Estonia: Significant tax changes in 2024 and 2025

Estonia’s new Parliament has recently approved significant amendments to the country’s tax laws, which are set to take effect between 2023 and 2025. The amendments underwent substantial changes during parliamentary discussions, and below is a summary of key changes along with some draft acts still under review.

Changes in VAT Rates:

1. Standard VAT Rate Increase: The standard VAT rate will rise from 20% to 22% starting from January 1, 2024. However, businesses can continue applying the 20% rate for contracts concluded before May 1, 2023, as long as the contract specifies the use of the lower rate.
2. VAT on Accommodation Services and Press Publications: Reduced VAT rates for accommodation services and press publications will increase. From January 1, 2025, the reduced rate for accommodation services will be 13%, and the reduced rate for press publications will be 9%.

Changes in Corporate and Individual Income Tax:

1. Corporate Income Tax: The corporate income tax rate will increase from 20% to 22% in 2025. The preferential tax rate of 14% on regularly distributed dividends and the related 7% withholding tax on dividends paid to individuals will be abolished from 2025.
2. Individual Income Tax: From 2025, a uniform basic tax exemption of €8,400 per year will apply to all individuals, replacing the current tax exemption structure based on annual income. Certain tax exemptions and deductions, like the deduction for housing loan interest, will also be eliminated.

Clarifications in Implementation:

1. ATAD2 Directive: Amendments to the Income Tax Act clarify the implementation of the ATAD2 Directive with regard to anti-hybrid mismatch rules, aiming to address specific hybrid mismatch situations.
2. Collective-Investment Vehicle Hybrid Exemption: A collective-investment vehicle hybrid exemption will be introduced retroactively from January 1, 2023.

Additional Amendments:

1. Obligations for Payment-Service Providers: Payment-service providers will be required to store and report data on cross-border payments by payees to the tax authority, starting January 1, 2024.
2. Transposition of EU Directive: Estonia plans to introduce amendments to the VAT Act, allowing UK entrepreneurs to decide whether they wish to use a tax representative when registering for the Import One-Stop Shop.

Changes in Excise Duties and Gambling Tax:

1. Excise Duties: Excise duties on alcohol and tobacco products will increase by 5% annually from 2024 to 2026.
2. Gambling Tax: Tax rates on various forms of gambling will increase, with online betting and lotteries seeing a rate increase to 6% in 2024 and 7% in 2026. Lotteries and commercial lotteries will face an increase from 18% to 22% in 2024, and tax rates on gambling tables and slot machines will also see adjustments.

Introducing Car Tax:

The Estonian Government is working towards introducing a car tax in July 2024, aiming to encourage consumers to choose more economical vehicles. The details and specific regulations of the car tax are yet to be finalized.

These amendments are expected to play a crucial role in achieving a balanced state budget and enhancing tax revenues for Estonia in the coming years.