I often hear the same question from founders and CFOs in Europe and Asia: how to preserve Estonia’s flexible and attractive tax model in light of the 2026 reforms. In focus: Estonia’s defense tax and the broad agenda of changes to Estonia’s tax legislation for 2026. Over a decade of COREDO’s work with IT companies, fintechs and global groups COREDO we have learned to quickly clarify the essentials, model the effects and build practical solutions. In this article I have compiled a structured guide with an emphasis on the IT sector, startups and technology groups headquartered in the EU and present in Asia and the CIS.
Defense tax in Estonia from 2026
Estonia is publicly preparing to introduce a defense tax in 2026 as part of strengthening the resilience of public finances and defense spending. At the time of preparing this material the market is discussing several designs, and it is sensible to prepare scenarios in advance. I advise clients to be flexible in calibrations, as final parameters may differ by base and rate.
Rate of the defense levy and its calculation
Under the models discussed, possible options include:
- an add‑on to corporate taxes at a fixed percentage of the tax base;
- a levy on the payroll fund (similar to an add‑on to social contributions);
- a top‑up on distributed profits.
The new defense tax in Estonia
Compliance costs depend on administration. Likely elements: taxpayer registration, reporting frequency (monthly/quarterly), declaration format and control ratios. The solution developed by COREDO includes a process map: who in the company is responsible, which ERP data are needed, which IFRS and local tax accounting views to reconcile, and the SLA for adjustments.
Tax incidence of the defense levy
The question is not only ‘how much to pay’, but ‘who economically pays’. The tax incidence of the defense levy is distributed between the company, employees (through compensation packages) and customers (through pricing changes). I use price elasticity and cost pass‑through as the basis for a negotiation strategy: what we pass on in the price, what we absorb through efficiency gains, and what we offset via fiscal incentives.
Impact on IT and startups
IT business is sensitive to costs for talent, infrastructure and scalability. Taxation of the IT sector Estonia 2026 affects key blocks of product economics and financial metrics.
Defense tax for IT and startups
For product and service teams Estonia’s defense tax can increase OpEx if the base, payroll, and reduce net returns on dividends if the base is distributed profit. Our experience at COREDO has shown: timely adjustment of compensation policy and bonus models softens the hit to the P&L, and smart pricing preserves gross margin.
Taxes and hiring for startups in Estonia
The economic burden on small and medium businesses often appears as an increase in the total cost of hiring. I recommend recalculating the social cost in advance to assess the impact on offers, stock options, ESOP mechanics and retention of IT talent. We compare offer packages in Tallinn, Vilnius and Lisbon by final net compensation, taking into account tax residency and the defense tax.
CapEx vs OpEx: infrastructure/devops
The impact on IT capital expenditures (CapEx) and on IT operating expenses (OpEx) manifests differently. If you build your own data centers or invest in R&D equipment, the defense tax tied to profit hits free cash flow later. If the base is payroll, the burden falls into OpEx immediately. The COREDO team implemented a scenario analysis for a client: migrating part of the infrastructure to cloud services and CDNs reduced CapEx, and revising SLAs with providers kept OpEx in check while maintaining the same level of QoS.
Pricing, SaaS models and unit economics
The impact on digital services and SaaS models is noticeable through unit economics. I look at CAC, LTV, gross margin, NRR and payback period. When tax pressure increases we adjust pricing tiers (tiered pricing), introduce annual prepay discounts, strengthen retention mechanics and use geo-pricing for European and Asian customers. This way SaaS keeps LTV/CAC > 3, and the runway is not critically compressed.
Financial planning: DCF and scenarios
The new tax is about the accuracy of the financial model and treasury discipline. Here IFRS accounting and tax accounting in Estonia matter: they diverge in recognition timing and the calculation base.
Accounting for the defense tax in the DCF
I recommend updating the WACC, reassessing the tax shield, and including the defense levy in the FCF forecast. A DCF financial model with the new tax should cover:
- three scenarios: base, moderately stressed, stressed;
- escalation of the tax burden and scenario analysis over 3–5 years;
- impact on ROI when paying the defense tax for key projects.
Cash flows under the new tax
I break down cash flow management under the new tax into four steps: synchronizing the payment calendar, reserving tax liabilities, automation through ERP systems and integration of tax calculation, and covenant monitoring. This approach supports discipline and reduces the cost of debt.
Cost of compliance and automation
The cost of compliance (compliance cost) for businesses rises not only because of payments but also because of processes. The solution developed at COREDO includes templates of control procedures, integrations with accounting modules, and dashboard configurations for the CFO. It eliminates manual errors and strengthens internal control and the audit of tax risks.
Tax architecture of Pillar Two
Estonia is known for the “tax on distributed profits” model, which helps startups reinvest. The defense levy may introduce new logic into corporate decision‑making.
Tax on distributed profits
If the defense levy is charged on distribution, companies will retain the incentive to reinvest. In that case, a legal structure to minimize the defense tax may include a holding layer to consolidate profits and plan dividends every 12–18 months to smooth tax peaks.
Transfer pricing and tax
Transfer pricing and the defense tax are directly linked: the margin at the Estonian company level determines the base. Transfer pricing documentation, master file and local file, support for benchmarks and a functions‑risks‑assets analysis: this is not a formality but a protection against reassessments and fines. The COREDO team implemented an IP risk rotation for a group SaaS business and updated the TP policy taking BEPS into account.
Anti‑avoidance: BEPS and Pillar Two
Thin capitalization, withholding taxes, VAT
Thin capitalization affects interest deductibility and, consequently, the ETR. Withholding tax on royalties and services should be checked against international double tax treaties. VAT and the defense levy for digital services are a separate block: SaaS providers must correctly determine the place of supply and use MOSS/OSS to avoid double taxation.
Residence and e‑Residency: migration
AML, compliance and reporting 2026
Tax transparency and AML requirements are increasing in parallel with tax reforms. I recommend establishing an overall compliance framework to avoid expanding control functions chaotically.
AML and KYC under new taxes
AML and KYC in the context of new taxes require verified beneficial ownership, source of funds and transparent payment routes. This reduces the risk of freezes and supports interbank limits and payment traffic (EUR) without disruptions. COREDO’s practice confirms: a clear AML profile speeds up onboarding at payment institutions.
Reporting 2026: requirements and disputes
regulatory requirements for 2026 reporting may include new forms and control metrics. I always prepare a «Plan B»: procedures to challenge tax decisions and legal mechanisms for appealing taxes. This is a working tool, not a call to conflict: a proper appeal reduces fines for non-compliance with tax reporting and resolves interpretive disagreements.
Defense contracts, technology export
Investments, M&A and Venture: Keeping the Pace
The tax agenda directly affects the cost of capital, round terms and M&A.
LPs and the macro effect on venture investing
Runway, cost of capital, exit valuation
The impact on the cost of raising capital is measured in the delta to the discount rate and in covenant requirements. Assessment of the risk of a startup’s runway shortening is conducted through a rolling‑12 cash projection taking the defense levy into account. The impact on exit valuation appears through revenue and EBITDA multiples; an optimization plan and proven control of compliance costs are important here.
Due diligence for R&D
C-level roadmap for 90 days
I like a pragmatic approach: rapid diagnostics, priorities, checkpoints. The COREDO team has implemented dozens of launches following these steps.
Tax strategy for European IT startups
- Mapping the legal structure: corporate structure: holdings and branches, substance, nexus.
- Legal structure options for minimizing defensive taxation without aggressive schemes.
- International treaties and avoiding double taxation: verification of treaty benefits.
Optimization in compliance with the law
- Tools for calculating tax burden and automating taxes in ERP.
- Legitimate tax-optimization scenarios: TP‑policies, dividend calendar, CapEx/OpEx mixes.
- risk insurance for fiscal reform and updating the risk‑register.
What an operational contour is
- Price management and passing costs to customers taking into account elasticity and competition.
- development outsourcing vs a local team considering social costs and IP control.
- Structuring employee pay and taxes, social contributions, ESOP, buy‑back rules.
Communication and resilience
- Managing investor relations and communication: a memo on tax strategy and scenarios.
- Supply chain and business resilience: cloud providers, CDN, backup payment channels in EUR.
- Internal control: roles, limits, audit, report to the Board once a quarter.
COREDO case studies: solutions for clients
First case: a European cybersecurity SaaS with its main legal entity in Estonia and customers in the EU and Asia. The COREDO team implemented a TP model rebuild: they redistributed risk functions between the Estonian head office and a service center in Slovakia, updated the master/local file and implemented ERP integration to calculate the defense levy. A DCF model with three scenarios showed that with a 1.5% surcharge to the payroll fund the company maintains LTV/CAC > 3.2 and does not lose runway. Investors confirmed the round with the previous covenants.
Second case: a fintech with licenses for payment services and crypto services in several EU jurisdictions. Our experience at COREDO showed that the regulatory reporting requirements for 2026 and the AML/KYC framework go hand in hand. We strengthened AML procedures, synchronized tax transparency and beneficial ownership, reviewed withholding taxes under international treaties, and integrated a stress test of the defense levy into the treasury policy. The correspondent bank retained the limits, and the funding cost did not increase.
Third case: a product IT core with R&D in Tallinn and commercial operations in the UK and Singapore. The solution developed at COREDO involved shifting part of CapEx to cloud contracts, introducing annual prepay for clients and phased price indexation. We built a potential defense levy into the discount structure, updated the ESOP so that talent retention preserved the target net income. As a result, the EBITDA margin remained within the target range, and the exit valuation in the model did not drop.
Frequently asked questions about complex matters
What to consider right now
- Update the DCF financial model with the new tax, add stress scenarios and covenant testing.
- Recalculate unit economics and pricing: impact on CAC, LTV, gross margin and payback.
- Conduct TP diagnostics and prepare transfer pricing documentation.
- Synchronize IFRS and local tax accounting; set up ERP integration of calculations.
- Strengthen AML/KYC controls and beneficial owner transparency for banks and regulators.
- Review international double taxation treaties and withholding taxes.
- Document procedures for challenging tax decisions and internal tax risk controls.
Strategic flexibility – the main asset of 2026
Estonia retains its strengths: digital infrastructure, clear rules and historically favorable business taxation. The introduction of the 2026 defense tax changes the equation, but does not break it. Timely financial planning, a clear tax strategy and compliance discipline protect margins, capital and investor confidence.
The COREDO team helps entrepreneurs calculate the tax burden taking the defense levy into account, adapt legal structures and build transparent reporting. I base my approach on a simple logic: transparency, legality and business rationality. This approach ensures tax neutrality where possible and supports the long-term competitiveness of the Estonian IT cluster after the reforms.
If you are planning registration, Licensing or AML setup for an international group, factor the defense tax into baseline scenarios today. This will strengthen management confidence, lower the cost of capital and create a foundation for growth that investors and banks view with interest and trust.