Following the general election, the new coalition government has committed to balancing the state budget and consequently revealed many intended taxation changes. While these ideas are not yet set in stone, here are the key changes that could be expected based on what has been communicated.
Personal income tax – tax rate increase, reworking personal allowance
The personal income tax rate is expected to increase from 20% to 22% in 2025. In conjunction, the government has promised to rework the system of personal allowance.
Currently, personal allowance is available for individuals with a yearly gross income of under 25,200 euros, starting at 7848 euros and progressively reduced once the yearly gross income exceeds 14,400 euros. Additional personal allowance may be available on behalf of a spouse or children. Starting in 2025, the government seeks to provide everyone with a yearly personal allowance of 8,400 euros, regardless of their income, while abolishing the additional personal allowance for a spouse or children as well as ending the deduction of housing loan interests.
The combined effect of these changes should generally benefit private individuals who either do not qualify for significant additional personal allowance or whose yearly gross income does not exceed 95,000 euros. The biggest winners relative to their income are people earning between 21,120 euros and 31,800 euros per year (1760 euros to 2,660 euros gross per month), as their income is effectively increased by 5% or more.
Corporate income tax – tax rate increase, abolishing the reduced rate for regular dividends
The corporate income tax rate is also expected to rise from 20% to 22% in 2025. At the same time, the government has promised to abolish the reduced tax rate for regular dividends.
Starting from 2019, a reduced income tax rate of 14% has been applied to dividends paid out by resident companies, as opposed to the standard 20% rate, insofar as the dividends do not exceed the average dividends paid out in the three preceding years. Generally, this only reduces the total tax burden in cases where the regular dividend payment is made to a corporate shareholder, as private individuals are obliged to pay the difference as additional personal income tax. The government seeks to abolish the reduced rate and go back to the universal application of the standard rate.
The abolishment of the reduced rate decreases the potential profits of corporate shareholders in Estonian resident companies. The effect is more significant for companies which regularly distribute profit. In contrast, taxation does not change in cases where the company pays dividends only once every three years or less frequently.
Value-added tax – tax rate increase, increasing the tax rate on accommodation services
The government seeks to increase the standard value-added tax rate from 20% to 22% starting from 2024. Additionally, the reduced rate of 9% shall cease to apply to accommodation services in 2025, whereby accommodation providers are effectively faced with a 13% tax increase.
Gambling tax – tax amount and rate increases
According to the coalition agreement, the parties agreed to increase tax revenue from gambling activities. The government has subsequently prepared draft legislation to increase gambling tax on all forms of gambling.
The tax rate on lotteries is set to increase from 18% to 22% in 2024. While general lotteries are monopolised by the State, the increased tax rate will also apply to commercial lotteries organised by businesses to promote their goods or services. The change will thus mostly affect regular businesses running certain consumer games, rather than private gambling operators who are generally precluded from organising lotteries. Additionally, the current 5% tax rate on betting and online gambling is also set to increase: to 6% in 2024 and to 7% in 2026.
Car tax
The government is seeking to establish a car tax by July 2024, with the details being determined during upcoming analysis. It has been expressed that the main criteria should be CO2 emissions, with less tax being due on more economical cars. On the other hand, the government is also considering increasing tax revenue based on car value, particularly to generate revenue from luxurious electric cars. The initially proposed mechanism to include both considerations is to charge a yearly CO2-based car tax as well as a one-off car-value-based tax at the time of purchase. This, along with the rest of the proposals described above, is subject to change based on future government decisions and analysis.
By Taaniel Sivonen, Junior Associate, Cobalt