The Defense Tax Act, adopted at the end of last year and widely debated due to the proposed taxation of corporate profits, has been repealed. Instead, permanently increased tax rates will now apply to value-added tax (VAT), income tax, and business income tax.
Key changes:
- As of 1 July 2025, the VAT rate increased to 24%.
- From 1 January 2026, the income tax rate for both individuals and legal entities will rise to 24%.
- The business income tax rate for individuals using a business account will increase to 22%.
While the tax increases under the Defense Tax Act were initially intended to be temporary, the newly adopted permanent tax changes bring a number of positive developments.
Most notably, the repeal of the Defense Tax Act eliminates the introduction of ongoing corporate profit taxation based on accounting profit, which would have resulted in increased administrative burden, more complex reporting requirements, and potentially unpredictable tax liabilities — especially in cases where tax obligations were disconnected from actual cash flows.
Additionally, individual income would have been subject to a 2% surcharge from the very first euro earned, without taking into account the basic exemption or other deductions.
Thus, although the overall tax burden will rise, Estonia retains a simplified and predictable tax system, helping to avoid excessive complexity for both businesses and individuals.
