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Estonia is known for its innovative and progressive taxation system, which attracts the attention of researchers, economists, and entrepreneurs from all over the world.
This country, located in the southwest of the Baltic Sea, successfully combines progressiveness and simplicity in its taxation system.
So let’s consider the main aspects of the taxation system in Estonia, its features, and its impact on the country’s economy and society.
Principles of Taxation in Estonia
In the taxation system of Estonia, the main principles are progressiveness, simplicity, and transparency.
Taxation of individuals and legal entities is based on a number of basic taxes:
- Corporate income tax (CIT): None, i.e. undistributed profit from the economic activity of an Estonian company is not subject to income tax. The tax at the rate of 20% is paid when the profit is distributed (that is when dividends are paid to the company’s participants). This contributes to the attraction of foreign investments and stimulates the development of domestic business.
- Personal Income Tax (PIT): PIT also has progressive rates, meaning that people with higher incomes pay higher taxes.
- Value Added Tax (VAT): The VAT rate in Estonia is one of the lowest in Europe at 20%. This contributes to the development of the domestic market and foreign trade.
Electronicization and simplicity of procedures
One of the key features of the taxation system in Estonia is the high level of computerization and automation of tax procedures.
Companies and citizens can perform most operations remotely via the Internet, which greatly simplifies accounting and tax reporting.
This not only reduces bureaucratic obstacles but also reduces the possibility of tax fraud and tax avoidance.
The impact of the taxation system on the economy and society
The taxation system in Estonia has a significant impact on the economic development and social progress of the country.
A progressive approach to taxation ensures a balanced distribution of financial resources in society and contributes to the reduction of social inequalities.
However, the new Estonian parliament has recently adopted several amendments to the tax legislation, which have been published and will come into force in 2024 or 2025 (and some as early as 2023).
The draft amendments underwent significant changes during the parliamentary debates.
Estonia has already adopted important amendments to its tax legislation, including increases in value-added tax (VAT), excise, and gambling taxes, as well as changes to corporate and personal income tax.
Thus, the changes to corporate income tax will abolish the preferential tax rate on regularly paid dividends starting in 2025 (currently 14%), which may have a negative impact on the current dividend policy of companies.
In addition to the increase in the standard VAT rate, the changes also provide for an increase in the preferential VAT rates established for hosting services and periodicals.
From January 1, 2024, the standard VAT rate will increase from 20% to 22%. From January 1, 2025, preferential VAT rates for accommodation services (for example, providing hotel rooms) and publications in the press will increase. The main goal of these changes is to balance the state budget by increasing the collection of tax revenues.
Income tax will rise for both corporations and individuals in 2025 from 20% to 22%.
There is currently a concessional corporate tax rate of 14% applicable to regularly distributed earnings and a corresponding tax of 7% on dividends paid to individuals.
Therefore, the taxation system in Estonia serves as an example of a successful reform that combines progressiveness and simplicity. Its impact on the country’s economy and society is impressive with its effectiveness and efficiency.
The development of electronic technologies combined with a competent tax policy make Estonia one of the most attractive countries for business and investment in Europe.