The Estonian Parliament passed Bill No. 645 SE on June 18, 2025, eliminating the temporary security tax while permanently raising VAT and income tax rates to fund defense spending from 2026.

The legislation removes the temporary security tax component currently applied to individual and corporate income tax rates. In its place, standard individual and corporate income tax rates will increase from 22% to 24% from January 1, 2026, while business income tax rates rise from 20% to 22%.

VAT Rate Changes

The standard VAT rate increases from 22% to 24% effective July 1, 2025, with the change becoming permanent rather than temporary. This represents a shift from the original plan to implement the increase as a time-limited measure.

Corporate Tax Structure

The reform reinstates Estonia's traditional corporate income tax system, where companies pay tax only on distributed profits rather than current earnings. This replaces the security tax model that imposed taxation on corporate profits as they were generated, returning to what the government describes as a more business-friendly approach.

Context

The changes form part of Estonia's broader fiscal strategy to secure stable funding for defense capabilities while maintaining the country's competitive tax environment. The security tax was originally designed as a temporary measure through 2028, but the government opted for permanent rate increases as a more predictable revenue source for long-term defense planning.