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    estonia’s tax system most competitive in the world

    For the tenth year in a row, Estonia is first in International Tax Competitiveness. And despite changes to its tax rules and rates next year, it’s likely it will stay that way. 

    The national flag flying over the rooftops of Tallinn, capital city of Estonia

    Editor's Note (January 2025): Estonia has increased tax rates for companies and individuals from 1 January 2025. A security tax package has also been introduced, which will raise the VAT rate from 1 July 2025, raise the personal tax rate from 2026, and introduce a 2% profit tax from 2026. Read more about the changes.

    For the tenth year in a row, Estonia's tax system has topped the 2023 International Tax Competitiveness Index (ICTI). This means that once again, Estonia has the best tax code of all OECD countries.

    A well-structured tax code is a good determining factor of a country’s economic performance. Taxpayers can more easily comply with a properly structured tax code and thus promote economic development, which in turn improves the country’s public revenues. On the contrary, poorly structured tax systems “can be costly, distort economic decision-making, and harm domestic economies”. So says the Tax Foundation, the US-based tax policy non-profit and publisher of the ICTI. 

    OECD countries approach taxation in a variety of ways, resulting in a need for comparison to critically evaluate performance. For that purpose, the Tax Foundation developed the ITCI. The ITCI looks at more than 40 tax policy variables to measure the competitiveness and neutrality of country tax codes. These include tax rates and structures of a country's corporate taxes, individual income taxes, consumption taxes, property taxes, as well as the treatment of profits earned overseas. 

    Estonia's tax systems is first in the 2023 International Tax Competitiveness Index Ranking
    See the full list at the Tax Foundation website.

    Estonia's top score in 2023 is again driven by four features of its tax system:

    1. a cash-flow corporate tax system with a 20% tax rate only applied to distributed corporate profits (increasing to 22% from 1 January 2025)
    2. a flat 20% tax on individual income that does not apply to personal dividend income (increasing to 22% from 1 January 2025)
    3. property tax applies only to the value of land, rather than to the value of real property or capital, and
    4. Estonia's double tax treaty network helps domestic corporations get credits for foreign tax liabilities.

    And just as Estonian citizens and tax residents benefit, so too can e-⁠residents. While Estonia is not a tax haven and e-Residency doesn’t exempt you or your companies from dual tax residency or foreign tax liabilities, Estonia's clear tax system and network of 62 tax treaties can be a huge advantage for foreign entrepreneurs looking for a place to base their borderless business. This includes opportunities to take advantage of the country's clear tax system, transparent business environment, and efficient digital services. Together, these features keep compliance efforts and costs low and the time to file taxes at a minimum. 

    Estonia tops tax competitiveness and neutrality in Europe and the OECD

    E-residents can take further steps to make their companies tax residents of Estonia. This will involve structuring your corporate operations to ensure more business presence in Estonia. For example, renting an office or site location, hiring employees, registering assets or intellectual property, and holding board meetings in Estonia.

    We recommend speaking to a tax expert to get advice on international conventions, the tax codes of Estonia. They can also help you optimise your corporate tax structure taking into account your own geographical location and business operations.

    To browse expert international and country-specific tax advisers, visit the e-Residency Marketplace.

    Looking forward to 2024-26 and changes to Estonian taxes

    This year, the Estonian Government announced amendments to Estonian tax law. The changes will come into force between 2024 and 2025. The adopted amendments concern increased tax rates and elimination of some exemptions. Generally speaking, the overall tax system in Estonia will remain simple and transparent. 

    The main changes affecting e-⁠resident businesses are listed below. To help prepare e-⁠residents for these changes and their implications for your businesses, we will be providing more information on their specifics in the coming months. 

    From 1 January 2024:

    1. The standard Value Added Tax (VAT) rate will increase from 20% to 22%. The change will only impact e-⁠resident businesses selling to consumers in Estonia. For these businesses, the change might necessitate a re-evaluation of prices on supplies.

    From 1 January 2025: 

    1. The standard Corporate Income Tax (CIT) rate will increase from 20% to 22%, i.e., from 20/80 to 22/78 on net distributions. This means that companies will be subject to a higher tax cost for profit distributions.
    2. The 14% reduced CIT rate will be abolished. The 14% CIT rate currently applies to regularly paid dividends. As a result, the 7% withholding Personal Income Tax (PIT) will no longer apply (except for any dividends already taxed before 31 December 2024 at the CIT rate of 14/86). The higher CIT rate together with elimination of the preferential tax rate on regularly paid dividends may impact the overall dividend policy of companies.
    3. The PIT rate will increase from 20% to 22% and the regressive tax-free income for natural persons will be replaced with uniform tax-free income of 700 euros per month. The rise in PIT could lead to a potential decrease in net salaries and wage pressure, and could impact e-⁠resident businesses. However, Estonia’s simple, flat PIT system remains advantageous over most countries that apply progressive PIT.

    Other changes will include:

    1. Raising advanced CIT payments of credit institutions.
    2. Increasing reduced VAT rates of accommodation services and press publications.
    3. Progressively increasing gambling tax rates from 2024 to 2026.
    4. Introducing car and sugar taxes in 2025.

    You can find all proposed changes and read more specifics on the Estonian Tax and Customs Board website.

    Importantly, there will be no introduction of capital gains tax or property transfer taxes. And property tax will continue to only apply to the value of land (not buildings). Due to this and the continued simplicity and efficiency of Estonia’s tax code, most likely, we will remain number one in international tax competitiveness and neutrality in the OECD.

    Security tax package

    The Estonian Government has also introduced a three year ‘security tax’ package. The package contains three elements, which are planned to last until 31 December 2028: 

    • Element 1: 2% tax on corporate profit – this element will commence on 1 January 2026
      1. The first tax payment will be due on September 10, 2026. The tax base is the previous fiscal year’s accounting profit before income tax. The tax is paid in advance quarterly and finalised after submitting the fiscal year’s report, allowing the tax burden to be spread out and paid in instalments.  
      2. If a company has no profit, no tax obligation arises. 
      3. The profit tax considers alternative measures based on a company's financial capacity, making it the least burdensome way to contribute to national defence during challenging times. 
    1. Element 2: Increase in the VAT rate by 2% to 24% - this element will commence on 1 July 2025. VAT-registered e-⁠resident companies will need to start using this rate from that date.
    1. Element 3: Increase in the personal income tax rate by 2% to 24% - this element will commence on 1 January 2026. E-⁠resident companies with employees in Estonia should note the increase in the personal income tax rate from 22% to 24% from 1 January 2026. The personal income tax rate will also increase for the salaries of board members of companies, from 22% to 24% from 1 January 2026. For the vast majority of e-⁠residents, you will continue paying personal taxes in your own country of tax residency at its local rates, so the change in Estonia's personal income tax rate will not impact you. 

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