Estonia Scraps Part of Planned Tax Hikes

Estonia entered 2026 with a considerably milder tax regime than plans published a year earlier had suggested. The country cancelled a separate 2% levy on personal income and corporate accounting profits and later abandoned the planned increase in the general income-tax rate from 22% to 24%. Standard VAT remains at 24%, corporate tax on distributed profits stays at 22%, and retained corporate earnings continue to escape standard corporate income tax until distribution.

Estonia keeps income tax at 22%

One of the biggest planned tax increases did not take effect in 2026.

Estonia's general personal income-tax rate remains 22%. The standard corporate rate applicable when profits are distributed also remains equivalent to 22%.

The increase to 24% had been scheduled for January 1, 2026. The Riigikogu cancelled it on December 3, 2025. Parliament also abandoned a planned rise in the business-account tax rate from 20% to 22%. The explanatory memorandum said the reversal was intended to keep the tax burden moderate, support economic growth and domestic consumption, and ease pressure on households.

The rates actually in force in 2026 therefore differ from many tax projections prepared during the first half of 2025.

The basic exemption rises to €700 a month

A major personal-tax change did take effect at the beginning of 2026.

The general basic exemption is now €700 per month, or up to €8,400 per year, regardless of income.

Until the end of 2025, the maximum monthly exemption was €654 and declined as annual income increased. Higher earners eventually lost the allowance entirely.

People who have reached pensionable age, or reach it during the calendar year, are entitled to a separate exemption of €776 per month, or €9,312 annually. The Estonian Tax and Customs Board notes that the general €700 exemption is normally applied by one employer or payer on the basis of a written application.

The removal of the income-dependent allowance is one of the most significant tax changes actually felt by employees in 2026.

The security tax was repealed before launch

The cancellation of the security tax was more important for the structure of corporate taxation.

The original reform would have introduced an additional 2% levy on personal income and a 2% tax on corporate accounting profits from 2026. For companies, the latter would have been based on accounting profit before tax from the previous financial year.

That would have departed from one of the core features of Estonia's corporate-tax system: the ability to retain profits inside a company without standard corporate income tax becoming due merely because the profit was earned.

Parliament repealed those elements on June 18, 2025, before they took effect. At that point, the government intended to replace them with a 24% general income-tax rate, but that increase was subsequently cancelled as well. 

Neither a separate 2% levy on current corporate profits nor a 24% general income-tax rate therefore applies in 2026.

Retained corporate profits remain untaxed

The central principle of Estonia's corporate-tax model remains intact.

An Estonian company generally does not pay standard corporate income tax simply because it earns an accounting profit. Tax becomes due when profit is distributed and in certain other cases defined by law.

Since 2025, the standard distribution rate has been 22/78 of the net payment. This corresponds to 22% of the pre-tax profit being distributed. A company distributing €100 of pre-tax profit, for example, pays €22 in corporate income tax and can distribute the remaining €78.

The previous 14/86 reduced rate for regularly distributed dividends was abolished from 2025. The related 7% withholding tax on dividends paid to individuals under that regime was also removed for new standard distributions, although transitional rules remain relevant to previously accumulated dividend balances taxed at the lower rate.

Describing Estonia as having "0% corporate tax" is therefore incomplete. The zero applies to profits retained inside the company, not to every type of corporate payment or activity.

Standard VAT remains at 24%

The major tax rise that did survive is value-added tax.

Estonia's standard VAT rate increased from 22% to 24% on July 1, 2025. The rate had been 20% before 2024, meaning the standard VAT rate increased by four percentage points in two stages.

Reduced rates of 13%, 9% and 0% also apply. Accommodation and accommodation with breakfast are taxed at 13%. The 9% rate applies to categories including books, periodicals, medicines and certain medical products, while exports and specified international transactions qualify for a zero rate.

The increase matters most directly to businesses selling to Estonian consumers. VAT-registered companies making taxable business-to-business supplies can generally deduct eligible input VAT, but the rate can still affect cash flow, consumer prices and demand.

Estonia did not return to its 2024 tax regime

The 2026 regime is less aggressive than originally planned, but the tax increases of previous years were not reversed.

The general income-tax rate rose from 20% to 22% in 2025. The reduced 14/86 rate for regular corporate distributions was abolished. Standard VAT rose from 20% to 22% in 2024 and then to 24% in July 2025.

What changed in 2026 was the cancellation of the next round of tightening.

Legarithm highlighted this difference in its September review of Estonia's tax system: public discussion had focused heavily on a 24% corporate distribution rate and a separate 2% tax on accounting profit, although neither measure ultimately entered into force. The higher 24% VAT rate, by contrast, remained.

Current investment calculations therefore need to use the legislation actually in force rather than earlier reform proposals.

The system still favours reinvestment

The main feature attracting businesses that reinvest earnings remains unchanged.

If an Estonian private limited company, or OÜ, earns a profit and keeps it inside the business for operations, expansion or investment, standard corporate income tax is not triggered merely by earning that profit.

Taxation is generally deferred until profit is distributed or another taxable payment is made. This leaves more capital available for reinvestment than under a conventional system that taxes corporate profits annually as they are earned.

That does not mean an Estonian company operates tax-free. Depending on its activities, it may incur VAT, payroll taxes, social tax, land tax, motor vehicle tax, excise duties and other liabilities.

An Estonian incorporation also does not by itself determine the owner's tax position abroad. The shareholder's tax residence, the company's place of effective management, permanent-establishment rules and double-tax treaties can all affect the final result.

Motor vehicle tax remains in force

The annual motor vehicle tax introduced on January 1, 2025 also continues in 2026.

For vehicles registered in Estonia on January 1, the annual tax is payable in two instalments: half by June 15 and the remainder by December 15. The full amount may be paid by the first deadline.

If a used vehicle is sold in Estonia during the year, the full annual liability remains with the person who owned or was the authorised user of the vehicle on January 1. The buyer becomes liable from the following calendar year. Vehicles first registered during the year are taxed proportionately for the remaining days.

For businesses operating vehicle fleets, the levy remains part of recurring operating costs.

What the 2026 changes mean for businesses

The final tax regime is substantially milder than the early reform plans suggested. Companies did not receive an additional tax on current accounting profit, the distribution rate remains equivalent to 22%, and the planned rise to 24% was cancelled.

Estonia has not, however, returned to a 20% income-tax and 20% VAT environment. Much of the broader tax increase took place in 2024 and 2025 and remains in force.

The key development in 2026 is therefore not a broad tax cut but the cancellation of additional increases.

As International Investment experts report, the most important outcome for investors is the preservation of a predictable system for reinvested profits. Repealing the 2% accounting-profit tax removed a measure that would have changed the structure of Estonia's corporate-tax model. Still, describing the jurisdiction simply as "0% tax" is misleading: distributed profits are taxed at 22%, standard VAT is 24%, and the effective burden depends on the company's activities, payments to owners and the tax residence of the participants.

FAQ: Estonia taxes in 2026

What is Estonia's income-tax rate in 2026?

The general rate is 22%. The planned increase to 24% was cancelled in December 2025 before it took effect.

Does Estonia have a 2% corporate profit tax?

No. The planned 2% security tax on corporate accounting profits was repealed in 2025 before it entered into force.

Are retained profits taxed in Estonia?

Standard corporate income tax is generally triggered when profits are distributed rather than when they are earned. Retained profits therefore remain outside the standard distribution tax until a relevant taxable event occurs.

How are company distributions taxed?

Since 2025, standard profit distributions are taxed at company level at 22/78 of the net payment. The previous 14/86 reduced rate for regular distributions was abolished.

What is Estonia's VAT rate?

The standard VAT rate is 24% and has applied since July 1, 2025. Reduced rates of 13%, 9% and 0% apply to specified categories.

What basic exemption applies to individuals?

From 2026, the general exemption is €700 per month, or up to €8,400 per year, regardless of income. People of pensionable age have a separate exemption of €776 per month.

Did Estonia return to its old 20% tax regime?

No. The income-tax rate remains 22% and standard VAT is 24%. Estonia cancelled planned additional increases rather than reversing the tax rises already implemented.