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%.
- A temporary 2% “defense tax” on corporate income will apply from 2026 to 2028.
- 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.
Estonia's newly formed government has unveiled a strategic plan to tackle inflation by implementing various tax increases. Value-added tax (VAT), income tax, and excise duties on alcohol, tobacco, and gasoline, will all see an upward adjustment as part of the government’s primary policy agenda.
According to the plans VAT and income tax rates will each be raised by two percentage points, increasing them to 24%. These changes will take effect in July 2025 and early 2026, respectively. In addition, a temporary corporate income tax, referred to as the "defense tax," will be introduced at a rate of 2% starting in early 2026 and will remain in place until the end of 2028.
Excise duties on alcohol, tobacco, and gasoline will increase by 5% annually. Additionally, the elimination of the income tax-free threshold, known as the "tax hump," originally set for 2025, will be postponed by one year.
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: Early 2026
- Defense tax (corporate income): Early 2026 – End of 2028
What is the “defense tax”?
It’s a temporary 2% corporate income tax introduced to support national defense spending over a three-year period (2026–2028).
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.
