Taxes Estonia: What’s changing in 2025?

Taxation in Estonia is set to undergo key changes in 2025, impacting both individuals and businesses. With adjustments to tax rates, new corporate tax benefits, and modifications in dividend taxation, it is crucial to stay informed to ensure compliance and optimise tax planning.

The Estonian Tax and Customs Board has announced several updates, including an increase in the standard VAT rate, a revised approach to social tax obligations, and changes to the entrepreneurial account tax rate. Additionally, new EU-wide taxation rules for small enterprises will be introduced, influencing how businesses operate across borders.

Understanding these changes will help individuals and businesses make informed financial decisions. Whether you are an employee managing income tax, an employer navigating corporate tax benefits, or an entrepreneur considering the SME Scheme, knowing these updates can help you plan effectively and avoid unexpected tax liabilities.

This article provides a comprehensive overview of Estonia’s 2025 tax changes.

Learn about new tax rates, social tax obligations, corporate tax adjustments, and how these modifications could affect your financial planning. Staying ahead of these developments will ensure compliance and financial efficiency in the year ahead.

Overview of Tax and Customs Board

The Tax and Customs Board is the Estonian government agency responsible for administrating taxes and customs in Estonia.

This government agency plays a crucial role in collecting taxes, including income tax, and ensuring compliance with tax laws and regulations.

The Tax and Customs Board also provides valuable information and guidance to taxpayers, including both individuals and businesses, on their tax obligations and entitlements. By offering support and resources, the Board helps ensure that taxpayers in Estonia can meet their responsibilities efficiently and accurately.

Taxes and Rates in 2025 – Payments to Individuals:

Social tax: 33%.
Personal income tax: 22%.
Pension insurance: 2%, 4%, or 6%, depending on the individual’s choice.
Unemployment insurance: 1.6% (deducted from the employee’s gross salary) and 0.8% (paid by the employer on top of the gross salary).
The minimum wage will be €886 per month and €5.31 per hour.
The rate for calculating the minimum social tax obligation will increase to €820 in 2025. As a result, employers must pay at least €270.60 in social tax per month for employees working under an employment contract.
The general tax-free income will range from €0 to €7,848 per year (or €0 to €654 per month), depending on the individual’s annual gross income.
The tax-free income for old-age pensioners is fixed at €9,312 per year (or €776 per month) and does not depend on the individual’s annual gross income.

These rates apply to any natural person residing in Estonia.

Corporate Tax Rates in 2025 – Businesses in Estonia

Tax Rates in 2025 – Businesses

The standard VAT rate until June 30, 2025: 22%.
The standard VAT rate starting from July 1, 2025: 24%.
The reduced VAT rate for accommodation services (e.g., AirBnB, Booking.com) in 2025 is 13%.
The reduced VAT rate for periodicals (print and digital) will increase to 9%.
The tax on paid dividends is 22/78 of the net amount or 22% of the gross amount (read more about dividend payments below).

Minimum Wage in 2025 in Estonia

The minimum wage in 2025 will be €886 per month and €5.31 per hour.

All employers in Estonia must pay the minimum wage. This means that if employees have a full-time employment contract, their gross salary cannot be less than €886 per month.

The minimum wage also affects the size of certain social benefits.

You can view the tax calculation for the minimum wage here.

Minimum Social Tax Obligation

The rate for calculating the minimum social tax obligation will increase to €820 in 2025. As a result, employers will be required to pay at least €270.60 in social tax per month to employees under an employment contract.

This obligation applies even if the employee works part-time and their gross salary is less than €820 per month, provided that this job is their primary or sole employment.

Paying social tax starting from €270.60 per month is, in most cases, a mandatory condition for activating health insurance coverage (Tervisekassa).

You can read more about the minimum social tax obligation here.

Taxation of Personal Income

The tax-free income threshold will remain unchanged.

In 2025, the tax-free income threshold will range from €0 to €7,848 per year (or €0 to €654 per month), depending on the individual’s annual gross income. This applies to all individuals who have not yet reached the old-age pension age.

The tax-free income threshold is different for individuals who have reached the old-age pension age. It is a fixed amount of €9,312 per year (or €776 per month) and does not vary based on the individual’s annual gross income.

Income tax is a mandatory financial charge imposed on individuals’ earnings, including wages, pensions, and investment returns. The current personal income taxation system assumes that each individual:

Has a clear understanding of their annual and monthly income.
Understands what is included in the concept of yearly income under the law.
Can independently calculate and inform their employer, via a declaration, of the appropriate amount of tax-free income to apply.

Individual income is calculated based on their total earnings from various sources, including salaries, rental income, and investment returns, with specific deductions and exemptions applied according to the law.

We advise our corporate clients and their employees to declare a tax-free income threshold of €0 if their financial situation allows for this option. If applicable, any overpaid income tax can be refunded when the employee files their annual income tax return.

This approach helps avoid unpleasant situations where, due to an incorrect estimation of the annual income, a significant tax payment must be made to the Tax and Customs Board within a short period. The income tax is applied to different types of income, ensuring that all taxable earnings are appropriately accounted for and reported.

Tax-exempt income threshold

Basic exemption in 2025

NB! The “tax hump” will remain in effect also in 2025.

The person is not of pensionable age: Basic exemption: up to €7,848 per year (up to €654 per month). Overall, the basic exemption decreases as annual income increases. Read more from the section “Calculation of basic exemption”.

If the person is of pensionable age, the Basic exemption in 2025 is up to €9,312 per year (or €776 per month). This fixed amount does not depend on a person’s annual income.

Corporate Tax Benefits in 2025

In 2025, corporate tax benefits will undergo significant revisions.

Corporate Tax Benefit Limits in 2025

The daily allowance for foreign business trips is €75 (for the first 15 days) and €40 (for subsequent days).
Expenses for hosting clients and business partners: €50 per month + 2% of the gross salary fund.
Promotional goods and services for advertising: €21 (excluding VAT).
Employee accommodation costs: €500 per month in Tallinn and Tartu; €250 per month in other cities.
Compensation for using a personal vehicle for business purposes: €0.50 per kilometre, up to a maximum of €550 per month.
Health-related expenses for employees: €400 per year, with an expanded list of covered services (e.g., massages and services provided by medical professionals or certified specialists).

Certain conditions must be met, and internal documentation must be completed to take advantage of these tax benefits.

Dividend Taxation

Please note that starting from 2025, the dividend taxation system will change. The tax rate on distributed dividends will be 22/78 of the net amount or 22% of the gross amount. This means the tax on distributed dividends will increase. If you were planning to distribute dividends, it is advisable to do so in 2024.

The reduced tax rate on dividends (14/86) will be abolished; all dividends will now be taxed at a unified rate of 22/78. For dividends previously distributed at the reduced rate of 14/86, where the 7% withholding tax was not applied, the obligation to withhold 7% is carried forward to future periods.

Mandatory Conditions for Dividend Distribution:

For a limited liability company (OÜ), the share capital must be paid in and reported to both the Commercial Register and the TSD form.
The management board must prepare and approve the company’s annual report.
The financial year must end with a profit, and the dividend distribution must not harm the company’s financial position or solvency.
After dividend distribution, the company’s equity must not fall below the required minimum.
A decision by the shareholders to distribute dividends must be in place.

You can read more about dividend taxation here.

Taxation of Permanent Establishment

A permanent establishment is a fixed place of business through which a non-resident conducts business in Estonia. This can include branches, offices, factories, or other fixed locations where business activities are performed.

In Estonia, a permanent establishment is subject to income tax on its profits, regardless of whether they are distributed or retained. The taxation principles for a permanent establishment are aligned with those for a resident legal person, ensuring a consistent approach to tax obligations for all business entities operating within the country.

Sick Leave Payment Procedure by the Tax and Customs Board in 2025

Per the established procedure for sick leave compensation, employers are obligated to pay sick leave benefits from the 4th to the 8th day of illness at a rate of 70% of the employee’s average salary. The Health Insurance Fund pays compensation starting from the 9th day of illness or injury.

Starting in 2025, employers will have an expanded option (not an obligation) to pay or supplement sick leave compensation from the 1st calendar day of illness until the end of the sick leave at a rate of up to 100% of the employee’s average salary. Starting in 2025, employers are encouraged to compensate employees for the difference between their average salary and the incapacity benefit while benefiting from slightly more favourable tax treatment for such payments.

It is important to note that only income tax at the rate of 22% is withheld from this payment to the employee. Social tax, unemployment insurance, and funded pension contributions do not apply to these payments. Sick leave compensation must be declared in the TSD form under payment code “24.” Any portion of the payment exceeding the average salary is taxed as regular salary and must be declared on a separate line under payment codes 10, 11, 12, 13, 21, 22, or 23, depending on the payment type. This procedure also applies to members of the management board. The mandatory condition for this is the presence of a sick leave certificate.

Overview of Selected State Fees in 2025

State Fees for Company Formation in 2025:

Public Limited Company (AS) – €250 (2024: €200)
Private Limited Company (OÜ) – €350 (2024: €265) (€250 at a notary, 2024: €200)
Sole Proprietor (FIE) – €50 (2024: €20)

State Fees for Amending the B-Card in 2025:

Public Limited Company (AS) – €75 (2024: €25)
Private Limited Company (OÜ) – €75 (2024: €25)
Sole Proprietor (FIE) – €50 (2024: €10)

State Fee for Reinstating a Company Removed from the Register in 2025:

€500

Advance Payments and Refunds

Taxpayers with a taxable income exceeding a certain threshold must make advance income tax payments. These payments are made quarterly, helping to spread the tax burden throughout the year. At the end of the tax year, taxpayers must submit a tax return and pay any remaining tax due. If taxpayers overpay their tax liability, they are eligible for a refund. The refund process is initiated after the taxpayer submits their tax return, and the Tax and Customs Board verifies the tax liability. This system ensures that taxpayers only pay the amount of tax they owe, with any excess being promptly refunded.

Income Tax Returns and Payment

Income tax returns must be submitted to the Tax and Customs Board by the end of the tax year. These returns should include comprehensive information on the taxpayer’s income, deductions, and overall tax liability. Any remaining tax due must be paid by the end of the tax year to avoid penalties. The Tax and Customs Board may also request additional information or documentation to support the tax return, ensuring accuracy and compliance. This thorough process helps maintain the tax system’s integrity and ensures that all taxpayers meet their obligations on time.

Entrepreneurial Account in 2025

Remember that an entrepreneurial account is a legal form designed for entrepreneurs with a small turnover of up to €40,000 per year.

The entrepreneurial account can only be opened at LHV Bank.

When payments are made to the LHV Bank, a portion of the axes is withheld and transferred to the Tax and Customs Board. Entrepreneurs using this account do not need to submit reports or maintain accounting records. However, expenses cannot be deducted, and all income credited to the account is subject to taxation.

This form of entrepreneurship is ideal for providing services to individuals (e.g., nanny, tutor, personal trainer) or selling self-made goods, provided that production and service-related costs are minimal.

Starting in 2025, the tax rate will change.

A unified tax rate of 20% will apply to all income up to €40,000 per year.

If the entrepreneurial account owner is enrolled in the second-pillar pension fund, an additional pension fund contribution (2%, 4%, or 6%) will be deducted from all incoming payments to the account. It is important to note that if the account owner has no other employment, a minimum of €2,255 must be credited to the account in 2025 to qualify for state health insurance coverage.

Details about the entrepreneurial account number, the account holder’s name, and personal identification code will become open data and will be available on the Tax and Customs Board’s website.

If a legal entity pays an entrepreneurial account for services, it must declare this payment in Annex 6 of the TSD form under code 6080. The legal entity’s tax rate is 22/78 of the amount paid for the service.

Special Scheme for Small Enterprises

New Taxation Rules in the European Union Starting in 2025

Beginning in 2025, the European Union will introduce a new taxation framework called the SME Scheme (Special Scheme for Small Enterprises). This scheme is designed to simplify VAT obligations for businesses with a small turnover, such as those engaged in limited online sales across EU countries or renting out property in another EU member state.

Under the SME Scheme, a “small entrepreneur” is defined as an individual or entity that:

Has a total turnover across all EU countries of no more than €100,000 for the current and previous calendar years, and
Does not exceed the VAT registration threshold in any single country (e.g., in Estonia, this threshold is €40,000).

Required Actions for the SME Scheme:

Apply to the Estonian Tax and Customs Board. A separate application must be submitted for each EU country where the scheme will apply.
Await a decision: application reviews take up to 35 working days (approximately 1.5 months).
Obtain a registration number with the postfix “EX.”
Operate as a non-taxable entity in countries where authorisation under the SME Scheme has been granted.
Maintain records of transactions by country.
Submit quarterly reports.

The SME Scheme is voluntary and aims to simplify recordkeeping and reduce administrative costs for entrepreneurs with small turnovers. Additionally, it allows businesses to avoid VAT registration in other EU countries.

As a reminder, registration obligations arise, for instance, if a business has a warehouse in another EU country or sells goods from an Amazon warehouse in another member state.

You don’t have to keep all this information in mind.

We advise you to contact a tax advisor to discuss your financial needs should you need further information.

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