Overview of Estonia's 2% Corporate Income Tax

Recently (17.09.2024), the Estonian government approved a 2% tax on corporate profits as part of a new defense tax initiative.

To summarize, the new Estonian government, which took office in late July 2024, has proposed a series of tax increases under this defense tax initiative. Notably, the VAT rate will rise by 2 percentage points, increasing from 22% to 24% starting in July 2025. Additionally, the income tax rate for individuals will also increase by 2 percentage points, from 22% to 24%, effective at the beginning of 2026. The introduction of the 2% corporate profit tax will coincide with this timeline, taking effect in early 2026. All these tax measures are intended to be temporary, concluding in 2028.

It is important to note that no draft legislation has been published yet. The following high-level details are based on the information available as of now.

The tax base will be determined by the previous fiscal year's accounting profit before income tax, with payments made in advance. Companies will make their initial tax payments in 2026, with two due dates: September 10 and December 10. These advance payments will be calculated based on profits from the 2025 fiscal year.

Starting in 2027, companies will transition to quarterly payments. Those whose fiscal year aligns with the calendar year will pay on March 10, June 10, September 10, and December 10. After submitting their annual reports, companies will undergo a recalculation based on actual profits. Generally, the tax base will consist of accounting profit before tax, with only a few adjustments. Importantly, the tax will apply exclusively to profitable companies.

Since the 2% tax on corporate profits is based on accounting profit, companies may have some latitude to "adjust" their profits through internal accounting practices. For instance, adjustments could involve asset recognition thresholds, depreciation periods, or the capitalization of intellectual property. Essentially, a higher accounting profit will lead to a greater tax liability; therefore, higher asset recognition thresholds or shorter depreciation periods could effectively reduce taxable profits.