Estonia to scrap higher tax rate for business accounts with income exceeding EUR 25,000

TALLINN - The Estonian Ministry of Finance has put on the approvals round a set of amendments concerning business accounts, which will allow the tax rate of 20 percent to be applied to intake of up to 40,000 euros into such accounts in the future.

According to current law, the tax rate of 20 percent applies to those business accounts into which less than 25,000 euros is paid per year. If the amount paid into the business account is between 25,000 and 40,000 euros, the tax rate is 40 percent. Users of business accounts who earn more than 40,000 euros a year have crossed the threshold for registering as a person subject to VAT and must start operating as an entrepreneur, either as a self-employed person or a private limited company.

"For those earning additional income, the business account is one of the easiest and most convenient options, where the user does not have to do anything themselves, as 20 percent of the income received is taken away as labor tax. Wages and the prices of services have risen over the years, and it is reasonable to do away with the obsolete threshold of 25,000 euros, and in the future, the tax rate applicable on such accounts will be 20 percent," Minister of Finance Mart Vorklaev said in a press release. 

The minister added that it is in the interest of the state that doing business would be as simple as possible and entail as little red tape as possible, while taxes would be paid correctly.

Under current rules, when a business entity purchases services from the user of a business account, they are subject to an additional income tax obligation of 20 percent. This is now going to be eliminated. Instead, the business entity will be required to pay social tax on 50 percent of the amount paid for the service. This will reduce the tax burden on the business entity while increasing the social guarantees for the owner of the business account.

The plan is also to make general information about the persons owning a business account and their business account numbers publicly available.

As at December 2023, some 21,500 individuals had an active business account. Transactions worth approximately 3.2 million euros are made through business accounts per month. Tax revenue received from business accounts totaled about 7.7 million euros last year.

The changes will take effect from 2025.

Under Estonian law, a business account is an account opened in the name of a natural person in a credit institution, concerning which the account holder has instructed the credit institution to reserve the amount on the account corresponding to the corporate income tax rate for the benefit of the Tax and Customs Board and to transfer it to the Tax and Customs Board.