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The Cabinet on Tuesday approved the introduction of a broad-based security tax for the period 2025-2028 to raise extra money for defense investment -- the rate of value-added tax will rise by two percentage points in the summer of 2025, and a security tax of 2 percent on personal income and corporate profits will apply from 2026.
«Tax increases are definitely not the choice of the current government, they are necessitated by the direct and indirect effects of Russia's military action. The war continues and we need to further contribute to the defense capability and security of Estonia in the coming years. This is the responsibility of all of us, and we will all contribute,» Finance Minister Jürgen Ligi said in a press release.
«Of the alternatives considered, taxing corporate profits is the least negatively impactful way for companies to contribute to national security,» the ministry's Deputy Secretary General Evelyn Liivamägi said. She said the tax is temporary and set at a low rate. If a company has no profit, there is no tax obligation.
The tax base will be the previous financial year's accounting profit before income tax, and the tax will be paid in advance. Companies will pay the security tax for the first time in 2026, and, by way of exception, two times in that year: by Sept. 10 and Dec. 10.
In 2027, the advance payments will be made quarterly. For companies with a calendar-based fiscal year, payments are due on March 10, June 10, Sept. 10, and Dec. 10. After submitting the financial statements, a recalculation will be done based on the actual profit. Generally, the tax base is the accounting profit before tax, adjusted only in very limited cases.
When a company makes a profit, it generally also can contribute to the country's security. The security tax will be paid by both resident companies and permanent establishments of non-residents operating in Estonia.
At present, Estonia collects relatively little profit- and asset-based taxes compared to the rest of the European Union. Capital taxes accounted for 2.7 percent of Estonia's GDP in 2022, putting the country second to last among EU members, the EU average being 8.9 percent.
According to Statistics Estonia, there are nearly 145,000 active companies in Estonia, of which around 60 percent are profitable.
The expected revenue from corporate profit tax is 157 million euros in 2026, 164 million euros in 2027 and 173 million euros in 2028.
In total, the security tax is expected to contribute 751 million euros to the state budget in 2026.
The government on Tuesday reached agreements in principle on the state budget of Estonia for 2025 and the country's multi-annual budget strategy.
With the budget decisions, the government secures the security of the people of Estonia and the state, invests in strengthening the economy and significantly cuts spending by the state. The drafts are due to be approved on Sept. 25, and the following day the prime minister will hand them over to the Riigikogu, the government's communications office said.
Estonia will have certainty about the state budget and tax peace until the next elections in 2027, Prime Minister Kristen Michal said. The keywords of the new budget are orderly public finances, spending cuts, confidence in defense, predictability in policy, and a direction towards economic growth.
«The tax festival, where every month brings a new tax proposal, will be brought to an end by the government. Predictability creates confidence, and confidence fosters growth. The state budget sets out a plan to cover increased defense expenditures with a fixed-term, broad-based security tax. This tax will be used to purchase munitions, finance security investments, and provide growth opportunities for the defense industry in aiding Ukraine, as part of the largest industrial growth plan in Estonia's history. We will reduce public spending to make the government more efficient, and a thorough review of the expenditures and activities of the state will continue annually,» the premier and chairman of the Reform Party said.
Finance Minister Jürgen Ligi emphasized that the main responsibility of those who decided about the state budget is to ensure the survival of the state.
«There is no alternative; the government's primary task is to ensure the sustainability of the state. Our country is the property and interest of all citizens, and that is why the central focus of the budget effort was on restoring Estonia's financial sustainability. I am pleased to acknowledge the ministers, as this required considerable selflessness both in their sectors and personally,» Ligi noted.
Interior Minister Lauri Läänemets pointed out that in addition to national defense, people's sense of economic security also occupies an important place.
«Although the budget talks focused on national defense investments, I am pleased that we paid a lot of attention to the livelihoods of Estonian families, job creation outside the golden circles and the survival of important public services. From the point of view of national security, people's sense of economic security is as important as the strength of Estonia's border protection or the ability of the police and rescue services to provide urgent assistance,» Läänemets, chairman of the Social Democratic Party, said.
The interior minister described it as important to keep pensions growing and ensure that medical care continues to be of the current high quality.
«It is also important for families on average and lower incomes that child allowances and the parental allowance will continue at their current levels. When it comes to the security tax, I would like to thank businesses, who now will also be making a fair contribution to Estonia's security -- this way, the costs of defense investments will not fall on the shoulders of working people alone,» Läänemets added.
Kristina Kallas, minister of education and research and leader of the Estonia 200 party, stressed that the government's absolute priority must be to stimulate the economy -- a well-planned state budget will ensure a higher sovereign rating and give businesses the confidence to invest in Estonia.
Attracting major investments to Estonia is important for the competitiveness of the Estonian economy, where every 200 million euros of investment will provide us with around 80 million euros in tax revenue per year, Kallas said.
The focus of the state budget is on covering increasing defense expenditures, including the acquisition of munitions for long-range weapons systems. Investments in broad national defense will increase by nearly 220 million euros. In total, 1.6 billion euros will be added to defense spending until 2031.
A broad security tax will partially take effect from next year. This money is essential for the state to get the funds that are lacking for the development of defense capabilities and security investments. The tax is broad-based and consists of three components: from July 1, 2025, VAT will increase by 2 percentage points, and from 2026 a two percent security tax will start to be levied on the taxable income of natural persons and a tax of the same size on corporate profits. The tax calculation of companies will be based on the profit of the past financial year and the tax will be paid quarterly.
To stimulate the economy, the government will direct significant funds toward investments over the next four years, including 402.6 million euros in revenues from the sale of CO2 emission credits. Two-thirds of this amount will go towards the construction of Rail Baltic, including the establishment of a joint train depot for Elron and Rail Baltic. Funds will also be allocated for energy efficiency investments in apartment buildings, road construction, and supporting green technologies in the maritime sector.
Starting in 2026, the government will launch a support program for large investments to attract high-tech manufacturing to Estonia, boost exports, and create well-paying jobs. The construction of the new complex of buildings for the public broadcaster ERR will continue, while the renovation of the National Library is nearing completion, and the renovation of Tallinn Art Hall will begin.
The government is set to cut spending by nearly one billion euros over the next four years, including cuts of specific percentages in ministries' areas of administration and cost-saving resulting from a revision of the budget. All ministries and their departments will have to cut 10 percent of costs over the next three years: 5 percent in 2025, 3 percent in 2026 and 2 percent in 2027. The cost savings include not only public authorities, but also foundations and state-invested enterprises.
The government's target is to reduce the budget deficit in 2025 from an estimated 4.4 percent to 3 percent of gross domestic product.
The reduction in interest expenditures resulting from the government's decisions will amount to nearly 200 million euros over the next four years. More dividends will be taken from state-owned enterprises in the coming years to boost fiscal revenues.
As part of the revision of the budget, the government made changes to some social services. The decisions concern capping the sick pay and the parental allowance at two times the average monthly salary from 2026. Then the payment of social tax for stay-at-home parents will also end. As of 2025, the allowance for pensioners living alone will cease to be paid to pensioners living in a nursing home.
The state budget for next year and the state budget strategy for 2025-2028 are to be approved at the meeting of the government on Sept. 25. Before approval, the government will hear the position of the Fiscal Council, an independent advisory body. On Sept. 26, the prime minister will hand the budget bill to the Riigikogu.
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