Estonia’s VAT rate increase in 2024

Driven by the need for national security and aiming for a balanced budget, Estonia has reformed its tax system. One of the key changes is the increase in the VAT rate from 20% to 22%, which went into effect on January 1, 2024. This decision has significantly affected e-commerce sellers, among others, who must adapt to the new market conditions.

The increased VAT rate and its consequences

From the beginning of 2024, the standard VAT rate in Estonia increased from 20% to 22%. The decision is based on the assumption of the need to increase budget revenues, especially in the context of allocating 3% of GDP to defense. Prime Minister Kaja Kallas called the change a “tribute to national security,” emphasizing the importance of the country’s goal. It is worth noting that most of the revenue from the new taxes will go to the central budget, but 12% will be transferred to local authorities, based on where the taxpayer lives.

Exceptions and transitional regulations

For VAT payers who settle in cash, there are special rules for calculating the tax. If an invoice was issued before January 1, 2024, and the shipment of goods or performance of services took place before that date, tax will be charged at the existing rate of 20%. In addition, for contracts concluded before May 1, 2023, it is possible to benefit from the 20% VAT rate until December 31, 2025, as long as the provisions of the contract do not include a change in price resulting from any modification of the VAT rate.

Reduced VAT rates in Estonia

In addition to the standard VAT rate, which is now 22%, Estonia also applies reduced rates that have differentiated applications. The first reduced VAT rate is 9% and applies to pharmaceutical products, medical equipment for the disabled, books and hotel services. Another preferential VAT rate of 5% has been introduced for press publications in both physical and electronic form. Meanwhile, a third rate of 0% applies to intra-Community and international transportation.

Learn more about VAT in Estonia on our website: Estonia VAT – The Rates and Registration.

Summary

Raising the VAT rate in Estonia is just one of many tax changes that have been made to balance the country’s budget. It is crucial for e-commerce sellers to consciously adapt to the new regulations and take advantage of available exceptions and transitional regulations. Analyzing the tax implications and adapting your tax strategy to the new realities can help minimize potential negative tax consequences for your business.

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amavat^® Team