Contents:
- Tax rates changing
- New VAT rules for small businesses
- Cooperation with jurisdictions on the EU blacklist
- Lending to other commercial associations
- Payroll declaration
Starting from 2025, Estonia is introducing significant changes to tax legislation that cover various aspects of doing business, from tax rates to income declaration rules and cooperation with international jurisdictions. These innovations are aimed at strengthening financial discipline, increasing tax revenues, and harmonizing legislation with EU norms.
In this material, we will comprehensively examine all new developments and their impact on business. This will allow you to prepare in advance for changes and make well-grounded decisions aimed at minimizing risks and optimizing your activities.
TAX RATE CHANGES
Corporate Income Tax on Dividend Payments:
- In 2024, the rate was 20/80 or 14/86 + 7% dividend tax (when paying dividends for several consecutive years).
- From January 1, 2025, it will increase to 22/78.
- From July 1, 2025, an additional security tax of 2% will be introduced, which will affect the overall tax rates. Specifically:
- Income tax from January 1, 2026, will be 22/78 + 2%
- Turnover tax will rise from July 1, 2025, and will be 22% + 2%
- From January 1, 2026, a 2% corporate profit tax will be introduced.
Dividend Tax
Starting from the new year, the reduced 14/86 rate for dividends, which allowed for reduced tax burden, will be canceled. From 2025, dividends will be taxed at the standard 22/78 rate with an additional 2% security tax.
Value Added Tax (VAT)
- For hotel services: The reduced rate will increase from 9% to 13% from January 1, 2025. From July 1, 2025, the rate will be 13% + 2% security tax.
- For press publications: The reduced VAT rate will also be increased from the current 5% to 9% from January 1, 2025.
Introduction of motor vehicle tax
From January 1, 2025, a new law will come into effect requiring all owners or responsible users of vehicles registered in the road transport registry to pay a vehicle tax.
Key details:
- Taxation period is one calendar year. Tax is paid annually or after registering a new vehicle.
- Tax calculation will be done using a calculator available on the Tax Department's website.
- Tax notifications will be sent to taxpayers by February 15, 2025, through the electronic system.
NEW VAT RULES FOR SMALL BUSINESSES
From January 1, 2025, Estonia will implement a special procedure for small businesses in accordance with EU Directive 2020/285. These changes aim to ease tax obligations for businesses with low turnover operating within the EU and promote tax rule harmonization between EU member states.
Main Provisions of the New Procedure:
Turnover up to 100,000 €
Small businesses with an annual turnover within the EU (including Estonia) not exceeding 100,000 € will receive the opportunity to work under simplified tax rules. The 100,000 € calculation includes:
- Supply of goods or services taxed at the standard rate (including zero rate)
- Real estate transactions (except casual sales)
- Financial and insurance services (except occasional transactions)
No Mandatory VAT Registration in EU Countries
If a small business operates in an EU country and its turnover in that country does not exceed the VAT threshold, it is exempt from mandatory tax registration in that state.
Special EX Regime
To use the simplified procedure, the company needs to obtain a special VAT number with the EX. This number allows:
- No VAT calculation on goods or service supplies
- Reporting only once per quarter
- Reporting through the Tax Department's electronic services portal
EX Application Conditions:
- Annual turnover in the EU (including Estonia) does not exceed 100,000 €
- Turnover in a specific EU country where business is conducted must also not exceed the local VAT exemption threshold
- Even when operating under the EX regime, the company must submit quarterly reports on services provided or goods supplied in EU countries
Exceptions to the New Procedure:
- If a company exceeds the 100,000 € threshold within the EU, it automatically loses the right to use EX and must register as a VAT payer in each country of operation (subject to registration threshold)
- Companies performing distance sales of goods or providing digital services can use the OSS (One Stop Shop) procedure to simplify VAT registration and payment VAT. If the established conditions are met (annual turnover does not exceed EUR 100,000), if the volume of distance sales or digital services does not exceed EUR 10,000 per year, but in total with other sales reaches EUR 40,000 (registration threshold in Estonia), the company can choose a special small business regime in a particular EU country, remaining tax-free in that country. In this case, the company is obliged to pay taxes in Estonia and apply the OSS regime in other countries.
The new procedure for small businesses creates favorable conditions for businesses operating in multiple EU countries but requires precise planning to avoid violations.
COOPERATION WITH EU BLACKLISTED JURISDICTIONS
The list of jurisdictions not cooperating with Estonia has been updated as of October 8, 2024. It includes: American Samoa, Anguilla, Fiji, Guam, Palau, Panama, Russian Federation, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu.
When paying services to these jurisdictions, Estonian companies are required to withhold income tax at a rate of 22/78 from January 1, 2025.
LENDING TO OTHER COMMERCIAL ASSOCIATIONS
According to new Estonian tax law rules, any company expenses not related to its business activities are subject to income tax. From January 1, 2025, the tax rate for such expenses will be 22/78.
If a company provides a loan to other commercial associations without interest or at a rate lower than the European Central Bank's latest refinancing rate (currently 3.40%), such an operation is considered an expense unrelated to business activities.
Expenses that do not generate income for the company are considered economically unjustified. Thus, providing an interest-free loan or a loan with a low rate is subject to taxation in the month of its issuance.
PAYROLL DECLARATION
The Tax Department is intensifying control over companies that declare income but do not submit payroll declarations.
Therefore, if a company has no officially hired employees, it is recommended to declare compensation for at least a board member. Otherwise, tax authorities may lower the company's tax behavior assessment.
If you need additional information, consultations, or practical assistance in understanding and complying with these changes, please contact our experts. We are always ready to help you with tax planning, document preparation, and minimizing risks for your business.
