The government has decided to keep the temporary VAT increase in place permanently. Starting July 1, 2025, the VAT rate will remain at 24%, with no plans to reduce it. The official justification is the need for long-term defense funding.
In contrast, the planned +2% corporate profit tax has been scrapped. This avoids complicating Estonia’s straightforward tax system and saves the state and businesses from costly IT upgrades and bureaucracy. Scrapping the additional tax also avoids an estimated €950,000 in system development costs in 2025, followed by €735,000 in 2026 and €525,000 in 2027.
Simplified Income Tax System Reinstated
Estonia is reverting to its previous income tax model: companies will only pay tax on distributed profits, not on earnings as they’re generated. This keeps the tax system lean and internationally recognized for its simplicity.
Also, starting in 2026, individuals will no longer owe 2% income tax on every euro earned. However, the overall income tax rate will still climb to 24%.
What It Means for the Public
The VAT hike locks in higher consumer prices for the foreseeable future. But the removal of added profit taxes offers relief for businesses, especially important during a tough economic period. These decisions are aimed at stabilizing public finances while avoiding extra strain on entrepreneurs.
EU Context
With the VAT increase to 24%, Estonia joins the higher end of the EU tax spectrum—though still behind countries like Hungary and the Nordic states.