In 2024 and 2025, several tax changes will take effect in Estonia. Recently, significant amendments to the tax laws were adopted, foreseeing increases in direct and indirect taxes, as well as excise and gambling taxes.
From 2024, the following tax changes affecting natural persons will enter into force in the Income Tax Act:
- Additional Tax-Exempt Income for Child Maintenance:
Currently, additional tax-free income can be declared by the child’s parent, guardian or other child dependent if he or she has at least two children under the age of 17. The additional tax-free income for child maintenance is €1848 for the second child and €3048 from the third child onwards. However, effective from 2024, this option will no longer exist, and the additional tax-free income in case of child maintenance will disappear.
- Spouse’s Tax-Exempt Income:
Under existing legislation, a resident natural person is entitled to subtract an extra tax-free income of 2160 euros on behalf of their resident spouse, provided that the combined income of the resident individual and their spouse within the tax period does not surpass 50,400 euros. As of 2024, the additional tax-free allowance for spouses will be abolished.
- Deduction for Housing Loan Interest:
Currently, a natural person has the right to deduct the interest paid on a loan or lease taken for acquiring residential property from their income. Simultaneously, only the interest on a loan or lease for the acquisition of one residence can be deducted. However, starting from 2024, natural persons can no longer deduct mortgage interest from taxable income.
From 2025, the following tax changes related to natural persons will be incorporated into the tax laws:
- Personal Income Tax:
The personal income tax rate is currently 20%, calculated on gross principle taxable income. Starting from 2025, the personal income tax rate will increase to 22%.
- Basic Tax Exemption:
For natural persons who have not reached retirement age, the tax-free allowance is €7848 per year or €654 per month, and for natural persons who have reached retirement age, it is €8448 per year or €704 per month. The general tax-free allowance for natural persons who have not reached retirement age decreases as the individual’s annual income increases. As of 2025, the regressive tax-free allowance will be abolished, and a uniform tax-free allowance of €700 per month or €8400 per year will be established. An exception applies to individuals of retirement age, whose tax-free allowance is equivalent to the average old age pension. This new tax-free income extends to all residents of Estonia and the European Economic Area, regardless of the amount of income they earn.
From 2025, the following tax changes related to legal person will be incorporated into the tax laws:
- Taxation of Distributed Profits:
According to the current law, distributed profits (e.g., dividends) are taxed at a rate of 20% on the gross amount. However, for regularly paid profits (e.g., dividends), a reduced tax rate of 14% can be applied. When distributing profits at a lower tax rate (i.e., 14%) to an individual (i.e., resident or non-resident), an additional 7% income tax is withheld from the individual’s income. In 2025, the corporate income tax will increase to 22%. In the same year, the preferential rate of 14% for regularly distributed profits by companies will be abolished, leading to the discontinuation of the 7% income tax withheld from profits paid to individuals.
These changes are partially prompted by the implementation of a global minimum tax for large businesses with a turnover exceeding 750 million euros in most European Union member states from January 1, 2024. According to the rules of the global minimum tax, other countries have the right to tax the undertaxed profits of a company if the effective tax rate of its members in a specific jurisdiction falls below 15%. The abolishment of the 14% tax rate in Estonia provides Estonian companies with an opportunity to achieve a 15% effective tax rate and avoid taxation of profits earned in Estonia in other countries, such as in the country where the company’s headquarters is located, subject to the application of the global minimum tax.
Changes in Indirect Taxation:
- Currently, the standard VAT rate in Estonia is 20%. However, in 2024, the standard VAT rate will increase to 22%.
- Starting from 2025, accommodation and accommodation with breakfast will be subject to a 13% VAT rate, replacing the previous 9%. Additionally, the VAT rate for print media publications will increase from 5% to 9%.
- The VAT Act includes a transitional provision, stating that until December 31, 2025, a taxpayer has the right to apply a 20% rate to turnover generated based on contracts concluded before May 1, 2023. The transitional provision applies only if the specific goods or services’ price in the contract has been calculated with a 20% VAT rate and cannot be altered due to the change in the tax rate.
Upcoming Excise-Related Changes:
- Alcohol and tobacco excise duties will increase by 5% annually from 2024 to 2026.
- The excise rate for special-purpose diesel fuel will be 21 euros per 1000 liters (complying with the minimum allowed excise rate for agriculture according to Directive 2003/96/EC regulating energy taxation in the European Union). This overturns the previously planned increase in the excise rate for special-purpose diesel fuel.
Tax amendments are also awaiting the gambling sector:
- The current 5% tax rate for remote gambling and betting will be increased in two stages. In 2024, the tax rate will be raised to 6%, followed by an increase to 7% in 2026.
- The tax rate for lotteries and commercial lotteries will be raised from 18% to 22% starting from 2024.
Starting from 2025, Vehicle Tax (Motor Vehicle Tax) Will Be Implemented:
The annual vehicle tax is generally due in a single payment by October 1. The official term for this tax is the Motor Vehicle Tax. The vehicle tax is divided into two parts – 1) the annual tax and 2) the registration tax.
The amount of the vehicle tax depends on the environmental impact of the vehicles. This means that the greater the environmental pollution caused by a vehicle and the heavier it is, the higher the tax amount. The declared purpose of this tax is to encourage people to choose more environmentally friendly vehicles.
When calculating the annual tax for cars and vans, a base amount is considered, to which, for passenger cars, a portion dependent on CO2 emissions and a portion dependent on weight are added if the CO2 emission value exceeds a certain threshold. If there is no emission value, it is calculated using a substitute formula, which includes the base amount, a part based on the engine displacement, a part dependent on the engine power, and for heavier vehicles, also a part based on weight. For vans, the weight portion is not added in the substitute formula. For electric vehicles, only the base amount is applied, and for heavier vehicles, the weight portion is also considered. Motorcycles, ATVs, and UTVs are taxed only with an annual tax, the size of which depends on the engine displacement. The tax rates vary based on the engine size.
The registration fee is calculated on the same principles, but its collection and payment are carried out through the Transport Administration, being mandatory when a motor vehicle is first registered in the Estonian Transport Register.
If you have additional questions regarding the upcoming tax changes, please contact our specialists.
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