Security tax package
The Ministry of Finance has disclosed the draft Security Tax Act, pursuant to which:
- the income of a resident natural person as provided in §§ 12-22 of the Income Tax Act and the income of a non-resident as provided in § 29 of the Income Tax Act are subject to taxation;
- the income received in a business account is subject of taxation;
- the profit of a resident company for a financial year and the profit attributed to a non-resident company’s permanent establishment located in Estonia are subject to taxation;
- the value added tax rate is to be increased.
Taxation of income of natural persons
In accordance with the draft, natural persons should have to pay a 2% security tax as of 2026. The general principle is that all income of a natural person is subject to taxation, without taking into account the deductions allowed in calculating income tax liability.
Legal persons making payments subject to security tax to natural persons must also withhold, similarly to other taxes, security tax, which is to be declared and paid by the 10th of the month following the tax period. Income on which security tax has not been withheld is declared by the taxpayer themselves no later than on 30 April of the year following the tax period.
Security tax is not charged on fringe benefits, gifts or donations given and dividends paid by legal persons, which are subject to income tax on the basis of §§ 48-53 of the Income Tax Act.
Non-resident natural persons pay security tax on income subject to income tax on the basis of § 29 of the Income Tax Act, without taking into account the deductions allowed in § 311 of the Income Tax Act, unless this is contrary to a double taxation treaty.
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Taxation of corporate profit
The general rule prescribes that a 2% security tax is charged on the pre-income tax profit of a resident company and of a non-resident company’s permanent establishment located in Estonia for the financial year from which the following has been deducted:
- the dividend included in the profit, the underlying profit of which is subject to security tax or foreign income tax and which has been received from a company in which the taxpayer holds at least 10% of the shares or votes at the time the dividend is received. If the dividend received is not recognised as income in the income statement, no deduction can be made;
- the profit attributed to a permanent establishment located in a foreign state.
The security tax should be in force from 2026-2028. The pre-tax profit for the financial year ending in 2026 and beginning in 2028 is taxed in proportion to the number of months falling within the respective year.
Security tax is paid in the form of advance payments. The basis for the advance payments for 2026 is one-half of the pre-tax profit earned in the financial year ending in 2025. The tax calculated on this amount is to be paid in two equal instalments by 10 September and 10 December. If the annual report for the financial year ending in 2025 has not been submitted, the last report submitted will serve as the basis. In 2027 and 2028, advance payments must be made by 10 March, 10 June, 10 September and 10 December.
Credit institutions, their branches and listed companies will subsequently be required to make advance payments on the pre-tax profit earned in the previous quarter from which the dividends received and profit of the permanent establishment earned in the same quarter have been deducted.
The final amount of the security tax from which advance payments have been deducted is declared and paid no later than by the 10th of the ninth calendar month of the following financial year.
Value added tax
The security tax package also includes an amendment to the Value-Added Tax Act pursuant to which the standard value added tax rate is to be increased to 24% on 1 July 2025. At the same time, the right to apply the 20% tax rate established by subsections 46 (24) and (25) of the Value-Added Tax Act will also be shortened to the same date. The value added tax rate should fall again to 22% in January 2029.
The draft Security Tax Act can be examined here.
Read more about the security tax package on the KPMG blog here.
Planned amendments to the taxation of business income
The Riigikogu has opened proceedings on the draft amendment to the Simplified Business Income Taxation Act and other associated Acts, pursuant to which four major amendments will be made to the taxation of income earned through a business account.
- while previously, when services were provided to companies through a business account, a payment made by a company was treated as an expense not related to business, i.e. it was subject to income tax at the rate of 20/80, then the planned amendment will abolish the current additional income tax liability and instead establish the obligation to pay social tax on 50 per cent of the amount of the service fee;
- to date, two rates have been in force for the taxation of business income: the tax rate of 20% on income if the amount earned in a calendar year was up to 25,000 euros, and the tax rate of 40% on income if the amount earned was 25,000-40,000 euros. The amendment will abolish the higher tax rate of 40% and apply the 20% tax rate to all income transferred to a business account;
- in addition, the rules on the apportionment of business income tax will be amended. At present, the share transferred as cover for income and social tax accounts for 97-100% of business income tax and, should the amendment not be made, this share would fall to 90%, which means that the joint and several contribution in the form of income and social tax as made by a business account user who has joined the second pension pillar would be considerably lower than that of those who have not joined it. It is planned is to start apportioning business income tax according to income tax and social tax rules in proportion to their nominal tax rates (22/55 of business income tax paid will be apportioned pursuant to income tax and 33/55 pursuant to social tax apportionment rules). In addition, it will be provided that a user of a business account who has joined the second pillar has to pay business income tax at a 2%, 4% or 6% higher rate, depending on the funded pension contribution rate chosen by the person;
- to date, business account details have not been public pursuant to law, but now the Taxation Act will be supplemented by including additional items on the list of data that may be disclosed without the consent and knowledge of the taxable person, i.e. the account number used for paying business income tax will be included on the list.
In addition, the Riigikogu has also opened proceedings on the draft Security Tax Act, which regulates, among other things, the taxation of income of natural persons. On the basis thereof, as of 1 January 2026 income (including business income) of resident natural persons will be subject to security tax. The security tax rate is 2% of the income of natural persons. For more detailed information about the security tax, read the draft Security Tax Act.
The amendments to the taxation of business income are due to enter into force on 1 January 2025. However, the draft must first pass three readings in the Riigikogu. The proceedings concerning the draft can be followed here.
Planned amendments to the funded pension system
It is planned to change the funded pension system as of 1 June 2025 in order to eliminate bottlenecks therein.
The draft Act to amend the Funded Pensions Act and other Acts comprises the following set of amendments: 1) clarifying the rules for closing a pension investment account in the event of late receipt of funds; 2) providing an opportunity to re-register securities declared unmarketable in an ordinary securities account; 3) amending the conditions under which successors can transfer inherited second pillar pension assets to their own pension account; 4) making it possible to transfer funds from one insurance contract to another without the termination of one contract being a precondition; 5) obliging pension fund managers to disclose information about the investment and risk management of pension funds as regards sustainability; 6) increasing the misdemeanour penalties imposed for a breach of the requirements of the pan-European Personal Pension Product (PEPP) (5 million euros for legal persons and 700,000 euros for natural persons).
The draft can be examined in more detail here.
The list of non-cooperative jurisdictions for tax purposes has been updated
On 8 October, the Council of the European Union updated the list of non-cooperative jurisdictions for tax purposes. The list includes countries which have not engaged in constructive dialogue with the EU on tax governance or have failed to deliver on their commitments to implement the necessary reforms.
The list now includes 11 jurisdictions: American Samoa; Anguilla; Fiji; Guam; Palau; Panama; Russia; Samoa; Trinidad and Tobago; the US Virgin Islands; and Vanuatu. Before the update, Antigua and Barbuda was also on the list.
