Prime Minister Ratas: the Government must work towards a more integrated, stronger, and equal Estonia

19.12.2016 | 15:42

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Stenbock House, 19 December 2016 – Today the Riigikogu adopted an Act to amend the Income Tax Act and Social Tax Act, which has put into effect important tax changes proposed by the Government of Prime Minister Jüri Ratas.

According to Prime Minister Jüri Ratas, the Government and the Riigikogu were guided by commonly agreed fundamental principles.
“We seek to increase Estonia’s population as well as social well-being and coherence, to bring Estonia out of economic stagnation as well as to maintain and strengthen national security. The tax changes and the national budget for 2017, adopted today by the Riigikogu, help us to reach these targets. We must work towards a more integrated, stronger, and equal Estonia,” explained Prime Minister Jüri Ratas.

The Act abrogates the 0.5 percentage point decrease in social tax planned to take effect as of 1 January – thus the social tax rate will be kept at the current 33%. The proposed accommodation providers' VAT hike from 9% to 14%, which would have hit the accommodation providers outside Tallinn the hardest, as well as an increase in the rates of excise duty on diesel fuel, special purpose diesel fuel and heating gas oil, planned for 2018, will also be abandoned.
The proposed € 200 allowance for families with multiple children will increase to € 300, effective from 1 July 2017, which means that each family with three or more children will be paid at least € 500 per month starting from next summer.

The amount of tax-free pension will also increase to € 2,832 since the New Year, which means that next year the average pension will be completely income tax free.

One of the Government’s main objectives is to improve people’s livelihood. The new Act increases the tax-free income threshold from € 170 to € 500, with effect from January 2018. It is estimated that 86% of the workforce, i.e. more than half a million employed people, will benefit from the new tax regime. The disposable income of a person earning up to € 1,200 before tax will increase by € 62, i.e. € 744 per year.

The new regime will also replace the existing additional tax exemption on pensions and the refunds of income tax for the low-paid, as these fall within the tax-free income limit. In 2017, the Tax and Customs Board will refund income tax to those low-paid who meet the criteria based on their income in 2016. All tax exemptions related to children will remain in force as before.

A number of changes concern excise duties. The excise duty on natural gas will increase by additional 25% in the period between 2018 and 2020. Additionally, along with increasing the rates of excise duties, approximating excise duties on all gaseous fuels, and implementing anti-fraud measures are planned. The Government is planning to adopt compensatory measures for high added-value industries in the first half of 2017 in order to ensure their continued competitiveness.

Moreover, excise duties on light alcoholic drinks will be increased gradually to approximate the rates of excise duties on spirits. The purpose of the excise increase is to limit the consumption and availability of alcohol and to improve public health. The increases of excise duties on both alcohol and fuel will be postponed from 1 January 2017 to 1 February 2017.

The new Act also reduces the limit of deductions from the taxable income on account of interests paid on housing loans to € 300 and abolishes the tax exemption of savings interests.

Joint tax returns for couples will be maintained with regard to interests paid on housing loans, training costs and additional tax exemptions for families with children. Unlike the existing system, couples will not be able to add up their tax-free incomes when filing a joint tax return; however, the new limit of tax-free income, € 500 per month, is higher than the maximum tax-free income in the existing joint tax return regime.

Government Communication Unit