Government approves tax reform package and sends it to parliament

“The tax reforms are necessary to cover our increased defence spending and reduce the cost-benefit gap in the budget,” confirmed Finance Minister Mart Võrklaev. “The new government is committed to putting the state budget in order, which means reviewing spending and increasing revenues. While the income tax reform included in the tax package will leave more money in the hands of citizens, the overall tax package will help us cover additional defence spending. It will also improve the state’s fiscal position compared to the last economic forecast.”

The amendments to the Income Tax Act will introduce a flat tax-exempt income of €700 per month, or €8,400 per year, from 2025, regardless of income. A person earning an average salary of €1,837 per month would receive an extra €964 per year under the new system. “This will leave more money in the hands of people whose tax-exempt income today starts to decline from a certain income level. This change will also leave more money for teachers and police officers, whose salary increases have so far been partly eaten up by the decrease in tax-free income,” explained Võrklaev.

The bill also abolishes several costly tax credits, at the expense of which the state can support people through targeted benefits, depending on their needs. For example, starting in 2024, it will no longer be possible to use the additional tax-free income for child and spousal support and to deduct interest on housing loans from taxable income.

The income tax rate for both individuals and legal entities will increase to 22 per cent in 2025 and the preferential rate of 14 per cent on regularly distributed profits will be abolished. VAT will increase to 22 per cent from 2024 to boost public revenues and achieve a balanced budget. According to the ministry of finance, the increase in the VAT rate comes at a time when the economy is expected to grow again, confidence has been restored, and consumer spending is on the rise. To reduce disparities between VAT, the preferential rate of nine per cent for accommodation services will no longer apply starting in 2025.

The excise duties on alcohol will increase by five per cent annually over the next three years. The excise duties on alcohol were last increased in 2018. Meanwhile, as wages have increased, so has the availability of alcohol. The impact of the increase will be a slight increase in excise revenue but there will be no increase in the availability of alcohol. As a result of the increase in excise duties, in 2024, wine will be subject to an additional excise duty of five cents, beer and cider to an excise duty of one cent, and vodka to an additional excise duty of 19 cents. At a moderate pace, the excise duty increase will not increase the risk of an increase in border trade according to the ministry of finance.

Excise duties on cigarettes and smoking tobacco have increased by five per cent annually in recent years. They will continue to rise at the same rate over the next three years. Excise duties on tobacco liquids will also be increased by five per cent per year over the next three years.

The Gambling Tax Act increases the tax rates for various types of games. The current five per cent tax rate on remote gambling and toto will be increased in two stages. In 2024, the tax rate will be raised to six per cent and in 2026, to seven per cent. The tax rate for lotteries and commercial lotteries will be increased from 18 per cent to 22 per cent in 2024.