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13.05.2025

Security Tax Abolished, but VAT and Income Tax to Rise to 24%

On May 8, the government approved a draft law that abolishes the security tax scheduled to come into force at the beginning of 2026. This means there will be no corporate profit tax, but instead of a temporary security tax, the VAT and income tax rates will permanently rise from 22% to 24%.

VAT Increase to Become Permanent
According to the current security tax law, the VAT rate is set to increase from 22% to 24% starting July 1, 2025. As it stands, the higher rate would apply temporarily until December 31, 2028.

However, the government has decided to make this VAT increase permanent. The bill submitted to the Riigikogu states that from 2029 onwards, the VAT rate will not revert back to 22%. The justification for this change is that financing defense spending requires not a temporary tax but a long-term and stable source of budget revenue.

Income Tax Rate to Increase to 24%
On a positive note, the government has decided to cancel the corporate profit tax and taxation of individuals from the first euro of income, both of which were to come into effect on January 1, 2026.

Instead, the draft law submitted to the Riigikogu proposes increasing both corporate and personal income tax rates by two percentage points—from 22% to 24%—starting January 1, 2026. Thus, the temporary security tax will be replaced by a permanent increase in the income tax rate to 24%.

Entrepreneurship Account Tax Rate to Rise to 22%
As a result of the change, the tax rate on income earned via entrepreneurship accounts will rise from 20% to 22% in 2026, assuming the income earner is not a participant in the second pension pillar. If the user is participating in the second pillar, income paid into the entrepreneurship account will be taxed at 24%, 26%, or 28% starting in 2026.

Impact on the State Budget
According to an analysis by the Ministry of Finance, the tax changes will bring in an additional €27 million in 2025, mainly due to the shift in profit distribution by legal entities. In contrast, tax revenue is expected to fall by €234 million in 2026, €283 million in 2027, and €294 million in 2028. An increase of €477 million is anticipated in 2029.

If you have any questions about the planned tax changes, you can contact the Chamber’s lawyers at juristid@koda.ee.

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