Key takeaways
- Estonia’s new government is implementing a fiscal plan to combat inflation.
- VAT and income tax will each rise by 2 percentage points to 24%. The VAT rise took effect in July 2025, but the income tax rate stayed at 22% in 2026.
- A temporary 2% “defense tax” on corporate income was planned for 2026 to 2028, but it was repealed in June 2025.
- Excise duties on alcohol, tobacco, and gasoline will increase by 5% annually.
- The removal of the income tax-free threshold (“tax hump”) is postponed to 2026.
- The measures aim to stabilize prices, boost revenue, and support national defense funding.
In short: Estonia's new government plans to raise VAT and income tax by two percentage points each, to 24%. The VAT rise takes effect in July 2025 and the income tax rise in early 2026. A temporary 2% "defense tax" on corporate income was also planned but repealed in June 2025, and excise duties will rise 5% a year.
Update: Estonia's VAT rate rose to 24% on July 1, 2025 and was made permanent, while the planned 2% defense (security) tax was repealed in June 2025. The planned income tax rise did not take effect, and the income tax rate stayed at 22% in 2026. From January 1, 2026, the "tax hump" was replaced by a flat basic exemption of €700 a month.
Estonia's newly formed government has unveiled a plan to tackle inflation with several tax increases. Value-added tax (VAT), income tax, and excise duties on alcohol, tobacco and gasoline will all go up. These rises are part of the government's main policy agenda.
Under the plans, Estonia's VAT and income tax rates will each rise by two percentage points, to 24%. The VAT change takes effect in July 2025 and the income tax change in early 2026. A temporary corporate income tax, called the "defense tax," was also planned, but parliament repealed it in June 2025. It would have applied at a rate of 2% from early 2026 until the end of 2028.
Excise duties on alcohol, tobacco and gasoline will rise by 5% each year. The removal of the income tax-free threshold, known as the "tax hump," was set for 2025. It will now be postponed by one year.
What does this mean for businesses?
Businesses that charge Estonian VAT must apply the 24% standard rate to supplies made from July 1, 2025. The Estonian Tax and Customs Board says the correct rate depends on the time of supply. The increase is permanent, so there is no planned return to 22%.
Estonia also has reduced VAT rates of 13% and 9%, plus a 0% rate for certain supplies. Check which rate applies to each product or service.
This affects foreign sellers too. If you are registered for VAT in Estonia, or declare Estonian sales through the One Stop Shop, update your prices, invoices and tax settings. For registration and filing rules, see our Estonia VAT guide.
What do Estonia's reduced VAT rates cover?
Estonia has two reduced rates, 13% and 9%, plus a 0% rate. The 24% standard rate applies whenever no reduced rate or exemption fits. On a €1,000 supply at the standard rate, VAT is now €240, compared with €220 at the old 22% rate.
- 13%: accommodation, including accommodation with breakfast. This rate rose from 9% on 1 January 2025. Other services sold with the room do not qualify.
- 9%: printed and electronic books and educational literature, medicines and certain medical devices for disabled people. Press publications also returned to 9% on 1 January 2025, after a 5% rate from August 2022.
- 0%: exports, intra-Community supplies of goods and certain international transport services, among others.
When must a business register for VAT in Estonia?
An Estonian business must register once its taxable supplies in Estonia exceed €40,000 from the start of the calendar year. It then has three working days to apply.
- Foreign businesses: a business with no fixed establishment in Estonia has no threshold. It must register from its first taxable supply in Estonia, unless the buyer is VAT-registered there and accounts for the VAT.
- Distance sales and e-services: EU sellers can declare these sales to Estonian consumers through the One Stop Shop instead of registering.
- Returns: the tax period is one calendar month. The VAT return is due by the 20th day of the following month.
The Estonian Tax and Customs Board explains registration in more detail.
Key dates
- June 2025: parliament repealed the planned defense tax.
- 1 July 2025: the standard VAT rate rose from 22% to 24%.
- 1 January 2026: the "tax hump" was replaced by a flat basic exemption of €700 a month. The income tax rate stayed at 22%.
How Taxually handles this
Taxually’s CrossTax handles VAT registration, VAT, OSS and IOSS returns and fiscal representation in the countries you sell into, and checks your sales data against 250+ validation rules before each filing. OneTax then pays every tax authority with one bulk payment in your chosen currency.
Related guides
Frequently asked questions
Why is Estonia increasing taxes?
The government aims to combat inflation and generate additional revenue to maintain fiscal stability and fund defense initiatives.
When will the new tax rates take effect?
- VAT: July 2025
- Income tax: Planned for early 2026, but the rate stayed at 22% in 2026
- Defense tax (corporate income): Planned for early 2026 – end of 2028, but repealed in June 2025
What is the “defense tax”?
It was a planned temporary 2% corporate income tax to support national defense spending over 2026–2028. Estonia’s parliament repealed it in June 2025.
How will excise duties change?
Taxes on alcohol, tobacco, and gasoline will rise by 5% each year, creating gradual increases rather than a single large hike.
What is the “tax hump” and what’s changing?
The “tax hump” refers to Estonia’s income tax-free threshold system. Its planned removal in 2025 has been postponed to 2026, delaying the simplification of income tax brackets. Since January 1, 2026, it has been replaced by a flat basic exemption of €700 a month.
What is the VAT rate in Estonia now?
The standard VAT rate in Estonia has been 24% since July 1, 2025, with no end date. Reduced rates of 13% and 9% also apply to certain supplies.
What is the VAT registration threshold in Estonia?
An Estonian business must register once its taxable supplies exceed €40,000 from the start of the calendar year. Foreign businesses without a fixed establishment in Estonia have no threshold.
When is the Estonian VAT return due?
Estonia uses a monthly tax period. The VAT return is due by the 20th day of the month after the period ends.
What VAT rate applies to hotels in Estonia?
Accommodation, including accommodation with breakfast, is taxed at 13%. The rate rose from 9% on 1 January 2025.
