Overview of the Tax Changes
The government's agreement includes three main tax changes:
- Increase in Value-Added Tax (VAT): Starting from July 1, 2025, the VAT will increase by two percentage points, from 22% to 24%.
- Security Tax on Personal Income: From 2026, a 2% tax will be imposed on taxable personal income.
- Corporate Profit Tax: Starting from 2026, a 2% tax will be imposed on companies' profits, calculated based on the previous fiscal year's profit and payable quarterly.
What Changes Compared to the Current Situation?
Estonia's tax system has so far been unique, especially concerning corporate income tax. Currently, only distributed profits (e.g., dividends) are taxed, while reinvested profits are tax-exempt. This has encouraged investments and company growth.
The new 2% profit tax means that companies will have to start paying tax on reinvested profits as well. This is a significant change that affects companies' cash flows and investment plans.
Impact on Entrepreneurs
Reduction in Cash Flow
The funds available to companies will decrease, as a portion of the profit must be given to the state in the form of tax. This can affect:
- Investments: Less money for investments can slow down company growth.
- Development and Expansion Plans: Reduced cash flows may force plans to be postponed or scaled back.
Decrease in Competitiveness
- Domestically: Higher tax burden may reduce companies' ability to offer competitive prices.
- Internationally: Estonia may become less attractive to foreign investors compared to countries with a lower tax burden.
Administrative Burden
- Accounting: Calculating and declaring the new tax requires additional resources.
- Bureaucracy: Increased need for document submission and verification.
Calculation Examples of the Tax Changes
Example: Profit Tax
Annual Profit: €50,000
Current Tax Liability:
- Income Tax: €0 (if profits are not distributed)
Calculation of the New Profit Tax:
- Profit Tax: €50,000 × 2% = €1,000
Impact:
- Taxable Profit decreases by €1,000.
- Amount Remaining for Reinvestment: €49,000
Example: Distribution of Dividends with the New Profit Tax
- Annual Profit: €200,000
- Distributed Dividends: €100,000
Calculation of the New Profit Tax:
- Profit Tax: €200,000 × 2% = €4,000
Dividend Income Tax (20/80 method):
- Income Tax: €100,000 × (20/80) = €25,000
Total Taxes:
- Profit Tax + Dividend Income Tax: €4,000 + €25,000 = €29,000
Impact:
- Previous Tax Burden: €25,000
- New Tax Burden: €29,000
- Tax Burden Increases by €4,000.
Example: Increase in VAT
- Product Net Price: €1,000
Current VAT (22%):
- VAT: €1,000 × 22% = €220
- Sales Price Including VAT: €1,220
New VAT (24%):
- VAT: €1,000 × 24% = €240
- Sales Price Including VAT: €1,240
Impact:
- Price Increase: €20
- Consumers' Purchasing Power may decrease, affecting sales.
What is the Impact on Entrepreneurs?
- Negative Impact on Investments: Higher tax burden may reduce the motivation to invest.
- Decrease in Competitiveness: Companies may lose competitiveness both domestically and internationally.
- Concern Over Administrative Burden: Additional costs for accounting and tax calculation.
Government's Standpoints
- Strengthening Security: Tax revenues are directed towards covering defense costs and improving security.
- Long-Term Stability: The goal is to ensure the state's financial sustainability.
- Supporting the Social Sector: Despite cuts, investments in important sectors will continue.
Opinions of Economic Experts
- Risk to Investment Climate: Tax changes may reduce Estonia's attractiveness to foreign investors.
- Necessary Step: Some experts may see this as an opportunity to strengthen the state's financial position.
Recommendations for Entrepreneurs
Updating Financial Planning
- Budgets and Forecasts: Adjust financial planning considering the new taxes.
- Cash Flow Management: Plan cash flows to avoid liquidity problems.
Cost Optimization
- Cost Analysis: Map out costs and find savings opportunities.
- Increasing Efficiency: Invest in process optimization.
Tax Consultation
- Consultations with Specialists: Utilize accountants, financial managers, or tax consultants to optimize the tax burden.
- Tax Incentives: Explore opportunities to obtain tax benefits, for example, for innovation or environmentally friendly investments.
Prioritizing Investments
- Profitability Analysis: Assess the profitability of investments in the new tax environment.
- Focus Strategy: Concentrate on projects that bring the greatest value.
Are the Tax Changes Beneficial for Estonian Entrepreneurship?
Positive Aspects
- Strengthening National Security: Increased defense spending can create a more stable environment for business development.
- Long-Term Financial Stability: Tax changes help reduce budget deficits and national debt.
Negative Aspects
- Deterioration of Investment Climate: Higher tax burden may deter both local and foreign investors.
- Slowing Economic Growth: Reduced investments may slow down economic growth.
- Decrease in Companies' Competitiveness: Higher tax burden may reduce the competitiveness of Estonian companies internationally.
Tax changes are a double-edged sword. On one hand, they help strengthen national security and financial stability, which are important for long-term economic growth. On the other hand, they may temporarily hinder company growth, reduce investments, and deteriorate the business environment.
It is important for entrepreneurs to proactively adapt to the new tax environment, optimizing their operations and seeking ways to mitigate the effects of taxes. Cooperation between the government and entrepreneurs is crucial to find a balance between the state's needs and the viability of the business environment.
Tax changes affect us all. It is important to be aware of the upcoming changes, plan ahead, and look for ways to cope with them in the best possible way. Entrepreneurs have the opportunity to adapt to the changes, even using them as a growth opportunity through increased efficiency and the development of new strategies.
We hope that this overview helped you better understand the upcoming tax changes and their impact. If you have questions or need assistance with financial planning, please contact us!
