Tax Reform in Estonia: Overview of Updated Changes

INCREASE IN MAIN TAX RATES IN ESTONIA

Previously, the Estonian government planned a phased introduction of the so‑called “security tax,” which would have consisted of three parts and been in force for at least three years. The plan was:

• From 1 July 2025 – increase turnover tax (analogous to VAT) by 2%
• From 1 January 2026 – increase personal income tax by 2%
• From 1 January 2026 – introduce a 2% corporate income tax

However, these plans were canceled, and instead, the government passed a new bill changing the approach to tax rate increases.

New fiscal rules effective:

From 1 July 2025:

• VAT rate increases to 24%
• This increase affects all goods and services subject to VAT, including e‑commerce, dropshipping, consulting, retail, and more
• Contracts signed before 1 May 2023 at the old VAT rate of 20% without automatic price adjustment clauses may apply the old rate only until 30 June 2025. After that, all contracts must adopt the 24% rate

From 1 January 2026:

• Personal income tax rate also increases to 24%
• The planned new corporate income tax is canceled
• Estonia returns to its traditional corporate tax model: companies pay tax only on distributed profits (dividends)

Increasing both key rates (VAT and income tax) will definitely lead to an increase in the tax burden on business and end consumer. At the same time, the cancellation of corporate income tax can be regarded as a positive signal for investors: the stability and predictability of one of the main advantages of the Estonian tax system - taxation of distributed profit only.

NEW THRESHOLD VALUES ​​FOR MANDATORY AUDIT

Since January 1, 2025, the thresholds are changing in Estonia, which determines whether the company is subject to a mandatory audit. These changes relate to financial statements and were adopted to adapt the legislation to modern economic realities, including an increase in the volume of turnover and assets of companies.

New Auditing Conditions in Estonia

The company will be obliged to conduct a full audit if at least one of these indicators exceeds:

• 15 million euros of annual turnover,
• 5 million euros of balance value of assets,
• 180 employees of the average annual state.

Also an audit is mandatory if the company exceeds two of the three lower thresholds:

• 5 million euros of annual turnover,
• 5 million euros of balance value of assets,
• 60 workers on average per year.

Conditions for Audit Examination in Estonia

A softer verification form - an audit - will be required if the company exceeds at least one of the following indicators:

• 6 million euros of annual turnover,
• 3 million euros of the balance sheet value of assets,
• or 72 employees on average per year.

The review will also be required if the company exceeds two of the three following values:

• 2 million euros of turnover,
• 1 million euros of assets,
• or 24 employees.

This innovation actually increases previous thresholds, so small business receives more freedom and less bureaucratic restrictions. At the same time, the average and large businesses must carefully monitor their financial performance in order not to miss the time when the check is mandatory. The audit and review involve the involvement of an independent auditor, so the companies that get into the risk zone should prepare the full financial statements and book the auditor's services in advance.

VIDA: VAT DIGITALIZATION WITHIN THE EU

In 2025, the countries of the European Union, including Estonia, began the implementation of a large -scale tax reform called Vida - Vat in the Digital Age. It is an initiative of the European Commission, which provides for the modernization of the value added tax system (VAT), taking into account modern digital realities. The reform will be gradually implemented by 2035.

What is Vida?

Vida is a packet of change, called:

• digitize VAT reports and go to almost real data time.
• Redistribute the responsibility for VAT from sellers to platforms (for example, marketers, booking services, etc.).
• Expand One Stop Shop (OSS) - a single VAT reporting point for other types of transactions, including internal supplies between EU countries.

The main changes that are expected

1. Electronic real -time reporting

The gradual transition to the submission of VAT reporting in electronic format is almost real. Each country will implement this on its own schedule, but Estonia has already announced the preparation of the platform for the following data exchange:

• from 01.07.2028-the possibility of introducing mandatory E-invoice for B2B transactions.
• from 01.07.2030 - necessarily in all EU countries.

Companies should be reported real -time through electronic accounts, and tax authorities should exchange data with each other. It is the fight against fraud and simplification of reporting.

2. New responsibilities for platforms

Digital platforms facilitating the sale of third-party goods or services (e.g., accommodation rentals, transportation, e-commerce) will be held responsible for collecting and remitting VAT on behalf of their users. This significantly increases the tax compliance burden on such platforms, which will be required to track transactions, file VAT reports, and fulfill the obligations of a taxpayer.

As of 1 July 2028, platforms such as Airbnb and Uber will be required to pay VAT themselves if their suppliers fail to do so.

3. OSS extensions (One Stop Shop)

The new model allows companies to declare and pay VAT in a single EU country, even when transactions span multiple jurisdictions. This simplifies tax administration for businesses operating across several EU markets, but also imposes strict accounting accuracy requirements.

Starting from 1 January 2027, the OSS (One Stop Shop) system will be expanded—enabling VAT registration across multiple EU countries via a single portal.

Additionally, a mandatory reverse charge mechanism will apply to B2B transactions where the supplier is not VAT-registered in the recipient’s country.

For example, if an Estonian company purchases a service from a German company that is not VAT-registered in Germany, from 2027 the Estonian buyer must declare and pay the VAT.

TAX RISKS WHEN ENGAGING FOREIGN SOLE ENTREPRENEURS

Many companies, seeking cost efficiency and flexibility, actively engage foreign freelancers or sole entrepreneurs (self-employed individuals) for specific tasks. However, such arrangements may involve hidden tax risks that are often overlooked.

For instance, an Estonian company may contract with a sole entrepreneur registered in Ukraine, Poland, or Georgia. The entrepreneur works remotely, is not a tax resident of Estonia, and does not physically operate in Estonia. At first glance, this appears safe, as Estonia does not require taxes to be paid on such payments.

However, this is only part of the picture. What is the actual risk?

In the entrepreneur’s country of registration, the local tax authority may determine that:

• The individual is effectively functioning as an employee, not an independent contractor
• The agreement resembles an employment relationship (e.g., ongoing collaboration, fixed schedule, subordination, access to social benefits)
• The Estonian company is effectively conducting business in that country and may be deemed to have a permanent establishment there

In such a case, the Estonian company could be subject to tax obligations in the contractor's country—such as personal income tax, social security contributions, or corporate income tax.

When does the risk of a permanent establishment arise?

The risk may arise if any of the following conditions are met:

• The foreign sole entrepreneur acts not on their own behalf, but on behalf of your company
• You maintain an office, warehouse, construction site, or other permanent place of business in the contractor’s country
• The contractor negotiates or signs contracts on behalf of the company
• The duration of cooperation exceeds the time limits set out in applicable double taxation treaties
• The contract, while formalized as a service agreement, effectively constitutes employment

How to mitigate these risks:

Companies should only engage foreign sole entrepreneurs under clear service agreements that do not show characteristics of employment, and must avoid granting them authority to act on the company’s behalf.
It is also strongly recommended to review the tax laws of the contractor’s country and seek legal advice, especially for long-term collaborations.

TAX TREATMENT OF CORPORATE DONATIONS IN ESTONIA

Corporate social responsibility is an important element of business culture. Companies are increasingly involved in charitable initiatives, humanitarian programs, or make donations to socially significant projects. However, such expenses are subject to a specific tax regime.

According to Section 61(66) of the Estonian Income Tax Act, a resident legal entity is exempt from paying tax on donations and gifts if:

• The donations are made to organizations listed in the official registry (available on the website of the Estonian Tax and Customs Board); and
• The donation limits set for the calendar year are not exceeded.

What are the applicable limits?

The tax exemption applies up to the higher of the following two thresholds:

1. 3% of the total payments on which the company has paid social tax during the current calendar year; or
2. 10% of the company's profit from the previous financial year (i.e., the year ending before 1 January of the current year).

What happens if the limit is exceeded or a donation is made to a non-listed organization?

• All amounts exceeding the allowable limit are subject to tax at the rate of 22/78.
• The same rate applies to any donation made to an organization not included in the official list, regardless of the amount.

As a result, companies can support social initiatives and charitable causes without additional tax liabilities, provided they respect the thresholds and choose an eligible recipient.
However, "out-of-scope" donations—even with the best intentions—can result in tax costs.

To avoid risks and adapt effectively, businesses should proactively incorporate these changes into their strategy.
If you have any questions about the new legal framework or need assistance in adapting to the updated requirements, please contact our team. We are ready to provide expert advice, assist with documentation, and support your business in navigating Estonia’s new tax landscape.