Understanding Estonia’s Tax System
Estonia has positioned itself as one of Europe’s most business-friendly jurisdictions, offering entrepreneurs and international companies a unique approach to taxation that encourages growth and innovation.
Whether you’re an e-resident managing your company remotely or a local business owner, understanding Estonia’s accounting and tax framework is essential for success.
This comprehensive guide covers everything you need to know about Estonian accounting standards, tax obligations, and compliance requirements for 2025 and beyond.
Why Estonia’s Business Environment Stands Out
Digital-First Infrastructure
Estonia’s e-governance system enables entrepreneurs to manage their entire business online—from company registration to tax filing—making it one of the most efficient jurisdictions globally for digital nomads and international entrepreneurs.
Access to EU Markets
An Estonian company provides immediate access to the European Union’s single market of over 500 million consumers, with the credibility and trust that comes from operating within an EU member state.
Transparent Regulatory Framework
As a member of the EU, NATO, and Eurozone, Estonia offers political stability, low corruption, and clear legal frameworks that protect business interests.
Estonia’s Unique Corporate Income Tax System
The 0/22 Model: A Growth-Oriented Approach
Estonia’s corporate income tax (CIT) system is fundamentally different from traditional tax models worldwide. Instead of taxing profits when earned, Estonia only taxes profits when they’re distributed to shareholders.
How It Works:
- 0% tax on retained profits: All profits kept within the company and reinvested into business growth are taxed at 0%
- 22% tax on distributed profits: Corporate income tax applies only when profits are paid out as dividends, share buybacks, or capital reductions
- Cash-based taxation: Tax is calculated based on the distribution date, not when profits were earned
Critical 2025 Tax Changes
Important Update: As of January 1, 2025, significant tax changes came into effect:
- Corporate tax rate increased from 20% to 22% on gross distributed profits (calculated as 22/78 of net distributions)
- Preferential 14% dividend rate abolished: The reduced tax rate for regularly distributed dividends no longer exists
- New Defense Tax (2026-2028): A temporary 2% defense tax will apply to accounting profits from January 1, 2026
Practical Example
If your Estonian company earned €100,000 in profit during 2024 and 2025:
- Scenario A: Keep all profits in the company → €0 tax liability
- Scenario B: Distribute €50,000 as dividends in 2025 → Pay €14,102.56 in corporate tax (22/78 × €50,000)
- Net dividend received by shareholder: €35,897.44
Non-Taxable Business Expenses
Not all outflows from your company trigger taxation. Legitimate business expenses such as:
- Employee salaries and social contributions
- Office rent and utilities
- Business travel and client entertainment (within limits)
- Professional services and software subscriptions
- Equipment and asset purchases
These expenses reduce your taxable profit and don’t trigger the 22% distribution tax.
Choosing an Accounting Partner
Look for providers that offer:
- Experience with international clients and e-residents
- English-language communication
- Integration with modern accounting software
- Proactive tax planning advice
- Transparent pricing structures
LKS Consult.eu specializes in supporting international entrepreneurs and e-residents with comprehensive accounting and tax compliance services tailored to your business needs.
Contact us today for a free consultation to discuss your Estonian accounting needs and ensure your company maintains full compliance while you focus on building your business.
