The government of a country that took a bold step over 20 years ago by implementing a revolutionary taxation system is now considering the introduction of a new 2% corporate tax.
Estonia has always taken pride in its unique tax system, which encouraged the reinvestment of profits, in turn driving economic growth and attracting foreign investments. This system has been so successful that it has been copied by several other countries seeking to improve their tax competitiveness.
Despite this, the share of corporate tax in Estonia’s budget has remained comparable to that of larger economies like Germany and the United States. This was achieved through incentives that encouraged companies to invest in development rather than distribute profits as dividends. As a result, Estonia consistently ranked first in global tax competitiveness indices, affirming the correctness of its chosen path.
However, recent discussions about introducing an additional 2% tax on corporate profits have raised serious concerns. The official goal is to balance the budget, but it is widely understood that this tax is unlikely to remain a temporary measure. Few doubt that over time, the 2% could increase to 4%, 6%, 8%, and beyond. Such a step could lead to a loss of investor confidence, as it represents a fundamental change in tax policy, not just an adjustment to the current system.
Experts are already expressing doubts about the effectiveness of this decision. Yes, it may bring “a few hundred million” into the budget, but what losses will the economy suffer in the long term? The introduction of a new tax will require changes to the tax administration system, expansion of staff, and training of new specialists—all of which will also burden the budget.
In the context of global tax competition, Estonia’s decision seems questionable. A vast number of countries offer businesses attractive tax conditions, both for specific sectors of the economy and for business as a whole, and Estonia will have to face serious competition.
In the coming months, we plan a series of publications and webinars in which we will take a closer look at the tax regimes and business conditions in various countries.
In particular, the following countries are scheduled for the upcoming months: the USA, Ireland, the UAE, and Luxembourg.