The Estonian government has approved a comprehensive new security tax plan aimed at boosting defense funding from 2025 to 2028. This decision comes as part of the government’s broader strategy to strengthen the country’s defense capabilities in response to security threats posed by the ongoing war in Ukraine.
What is the new tax regime and “security tax”?
The newly introduced security tax will feature two major components. First, the rate of value-added tax (VAT) will increase by two percentage points starting in the summer of 2025. Secondly, beginning in 2026, a 2 percent tax will be imposed on both personal income and corporate profits. According to the Ministry of Finance, the corporate tax will be based on the previous financial year’s profits and paid in advance, with quarterly payments beginning in 2027.
Finance Minister Jürgen Ligi emphasized that while tax hikes are unpopular, they are necessary. “The war continues, and we must contribute further to Estonia’s defense and security in the coming years. This is the responsibility of all of us,” Ligi stated.
The new tax measures are expected to raise €751 million by 2026, with corporate taxes alone projected to bring in €157 million that year. According to officials, the funds will be used to finance defense investments, including munitions purchases and strengthening the country’s security infrastructure.
Prime Minister Kristen Michal highlighted the importance of fiscal predictability, noting that this security tax plan will provide stability until 2027. “Predictability creates confidence, and confidence fosters growth,” he said, stressing that the tax increases will be fixed-term and broad-based.
Spending cuts for government budgets
In addition to the security tax increases, the government plans to cut nearly €1 billion in public spending over the next four years. This move is part of the effort to reduce the budget deficit from 4.4% to 3% of GDP by 2025. Spending cuts will affect government ministries and public services.
Estonia’s Deputy Secretary General of the Finance Ministry, Evelyn Liivamägi, noted that taxing corporate profits is the least damaging option for businesses. “If a company has no profit, there will be no tax obligation,” she added.
The government will submit the finalized state budget plan to the Riigikogu, Estonia’s parliament, on September 26. The tax is expected to help cover the rising costs of defense, including a €1.6 billion increase in defense spending through 2031.
What e-Residents should know?
1. Corporate Profit Tax
- For e-residents with companies: The new 2% corporate profit tax will apply to all resident companies, including those operated by e-residents. If an e-resident’s Estonian company generates profits, it will be subject to this tax starting in 2026. Since the tax is based on the previous financial year’s profits, companies with no profits will not be taxed.
- Double payments in 2026: E-residents will also need to be prepared for two advance tax payments in 2026, on September 10 and December 10. After that, payments will be quarterly from 2027.
2. Increased VAT
- For e-commerce businesses: E-residents who sell goods or services to consumers in Estonia may see an impact from the 2 percentage point increase in VAT starting in July 2025. This could affect pricing strategies, as VAT will rise, potentially leading to higher costs for consumers. However, VAT increases will generally not affect companies selling to customers outside Estonia, as VAT is usually applied based on the customer’s location.
3. Increased Compliance and Administrative Burden
- Quarterly tax filings: E-resident companies will need to ensure they comply with new quarterly corporate profit tax filings, which will add to the administrative burden for managing their businesses remotely. Proper accounting and tax planning will be essential to meet these requirements.
4. Broader Economic Impact
- Defense-related business opportunities: Some e-resident businesses in defense technology, cybersecurity, or sectors aligned with security infrastructure may benefit from increased defense spending. Estonia is set to invest heavily in national security, which could create opportunities for businesses supporting these sectors.