What does a "security tax" consist of?
The security tax consists of:
- About the VAT increase - from July 1, 2025, the general VAT rate will increase to 24%.
- Income tax for natural persons - from 2026, an additional income tax of 2% will be established on the taxable income of a natural person.
- Corporate profit tax - also from 2026, a tax of 2% will be added to the taxable profit of companies.
Profit tax, or everything new is a forgotten old
As part of the extensive tax reform, the profit tax is one of the three components of the "security tax", which, as a recent initiative of the Estonian government, is planned to be enforced in 2026. The purpose of the tax is to increase the country's defense capacity and security investments.
The corporate income tax in force in Estonia since 2000 is still unique in the world - companies pay income tax only when they distribute profits (as dividends, etc.). This means that reinvested profits are not taxed, thus supporting the growth and development of companies. A similar corporate taxation system is still in place in Latvia and Georgia.
Classic income tax back?
However, the profit tax that is part of the security tax is planned as a classic corporate income tax - the pre-tax profit earned during the company's financial year is taxed. Thus, we are somewhat moving away from the income tax system that brought fame to Estonia and was designed to attract foreign investors here. At the same time, perhaps the small tax rate of 2% and the fact that the tax is planned as temporary, for the period 2026 - 2028, offers relief (here, the hint about the amazing persistence of some temporary phenomena is also relevant).
Profit tax is established for Estonian companies, Estonian and foreign natural persons and non-resident legal persons who earn income in Estonia. Non-profit organizations (NPOs, SAs) will not pay tax.
Thus, entrepreneurs will face an increase in the income tax rate for two years in a row: from 01.01.2025 the tax rate is 22% and from 01.01.2026 it is 24%.
Tax treaties also apply to profit tax
In the case of cross-border business, it is useful to know that valid double taxation agreements can also be applied to corporate tax. Moreover, for the sake of equal treatment and simplicity, it is planned to avoid double taxation for all foreign countries, regardless of whether it is a treaty country.
Although there is no obligation to avoid double taxation in the case of a dividend within Estonia, for the purpose of equal treatment, it is still allowed to deduct from the pre-tax profit a dividend received from an Estonian company, the underlying profit of which is taxed with security tax (the 10% participation requirement remains valid). Profit attributed to a permanent establishment located in a foreign country is also allowed to be deducted.
The taxation procedure of a non-resident receiving income in Estonia depends on whether he receives income through a permanent establishment located in Estonia or not. In the case of operating through a permanent establishment, its profits are subject to security tax in the same way as the profits of a resident company. In other cases, the income of a non-resident in Estonia is taxed in the same way as the income of a resident natural person.
Profit tax is paid in advance
Similar to the classic corporate income tax, entrepreneurs also have to take into account advance payments for profit tax, the deadline of which is the 10th of the last month of each quarter. The amount of the advance payment is calculated from the pre-tax profit of the previous or the previous financial year - depending on which is submitted last. Exceptions are companies that submit quarterly profit reports: credit institutions and stock exchange companies. Based on the draft law, the first advance payment deadline is 10.09.2026. The first security tax return must be submitted in 2027 for the 2026 profit.
Individuals also contribute
Besides the profit tax, the other components of the security tax are the personal income tax and the increase in the VAT rate by 2%.
Designed as the broadest possible tax, natural persons pay the security tax from the first euro of their income. At the same time, deductions that are allowed in the case of income tax are not made: mandatory and voluntary pension column payouts, tax-free income, training costs, accumulated pension or unemployment insurance contributions, etc.
However, the investment account system, which allows tax deferral of income, can also be used for security tax.
VAT rate increase as early as 01.07.2025
2% will be added to the sales tax rate, i.e. the change from 22% to 24% will be enforced on 01.07.2025. It is planned to collect VAT at an increased rate until 2028.
The introduction of the new tax has drawn both support and criticism. Proponents emphasize that the purpose of the tax is to improve national security and prepare for future challenges, while opponents worry that an increase in the tax burden could stifle economic growth and business competitiveness. At the same time, the corporate income tax system remains largely flexible, allowing entrepreneurs to effectively manage their retained earnings. Entrepreneurs are expected to be sympathetic to the tax increase, sensing the fragile balance in today's world.