Upcoming changes in taxation

Changes to the VAT Act

Effective January 1, 2024, Estonia will increase the standard VAT rate from 20% to 22%. To facilitate this transition for businesses, transitional provisions allowing the application of the 20% VAT rate until December 31, 2025, are available in certain cases:

• Businesses using cash-based VAT accounting can apply the transitional provision if an invoice was issued and the service was rendered or goods were dispatched or made available before January 1, 2024. This applies to goods and services that are subject to the standard rate.
• The 20% rate can also be applied if, before May 1, 2023, a written contract was signed stipulating that the price includes VAT or explicitly states that VAT at 20% will be added to the price. In both cases, the contract must not allow for price adjustments due to changes in VAT rates.

From January 1, 2025, the VAT rate for accommodation services, including bed & breakfast service, will change from 9% to 13%. Additionally, the VAT rate for periodicals will rise from 5% to 9%. Transitional provisions apply until December 31, 2026 in case of cash-based VAT accounting for services rendered or periodicals dispatched or made available before January 1, 2025.

Changes to the Income Tax Act

Amendments to the Income Tax Act affect both individuals and legal entities. Starting in 2024, individuals will no longer be able to claim certain deductions from their taxable income. Deductions for additional tax-free income for children and spouses, as well as the right to tax refunds on paid mortgage interest, will be eliminated. Furthermore, the personal income tax rate will increase from 20% to 22% starting in 2025.

On a positive note, from January 1, 2025, all individuals residing in Estonia will be eligible for an annual tax-free income of €8,400. The tax free income will also be applicable for residents of the European Economic Area who receive taxable income from Estonia. The exception is for those of retirement age, whose tax-free income will equal the average old-age pension. This amendment represents a significant shift, as the current system of regressive tax-free income will be discontinued.

For legal entities, the corporate income tax rate will increase by two percentage points to 22% starting January 1, 2025. A major change will also occur in dividend taxation. The current option to tax regularly paid dividends at a reduced rate of 14% will be discontinued from 2025. Consequently, the 7% withholding tax rate on dividends paid to individuals will also cease. Going forward, a uniform tax rate of 22/78 will apply to dividends. While simplifying the tax calculation, this change may lead to a substantial tax increase for businesses that regularly pay dividends, especially those with foreign shareholders.

For further information regarding these upcoming tax changes, we recommend contacting BDO specialists.