Understanding Estonia’s Tax Reforms And The EU’s Crypto-Assets Regulation

The financial landscape in the European Union, and in Estonia specifically, is undergoing major changes. Estonia is implementing tax reforms between 2025 and 2026, and the EU’s Markets in Crypto-Assets Regulation (MiCAR) is coming into effect. Businesses and investors in these regions must stay informed to understand how to navigate this changing financial environment. 

Estonia’s Tax Reforms

Estonia’s government has announced significant tax changes which will take effect in 2025 and 2026. One of the biggest changes is the increase in the maximum tax rate for residential and agricultural land, doubling from 0.5% to 1%. The maximum rates on other land (including commercial, production, and transport) will also double from 1% to 2% starting in 2025. This adjustment is to increase revenue from property taxes as part of the government’s strategy to enhance public finances. 

The country is also aligning its corporate tax policies with overarching European directives. The country is transposing the EU Public Country-by-Country Reporting (CbCR) Directive into domestic law. This allows tax authorities to publish online all submitted CbC reports, increasing transparency and compliance from multi-country businesses operating within Estonia’s borders.

Other significant reforms include:

- A tax treaty with Pakistan to avoid double taxation. The treaty applies in Estonia from 1 January 2025 and in Pakistan from 1 July in the same year. For the issue of double taxation, Pakistan uses the credit method, and Estonia the exemption method. Following this treaty, Estonia now has tax treaties with 63 other countries. 

- Increased VAT rates for accommodation services.

- Increased VAT rates for press publications.

- Tax increases for:

- Personal income tax

- Corporate income tax

- Bank levy increases

- Land tax

- New motor vehicle tax

- New defense tax

Personal income tax will increase from 20% to 22% from the beginning of 2025. This is cash-based taxation, meaning it will depend on the date of payment. Universal tax exemption is delayed until 2026, and tax exemptions will continue to depend on the taxpayer’s income tax until this time. 

Corporate income tax is also increasing from 20% to 22% from the start of 2025. Taxation on dividends (profit distribution) is also cash-based, and the rate applied will depend on the date of the profit distribution payouts. 

MiCAR Creating A Unified Crypto-Asset Framework

The EU’s MiCAR came into effect on 30 December 2024. This framework established rules for the crypto-asset market in the region and imposed stringent requirements on crypto service providers. 

MiCAR aims to create a unified framework across EU member states, improving consumer protection and also encouraging innovation and development within the cryptocurrency sector.

New Licensing Requirements Under MiCAR

MiCAR introduces new licensing requirements for Crypto-Asset Service Providers (CASPs) in the EU. In Estonia, the Financial Supervision and Resolution Authority is responsible for issuing these licenses. 

Under MiCAR, existing Virtual Asset Service Provider (VASP) licenses will become invalid and companies with these licences must apply for a new CASP licence before 1 July 2026. This new license will allow them to continue to offer crypto services. The scope of services that require a license has also expanded to increase more activities, like custody and administration of crypto-assets, operation of trading platforms, and providing advice on crypto-assets and investments.

The scope has also increased to include more asset types. Previous laws focused mainly on virtual currencies, but MiCAR includes a broad oversight of crypto-assets, predominantly NFTs and utility tokens. Crypto-assets are divided into three categories under MiCAR:

1. E-Money Tokens

2. Asset-Referenced Tokens

3. Other Crypto-Assets (including services provided by CASPs)

Unsurprisingly, MiCAR will impact several sectors, including crypto gambling platforms. These platforms, which offer casino online experiences where players can gamble with cryptocurrencies, will have to understand the new regulations. Casino operators wil have to obtain the necessary CASP license to ensure compliance and continue to operate within the EU, offering accessible and convenient casino games for those wanting to gamble from home. 

Casino operators, and other crypto businesses, will have to adhere to strict requirements, like internal control mechanisms, protecting personal information, using secure communication technology systems, and segregation of clients’ funds and crypto-assets. 

How CASPs Can Prepare For Compliance

In order to comply with MiCAR, Crypto-Asset Service Providers in Estonia will have to take several steps:

1. Develop a comprehensive business plan: The CASP must outline the types of crypto-asset services that will be provided as well as market strategies and jurisdictions in which the business will operate. 

2. Ensure safeguards: The CASP must demonstrate compliance with any applicable financial requirements, including maintaining sufficient capital reserves as outlined in MiCAR Article 67. 

3. Establish a governance structure: Roles must be clearly defined and responsibilities assigned within the organization to ensure effective management and oversight of all operations.  There must also be proof that management members have the required skills, knowledge, and experience to manage the CASP.

4. Implement risk management policies: The company must develop internal controls to identify, assess, and manage potential risks, especially those related to money laundering and financing terrorist activities. 

5. Secure Information and Communication Technology (ITC) systems: Technical documentation must be prepared that details security measures to protect client data, crypto assets, and funds. 

6. Create client asset segregation procedures: CASPs must ensure that their clients’ crypto assets and funds are kept separate from the company’s assets to protect clients’ interests. 

7. Handling complaints: Details of complaints handling procedures.

Business Considerations

As Estonia starts implementing tax reforms and the European Union enforces MiCAR, businesses operating within the crypto and digital finances space must prepare do adapt and stay up to date with the latest regulations. CASPs and other businesses will have to stay informed about ongoing regulatory developments and must invest in compliance infrastructure, like ITC systems. 

CASPs will also have to comply with specific cybersecurity requirements as detailed in the EU’s Digital Operational Resilience Act. These provisions include having risk management systems, employing security teams to monitor systems, and regularly conducting resilience testing. This will enable crypto service providers to handle any potential cybersecurity threats. 

Businesses will do well to engage with legal experts to understand and take the necessary steps to navigate this fast-changing regulatory landscape successfully. 

By understanding, and adhering to, these new regulations in Estonia and the EU, companies will ensure compliance and also build trust with consumers and stakeholders. This will ensure ongoing and sustainable growth in the ever-evolving crypto-asset market.