Spring has brought fresh changes to the Estonian government, and the security tax will likely take a different shape than originally planned. A tax expert from the law firm Hedman explains how the government’s new plan will affect Estonian individuals and businesses.
As it stands today, the Security Tax Act stipulates that starting from 2026, a 2% so-called security tax will be imposed on the taxable income of individuals. For businesses, a 2% profit tax will be introduced as of January 1, calculated based on the previous financial year’s profit and paid quarterly.
However, the new government has promised to abolish the income tax components of the security tax that were established by law at the end of last year. “Essentially, this means individuals will not be subject to a 2% income tax from their first euro of income, and businesses will not pay a 2% corporate income tax on accounting profits,” explained Hedman’s tax advisor Marit Kelgo.
These are significant changes for individuals and businesses. Still, the tax advisor pointed out that the government’s promise to repeal the proposed tax increases has not yet been enacted into law, and the Security Tax Act remains currently unchanged.
Hedman’s tax advisor recommended individuals and businesses to rely on the current law to avoid unpleasant surprises, but not to rush into making changes. “We’re currently in a situation where, unfortunately, we must wait a little longer for the murky waters to clear and for plans to become law. However, it is certainly wise to prepare that new taxes will be introduced,” she noted.
Estonia’s security needs ongoing reinforcement, and the state budget deficit must be addressed. “There’s no reason to hope that tax hikes won’t happen—whether in the form of a general income tax increase, as we already saw earlier this year,” said Kelgo.
At present, the only aspect of the security tax that has been officially enacted is the 2% VAT increase—from 22% to 24%—which will take effect on July 1 this year. At the end of March, the government also proposed eliminating the temporary nature of the security tax and permanently increasing the income tax rate to 24%. On May 8, a draft law was introduced to amend the Security Tax Act and the Income Tax Act accordingly.
If the new plan proposed by the government is passed into law and the tax hikes are avoided, businesses will be spared many questions and additional costs.
“According to the new draft law, unlike the initial plan, the administrative burden on businesses will not increase. Companies would not be required to submit quarterly reports to the Tax and Customs Board, nor would they need to purchase significantly more accounting services,” Kelgo highlighted.
We hope the government’s draft will soon become law, and we are prepared for potential alternative tax increases.
Hedman Law Firm specializes in corporate and commercial law, supporting its clients in raising investments, managing shareholder relations, technology law, mergers and acquisitions, cross-border corporate movements, IT law, data protection, intellectual property matters, and various disputes.
