore, all VAT-inclusive goods/services you or your company buy-in Estonia will now be 2% more expensive.

At the same time, for companies that concluded long-term contracts until May 1, 2023, an exemption is applied: they can continue to apply the VAT rate of 20% until December 31, 2025, if two conditions are met:

1. The concluded contract specifies the use of a rate of 20%; and
2. It is forbidden to change the contract in connection with the update of the tax legislation in terms of rates.

In addition, until December 31, 2025, taxpayers using the cash accounting method have the right to continue paying VAT at 20% until December 31 2025 for goods or services supplied/provided after December 31, 2023, if the invoice was issued. The goods were shipped, or the services were rendered before January 1, 2024.

Given the presence of transitional provisions of tax legislation, we recommend reviewing concluded contracts and issued invoices to determine the possibility of using the previous 20 percent VAT rate until 12/31/2025.

Change in the reduced VAT rate in Estonia

The Estonian law affected not only the standard (introductory) VAT rate, which applies to all types of goods/services, but also the reduced VAT rate.

Accommodation services: From January 1, 2025, the preferential VAT rate for accommodation service providers will be increased. This means that VAT on hotel services in Estonia will increase from 9% to 13%. This innovation will primarily affect companies that conduct business in hotel services and shareholders/directors/ultimate beneficiaries of Estonian companies temporarily residing in Estonia.

Press publication services: From January 1, 2025, the VAT rate applicable to press publications will also be increased from 5% to 9%.

Change in the corporate tax rate in Estonia

From January 1, 2025, the income tax rate will increase by 2%, i.e., from January 1 next year, 22% will be applied to the company’s distributed profit instead of the usual 20%.

Abolition of the exemption from the application of 14% tax to the regular distribution of dividends

As a reminder, the current Estonian tax law currently provides for the possibility for a company that regularly pays dividends to participants (annually or at least once every two years) to apply a corporate tax rate of 14% (instead of the standard 20%) of net profit. At the same time, if dividends at a lower tax rate are distributed among shareholders and individuals, including non-residents, an additional 7% of the distributed profit received by the participant is charged. The exception is the application of a lower rate under conventions on the avoidance of double taxation between Estonia and the country where the company’s shareholder is a resident.

Adopted amendments to Estonia’s tax legislation from January 1, 2025, canceled the current option for company shareholders to apply a reduced income tax rate (14%), and canceled the 7% tax paid by individual shareholders. From 2025, a rate of 22% will apply to distributed profits (regardless of whether they are paid regularly or less often than once a year).

It should be noted that this step may harm the dividend policy of enterprises formed today. With this in mind, we advise you to take care in advance of changing the approaches to planning the distribution of profits between participants to minimize the consequences caused by the outlined changes in the legislation.

Updated obligations of payment service providers from 2024

In addition to the tax changes, according to the adopted amendments to the Estonian legislation, starting from January 1, 2024, payment service providers are required to store data on the payee’s cross-border payments and submit this data to the tax authority quarterly. The adopted changes duplicate the provisions of Council Directive (EU) 2020/284 and aim to detect cross-border VAT fraud and improve competitive conditions in e-commerce.

Suppose the total number of cross-border payments per one payee exceeds 25/quarter. In that case, the payment service provider must store data on the payee and the payments themselves and provide the specified data to the tax authority regularly.

Thus, the amendments adopted to Estonia’s tax legislation, in one way or another, affect the companies that are registered and carry out economic activities in the country. The specific consequences of adopting new tax norms must be considered in the context of issues of tax residency of shareholders, the company’s established dividend policy and pricing policy, and taking into account other criteria.

For tax advice on doing business in Estonia under the updated legislation, contact the lawyers of Azola Legal Services. We will analyze your company’s activities, conduct a “stress test,” and provide personal advice on the tax consequences of the updated Estonian legislation for your company and how to adapt to them.