Income Tax Increase

Estonia has implemented significant tax changes effective from 2025. These updates target both personal and corporate income, aiming to enhance government revenue while preserving Estonia’s competitive tax environment in Europe.

Personal Income Tax

Starting in 2025, Estonia increases its personal income tax rate from 20% to 22%. This new rate applies to all forms of personal income—including employment, business, rental income, capital gains, and other taxable sources.

For 2025, a basic exemption framework is introduced with a monthly exemption of €654 and an annual maximum of €7,848. This exemption is available exclusively to Estonian tax residents, who must declare it on their tax returns; non-residents are generally not eligible. Meanwhile, the planned unified tax‑free income of €700 per month has been postponed to 2026, and for pensioners, the tax‑free threshold is set at €776 per month in 2025.

The new rate applies to payments received from January 1, 2025. For instance, salary for work done in December 2024 will be taxed at 22% if paid in 2025.

These measures are intended to boost tax revenues for balancing the state budget while keeping Estonia’s tax environment competitive.

International Comparison: Despite the increase, Estonia’s top personal income tax rate of 22% remains among the lowest in Europe—only Hungary (15%), Bulgaria (10%), Romania (10%), and Moldova (12%) offer lower rates.

Corporate Income Tax

In parallel, the corporate income tax rate has been raised from 20% to 22% for profit distributions from January 1, 2025. The new rate is applied to the taxable base divided by 0.78, effectively resulting in a tax rate of 28.21% on gross distributions. Additionally, the previously available preferential rate of 14% for regularly distributed profits has been abolished—meaning that all dividends are now subject to a unified tax rate of 22/78.

The revised corporate tax rate applies to all profit distributions made from January 1, 2025, regardless of when the profits were generated. Credit institutions are also affected, with their advance income tax rate increasing from 14% to 18% in 2025.