Key amendments in Estonian tax legislation in 2025

The upcoming year 2025 will bring a number of changes in Estonian tax legislation which will affect both companies and individuals. Tax and excise rates but also tax-free limits will increase, the possibilities of using an investment account will expand, and the new Motor Vehicle Tax Act will come into force. The following gives an overview of the main changes in Estonian tax laws that will enter into force in 2025.

1. Income tax

The personal income tax rate will increase to 22%, instead of the current 20%. The basic tax exemption limit will remain up to 654 euros per month and up to 7848 euros per year in 2025, depending on the individual’s gross annual income.

The corporate income tax rate will also increase to 22% (22/78 on net payment).

The lower tax rate of 14/86 applicable to regularly distributed dividends and the income tax of 7% withheld from dividends paid to a natural person will be abolished. Note that the transitional provisions still oblige the company to withhold income tax at the rate of 7% on dividends paid to a natural person as of 2025, if the share of profits on which the dividend is based was previously taxed at the rate of 14% and a tax exemption applies to the re-distributed dividend at the level of the company paying the dividend.

The income tax rate for advance payments of credit institutions will increase to 18% instead of the current 14%.

Tax-free limits

The amendments in 2025 will not only consist of increases in tax rates, but also increases in tax-free limits for several types of expenditures.

*2% of the amount of payments made in the same calendar month subject to social tax will be added.

**As a new amendment, expenses related to massage or to the services provided by health care workers, professions or specialists with professional competence entered into the health care management information system will also be added to the list.

Investing

In addition, the legislator has updated the rules concerning an investment account, which allows to defer taxation of income received from financial assets, as well as other legal provisions concerning the taxation of income received from investments. The aim of these amendments to the Estonian Income Tax Act (ITA) is to make the investment account regime more flexible and favourable for retail investors by enabling tax-efficient investing in the form of additional financial instruments and a wider range of service providers.[1]

The list of financial assets held in an investment account will now include covered bonds, regulated crowdfunding instruments and crypto-assets. On the other hand, a unit or share of an unlicensed small fund is no longer considered as a financial asset allowed to hold in an investment account. Crypto-assets are deemed as financial assets of a resident individual’s investment account as of the tax period starting from 1 January 2025, provided that these assets have been acquired through an intermediary of a crypto-asset service provider or an issuer of such crypto-assets who has received a license to offer crypto-assets under the MiCA regulation.

Soon, an investment account can be opened in more types of financial institutions such as a payment institution, an e-money institution or an investment company established in a state of the European Economic Area. An account in an investment firm must be opened in the name of the individual taxpayer, provided that the investment firm clearly separates taxpayers’ funds from its own funds and its other clients.

There are also changes in the rules regarding the deduction of expenses. In addition to direct costs, indirect expenses are allowed to be deducted from investment income received through an investment account or outside it. For instance, expenses such as securities account management fees, platform fees for crowdfunding service or trading crypto-assets will no longer be treated as a payout from the investment account and these expenses can be deducted from the investment income. Thus, a natural person is allowed to consider management fees of a securities account as part of its acquisition cost (§ 38 of ITA).

Crypto-assets will also be added to the sample list of assets specified in § 15(1) of ITA and, as a positive addition, any losses arising as a result of the expiry of a proprietary right can be deducted from the income (e.g. if a crypto-asset becomes invalid or if a loan granted through crowdfunding is assessed as hopeless). It is also possible to offset gains and losses received during the same tax period when investing in crowdfunding and crypto assets outside the investment account regime (§ 39 of ITA). Thus, it appears that the legislator’s intention is to change the taxation of individual investors more similar to investing through a company.

Changes favourable for the taxpayer will be applied retroactively from the beginning of the tax period starting on 1 January 2024, but the provisions related to crypto-assets will enter into force on 1 January 2025.

2. VAT

On 1 January 2025, accommodation services will be subject to 13% VAT rate instead of the current 9%, and the VAT rate for periodicals, both on physical and electronic equipment, will increase again from 5% to 9%.

Due to the Security Tax Act (adopted by the Estonian Government on 11 December 2024), the standard VAT rate will also increase to 24% from 1 July 2025 until 31 December 2028. In this regard, the period for applying the 20% VAT rate for long-term contracts will be shortened to 30 June 2025.

As of 1 January 2025, a special scheme for small businesses will apply, allowing taxable persons established in Estonia to operate in other Member States without a VAT registration. Companies can apply for this special scheme for their turnover in other Member States if their turnover in the European Union as a whole does not exceed EUR 100,000 during a calendar year.

In this context, the principles for calculating the threshold of VAT registration will also be harmonised. From 2025, the following will be included in the threshold (i.e. EUR 40,000 per year):

• taxable turnover of goods and services, including turnover subject to zero percentage rate (excluding the disposal of fixed assets);
• turnover from real estate transactions (excluding disposals of fixed assets and incidental transactions);
• turnover of insurance and financial services (excluding incidental services).[2]

Considering the above, a company may be required to register as VAT taxable person in Estonia even if the total amount of its transactions (including VAT exempt financial transactions such as purchase and sale of shares) exceeds EUR 40,000, but only one transaction generates VAT taxable turnover. In addition to the monthly VAT reporting, the company must apply VAT on services or goods which is required by law (such as training courses or short-term rental apartments on Airbnb).

Additionally, the definition of new buildings in the Estonian VAT Act will change. Now, a building that is transferred for the first time within one year after its initial commissioning/re-use is also considered a new building (§ 16 (2) 3) of VAT Act). Therefore, if a building is sold during its first year of use, VAT must be added to the sale price.

3. Land tax

2025 will also bring changes to the land tax. Namely, the tax rates will change, the limit on the increase in land tax will either be 50 percent or 20 euros, and the amount of the first instalment of land tax will increase. For example, from now on, land tax amount up to 100 euros must be paid by 31 March at the latest.

4. Motor vehicle tax

As of 1 January 2025, the new Motor Vehicle Tax Act[3], which introduces a new motor vehicle tax will enter into force. Motor vehicle tax consists of two parts – an annual fee, which will be collected by the Estonian Tax and Customs Board (ETCB), and a registration fee, which is administered by the Estonian Transport Administration. Motor vehicle tax will be paid by all owners of motor vehicles or responsible users of motor vehicles registered in the Estonian Traffic Register.

The annual tax amount for each vehicle is individual and, depending on the category, is formed by different types of factors (base part, part of CO2 and part calculated on the basis of the maximum weight). In case of motor vehicles in categories M1 and N1 older than five years, the age of the motor vehicle shall also be taken into account when calculating the tax.

The tax period for motor vehicle tax is one calendar year. The tax liability arises in advance for the current year and must be paid in two parts: first half of the tax amount by June 15 and the rest by December 15. If the vehicle is registered in the Traffic Register for the first time in a year, the obligation to pay motor vehicle tax arises at a proportional rate. In this case, the tax is calculated proportionally for the days remaining until the end of the current year, and a tax notice is issued within 15 working days after registration of the vehicle in the Traffic Register. The registration fee is paid in one instalment as the registration fee is a prerequisite for registering the vehicle in the Traffic Register.

A tax notice for payment of motor vehicle tax is submitted by the ETCB to a person who is the owner or responsible user of a motor vehicle as of January 1. The tax notice will be issued by 15 February at the latest in the ETCB’s e-services environment e-MTA, where the calculation of the tax will also be visible.

It is also worth noting that in the event of transfer or transfer of right to use a motor vehicle during the tax period (year), the motor vehicle tax already paid during this period will not be refunded. Thus, for example, if the motor vehicle is destroyed during the year as a result of an accident, the prepaid annual tax will not be refunded and the tax amount will not be reduced. Vehicles with a temporarily deleted or a suspended registration will be subject to the annual tax as of year 2027.

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[1] Explanatory memorandum to the draft act amending the Income Tax Act and the Funded Pensions Act. Page 1.

[2] Estonian Tax and Customs Board. Amendments to the Value Added Tax Act. – https://www.emta.ee/en/business-client/taxes-and-payment/value-added-tax#from-01012025

[3] Motor Vehicle Tax Act, RT I, 17.08.2024, 1.