Tax Expert Explains: What’s Happening with the Security Tax?

Spring has brought changes to the Estonian government, and the security tax is likely to take a different form than originally planned. A tax expert from the law firm Hedman explains how the government's new plan will affect Estonian individuals and businesses.

Currently, the security tax law stipulates that from 2026, a 2% tax—so-called security tax—will be imposed on the taxable income of individuals. For companies, a 2% profit tax will be introduced starting January 1, calculated based on the previous fiscal year’s profit and paid quarterly.

However, the new government has pledged to remove the income tax components of the security tax that were established by law at the end of last year. “In essence, this means that individuals will not have to pay the 2% tax on their first euro of income, and companies will not have to pay a 2% corporate tax on their accounting profit,” explained Hedman’s CFO Marit Kelgo.

These are significant changes for both individuals and businesses, but the tax expert emphasized that the government's promise to scrap the above-mentioned tax hikes has not yet been legislated, and the existing security tax law has not been amended.

As of today, the only confirmed change to the security tax is that, starting from July 1 of this year, the VAT increase from 22% to 24% will take effect.

Hedman’s tax expert advised individuals and businesses to rely on the current law to avoid unpleasant surprises but not to rush into making changes. “Unfortunately, we currently don’t have clarity on whether next year’s budgets and plans should be based on the existing law or the government’s verbal promises. At the same time, the proposed changes would impact companies’ cash flow, budgets, and investment plans, so it is wise to take the written law seriously,” said Kelgo. She also recommended that businesses and individuals begin optimizing their expenses now and look for ways to mitigate the tax impact. “We’re in a situation where we have to wait a bit longer for the murky waters to clear and for plans to be formalized into law. But we should be ready for the possibility that new taxes will still come,” she noted.

Estonia’s security still needs strengthening, and the budget deficit must be addressed. “There is probably no reason to hope that tax hikes won’t happen—be it in the form of a general income tax increase, as we already saw earlier this year,” said Kelgo. The government has already proposed removing the temporary nature of the security tax and permanently raising income tax to 24%. Whether the current security tax law will remain or the planned changes will be made through amendments to other laws remains to be seen.

However, if the government’s new plan is implemented and the tax hikes are avoided, many questions and additional costs for businesses will disappear.

“If the government’s promise holds, businesses won’t face an increased administrative burden. They won’t need to submit quarterly reports to the Tax and Customs Board, nor will accountants need to provide services on a larger scale,” Kelgo pointed out.

Therefore, the changes to Estonia’s tax system as written in the security tax law remain in effect today and should not be ignored. We hope the government’s promise will soon become law and we are prepared for alternative tax increases.

Hedman Law Firm specializes in corporate and commercial law and supports clients with raising investments, managing shareholder relations, technology law, mergers and acquisitions, cross-border corporate movements, IT law, data protection and intellectual property matters, as well as various disputes.