In the run-up to the Riigikogu elections, promises were generously handed out to get votes and now politicians are looking to cover up their promises. As a result, Estonia's tax system is in a state of flux, and the tax changes planned by the government could have a significant impact on businesses and individuals alike. We give an overview of the tax changes planned in Estonia between 2023 and 2025. The details are certainly not set in stone yet, but it gives a clear sense of where we are heading.
The planned tax changes are as follows:
- From 2025, the current personal income tax cap will be abolished and the income tax exemption will be increased to €700 per month.
- VAT will be increased by €21T3T to €221T3T in 2024. The plan is to abolish the lower VAT differential for accommodation providers from 1 January 2025, but an intermediate rate (13%) is also under discussion.
- Individual and corporate income tax will be increased by €21T$3T in 2025, and the preferential dividend rate of €141T$3T is to be abolished.
- A car tax will be introduced from 1 July 2024. Details still unclear.
- A tax on the use of packaging and plastic will be introduced to reduce packaging waste.
- Giving local authorities the possibility to impose local taxes.
- Increase excise duties on alcohol and tobacco by 5% over the next 3 years and increase state tax revenue from gambling.
- Additional tax-free income for children, spouse and mortgage interest will be abolished from 2024.
Tax changes can affect businesses differently depending on their size, activity and structure.
Simplicity and clarity is one of the most important principles in the design of the Estonian tax system, and the abolition of the "tax maze" will certainly serve this purpose. At the same time, there is a risk that tax reforms will hit low-paid people the hardest, especially as a result of the VAT increase.
Hotel companies, which see the planned VAT reform as a major setback to their competitiveness compared to other destinations, are actively lobbying to curb the tax increase. Certainly, Estonia will lose some of its attractiveness to foreign companies if the corporate tax rate rises and the lower rate on regular dividends no longer applies.
Businesses are also affected by the choices and decisions of local authorities when they reach into their pockets and use the opportunity to raise local taxes to increase their revenues. The planned car tax will increase costs for both businesses and individuals. The more astute among us, who believe that a wider spread of green thinking is inevitable, will surely welcome tax changes that are environmentally friendly. Ultimately, it is a question of mindset, whether to treat tax increases as an undeserved punishment or as an opportunity to contribute to the common welfare and security of the Estonian people.
Tax laws can be complex and consultation with a tax adviser is advisable in order to get more accurate and relevant information about your specific situation. It is always sensible to consult your own personal adviser before planning any forward-looking transactions. Accountant or with a tax adviser.
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