Starting January 1, 2025, significant changes in taxation will come into effect in Estonia. These changes will impact various business sectors, making it crucial for company owners, especially those in small and medium businesses, to understand them properly to prepare accordingly and avoid potential difficulties. In this article, we will discuss the main changes related to Value Added Tax (VAT), income tax, and other important tax aspects.
Changes in Value Added Tax (VAT)
From the new year, VAT rates for certain categories of goods and services in Estonia will be changing. Here are the key changes:
- Increase in VAT Rate for Hospitality Services: Starting January 1, 2025, the VAT rate for accommodation services, including bed and breakfast, will increase from 9% to 13%.
- Change in VAT Rate for Printed and Digital Publications: The VAT rate for printed and digital media will also increase from 5% to 9%.
- Transitional Provisions for Cash-Based VAT Accounting Users: Companies using cash-based VAT accounting will be able to apply the old VAT rates until the end of 2026 for transactions where invoices were issued before the end of 2024, and services or goods were delivered before the start of 2025. This temporary exception will help businesses adapt more smoothly to the new rates.
New Provisions for Small Enterprises
Starting in 2025, Estonia is introducing a special regime for small enterprises operating in other European Union countries. Small companies will now be able to register as taxpayers in other EU countries under the same conditions as local businesses. This important innovation will facilitate international trade and simplify business operations within the EU.
The principles for calculating the VAT registration threshold have also been changed. The following items will now be included in the calculation:
- Turnover from the sale of goods and services, including those taxed at a zero rate, except for transactions involving fixed assets.
- Turnover from real estate transactions, excluding sales of fixed assets and occasional transactions.
- Turnover from insurance and financial services, excluding occasional services.
These changes are aimed at standardizing the accounting system for small businesses and creating a more transparent tax environment.
Changes in Real Estate Taxation
According to the new amendments, new buildings will include not only newly constructed properties but also buildings that are first transferred into use within one year after their initial usage. This means that companies involved in construction and real estate sales will need to reassess their tax obligations related to the commissioning of properties.
Additionally, when fixed assets are first put into use, it will now be necessary to adjust the VAT deduction based on the proportion of the asset's use in taxable activities. This will complicate accounting and require a more careful approach to planning real estate transactions.
Income Tax and Changes in Social Contributions
From January 1, 2025, changes will also be made to the income taxation of individuals, which in turn will affect salary taxation. The key changes include:
- Income tax rate will be 22%.
- Tax-free income will be up to 654 euros per month or up to 7,848 euros per year, depending on an individual's income level. For retirees, this threshold will be 776 euros per month and 9,312 euros per year.
- Unemployment insurance contributions will remain at 1.6% for employees and 0.8% for employers.
- Pension contributions will be 2%, 4%, or 6%, depending on the participant's choice.
- Social tax will remain at 33%, with a minimum payment of 270.60 euros per month, based on a minimum salary of 820 euros.
Minimum Wage in 2025
An agreement has also been reached between representatives of the Employers' Confederation and trade unions regarding the minimum wage for 2025. It will be set at 886 euros, which is 66 euros higher than the previous year. This change is especially significant for small companies as it will impact payroll funds and increase labor costs.
Conclusion
The tax changes coming into effect in 2025 will significantly impact the activities of small and medium-sized businesses in Estonia. The increase in VAT rates, the introduction of a new regime for small enterprises, and changes in real estate and income accounting principles require prompt response and adaptation from entrepreneurs. To minimize possible negative consequences, it is important to prepare thoroughly for these changes and review existing business processes.
If you have questions or need assistance in adapting to the new tax conditions, AMS Group OÜ specialists are ready to offer professional accounting services and consultations. Together, we can help your business successfully face the challenges that tax law changes bring.