Defense tax to be abolished in Estonia, replaced by other tax increases

Text Susanna Poikela
Photo Jakub Żerdzicki / Unsplash

The Estonian government is canceling the 2% defence tax, which was scheduled to come into effect temporarily from the beginning of 2026. The defence tax will be replaced by a 2% increase in value-added tax. VAT is currently 22%, but will increase to 24% in July this year. VAT was already increased at the beginning of this year, from 20% to 22%.

Income taxation will also change starting in 2026. This year, income tax increased from 20% to 22%, and from the beginning of 2026, the tax rate will be 24% for everyone. For those who have Estonia’s second pension pillar (voluntary funded pension), the total income tax will increase to 24, 26 or 28% from the beginning of next year.

The 2% defence tax planned for entrepreneurs will also be canceled. The dividend tax, however, will increase from 22% to 24%. Taxation for small entrepreneurs will also increase by two percentage points to 22%.

“The change will lighten the tax burden both for individuals and companies, and restore the logic of the tax system. Unfortunately, part of the change is that the fixed-term nature of the tax will be abandoned, as geopolitical developments no longer allow for temporary solutions regarding defence spending,” says Minister of Finance Jürgen Ligi in an interview with ERR.

Tax reforms in Estonia are making everyday life more difficult for citizens

In Estonia, citizens have begun to talk about an “endless tax circus” as the cost of living has risen and taxation has become more stringent, first as a result of the pandemic, then the war and inflation. The car tax that came into effect this year and other tax increases have aroused public discontent.

In particular, the higher income tax rate that will come into effect next year raises concerns about how the poor will get by in their daily lives. Estonia has a flat income tax, as opposed to a progressive income tax.

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