Estonia’s Defense Tax: What Was Repealed and What Applies to IT

Nikita Veremeev

25.02.2026 | 6 min read

Updated: 15.10.2026

If you planned the 2026 budget of an IT company in Estonia, you have almost certainly heard about the "defense tax". In the law it is called the security tax (julgeolekumaks). The Riigikogu adopted the act on 11 December 2024, but repealed it on 18 June 2025. The tax provisions of the act never started to apply. Only one change from the whole package remained for business: the 24% VAT rate from 1 July 2025. The tax on distributed profit in 2026 stayed as before: 22/78. Below is what was adopted, what was repealed and how to reflect it in the finances of an IT company. COREDO has worked with international companies since 2016. This article is written for founders and finance directors.

Defense tax in Estonia: what was adopted in 2024

In Estonia, the Security Tax Act (julgeolekumaksu seadus) was published in Riigi Teataja under the reference RT I, 02.01.2025, 2. It was due to enter into force on 1 January 2026. The act created a new tax for individuals and companies and also amended the VAT Act.

What the act provided for

• 2% on the income of individuals that is subject to income tax (§ 2 and § 10 of the act);
• 2% on a company's annual accounting profit before tax (§ 14), with quarterly advance payments (§ 16);
• an increase of the standard VAT rate from 22% to 24% from 1 July 2025 (§ 21 and § 23(2));
• validity of the tax provisions until 31 December 2028 (§ 23(4)).

For the Estonian model, a tax on profit would have been a notable shift. A company would have paid it on current profit, even without paying dividends. This element raised the most questions among IT companies that reinvest their profit.

Timeline: adopted in 2024, repealed in 2025

1. On 11 December 2024 the Riigikogu adopts the Security Tax Act.
2. On 18 June 2025 the Riigikogu adopts an act repealing the tax (RT I, 08.07.2025, 1). The same act raised the income tax rate from 22% to 24% from 1 January 2026.
3. On 1 July 2025 the 24% VAT rate enters into force.
4. On 18 July 2025 the Security Tax Act ceases to be in force.
5. On 3 December 2025 the Riigikogu deletes the increase to 24% (RT I, 18.12.2025, 3).
6. On 1 January 2026 neither the 2% security tax nor the 24% income tax rate enters into force.

Who administers the taxes

Taxes are administered by the Estonian Tax and Customs Board (Maksu- ja Tolliamet). Returns are filed with it and taxes are paid to it. Laws are published in the official gazette Riigi Teataja, which shows the version in force on any date.

What applies in 2026: taxes of an IT company

Three groups of taxes matter for an IT company in 2026: the tax on distributed profit, VAT and taxes on salaries. Below are the rates under the versions of the laws in force on 15 October 2026.

Tax on distributed profit: 22/78

An Estonian company pays income tax when it pays dividends or otherwise distributes profit (§ 50(1) of the Income Tax Act). The rate is 22% (§ 4(1)). Before applying the rate, the amount paid out is divided by 0.78 (§ 4(1¹)). The tax is therefore 22/78 of the net payout. For example, on a dividend of EUR 78,000 the tax is EUR 22,000. If the company does not distribute profit but invests it in the business, there is no tax. The 22/78 rate has applied since 1 January 2025; before that it was 20/80. The reduced 14/86 rate was abolished from 2025. Withholding of 7% remained only as a transitional rule for dividends paid to individuals from profit taxed at 14% until the end of 2024 (§ 61(68)).

24% VAT on services

The standard VAT rate has been 24% since 1 July 2025; before that it was 22% (§ 15(1) of the VAT Act). The Security Tax Act provided for a return to 22% from 1 January 2029 (§ 21 and § 23(3)). That provision was repealed together with the act. As early as 8 May 2025 the Ministry of Finance announced that the 24% rate would have no end date. VAT registration is mandatory once turnover with its place of supply in Estonia exceeds EUR 40,000 from the start of the calendar year (§ 19(1)). The place of supply of services is determined by § 10 of the act. If you provide a service to a person registered for VAT in Estonia, the place of supply is Estonia (§ 10(1)).

Taxes on salaries

• income tax of 22% is withheld from the salary;
• the basic exemption from 1 January 2026 is EUR 700 per month, regardless of income level;
• social tax of 33% on the employee's salary (§ 2(1) and § 7(1) of the Social Tax Act);
• unemployment insurance premium: 1.6% for the employee and 0.8% for the employer;
• the employee's contribution to the second pension pillar: 2%, 4% or 6% at their choice.

There is no 2% security tax on salaries in 2026. If your 2026 budget or salary calculator contains it, remove that line.

Financial planning: cash flow and scenarios

The main mistake of 2026 budgets is a model built on a draft rather than on the law. If the model still contains a 2% tax on profit or advance payments for it, it understates free cash flow.

What to remove from the model

• the 2% security tax on accounting profit and its quarterly advance payments;
• the 2% security tax on employees' salaries;
• a 24% rate on distributed profit: 22/78 applies in 2026;
• "rate corridors" that are not based on the law.

When to pay tax on dividends

Tax on distributed profit is declared and paid by the 10th day of the month following the payout (§ 54(2) and (4) of the Income Tax Act). It therefore makes sense to plan the dividend date together with the payment calendar. The money for the tax will be needed the following month, not at the end of the year.

Scenarios based on company decisions

Useful scenarios are built not on guesses about rates but on your own decisions. How much profit to keep in the company, when to pay dividends, how to split founders' remuneration between salary and dividends. For each option, calculate taxes at the rates in this article. If the law changes, you will update only the rate, not the whole model.

VAT and SaaS prices

For business customers that may deduct input VAT, the rate increase is usually neutral. For private customers in Estonia, the price including VAT went up unless you lowered the price before VAT. Whether to pass the increase on to customers is a commercial decision. Take it with your contracts in mind: where the price is stated including VAT and where it is stated without it.

Group structure, transfer pricing and Pillar Two

The repeal of the security tax preserved the key feature of the Estonian system: tax arises when profit is distributed. Structural decisions are therefore still linked to payouts, not to the profit of the year.

Undistributed profit and a holding company

Profit kept in the company is not taxed until it is distributed. If an Estonian company receives dividends from a company in which it holds at least 10%, it may pass them on without tax under the conditions of § 50(1¹). The conditions depend on the subsidiary's country and on whether tax was paid at its level. Think through your corporate structure before the first payouts. A holding company is justified when it reflects the real management of the group, not only a tax aim.

Transfer pricing

If the price of a transaction with a related party differs from the market value, the difference is taxed (§ 50(4)). The methods for determining market value are set by a separate regulation (§ 50(6)). At the request of the tax authority, a company provides data on related-party transactions and on the group structure. The deadline for this is at least 60 days (§ 50(7)). In IT groups such transactions are usually software licences, contract development and shared services.

Pillar Two: who is affected

Residence, e-Residency and non-resident owners

A company established under Estonian law is an Estonian tax resident (§ 6(2)). An individual is a resident if their place of residence is in Estonia or if they have stayed in Estonia for at least 183 days within 12 consecutive months (§ 6(1)). If a double tax treaty determines residence differently or provides more favourable terms, the treaty applies (§ 6(5)). The 22/78 tax on a dividend is paid by the Estonian company itself on payout (§ 50(1)). How the dividend is taxed for the owner depends on the owner's country of residence and the tax treaty.

Reporting and compliance in 2026

The Security Tax Act provided for its own tax returns (§ 13 and § 17). You do not need to file them: the act has been repealed. The tax reporting of an IT company stayed the same, so it matters more to keep its basics in order.

Monthly return and deadlines

A company files a return on payouts, including dividends, by the 10th day of the following month (§ 54(2) of the Income Tax Act). The tax is paid by the same deadline (§ 54(4)). If you are registered for VAT, add the VAT returns to the calendar as well.

What banks and partners check

A bank or payment partner usually asks who the ultimate owner of the company is, where the money comes from and how the group's payments flow. The answers must match the tax reporting and the dividend documents. Discrepancies between them are what most often delay onboarding.

Investments, M&A and venture: what to consider in valuation

For an investor, not only the amount of tax matters, but also the moment it arises. In Estonia this moment is again linked to the payout, not to the profit of the year.

Due diligence

Runway and cost of capital

For a startup that reinvests its profit, current profit is again not taxed until distribution. This supports runway. The 24% VAT affects runway mainly through prices for private customers and through input VAT that the company cannot deduct.

A 90-day roadmap

Start with the assumptions, then move on to structure and processes. Each step below relies on provisions in force, not on forecasts.

First 30 days: check the assumptions

• Remove the security tax and the 24% profit rate from the 2026 budget.
• Check the VAT, income tax and social tax rates against the current versions of the laws.
• Check that the payroll calculation applies the EUR 700 basic exemption correctly.

Days 30–60: structure and payouts

• Draw up a dividend calendar and take into account the payment deadline of the 10th day of the following month.
• Review related-party transactions and prepare the data in case of a request.
• If the group has a holding company, check the conditions of § 50(1¹) for dividends from subsidiaries.

Days 60–90: prices and processes

• Check contracts with private customers: is the price stated including VAT.
• Update the assumptions sheet of the financial model and record the date the rates were checked.
• Prepare a short note for investors on the 2026 tax regime.

Frequently Asked Questions

What to do now

• Remove the security tax and the 24% profit rate from the financial model.
• Calculate the tax on dividends at 22/78 and plan its payment by the 10th day of the following month.
• Build the 24% VAT into prices for private customers.
• Check the taxes on salaries: 22%, social tax of 33% and unemployment insurance premiums.
• Prepare the data on related-party transactions.
• Check rates against Riigi Teataja and emta.ee before each budget cycle.

Conclusions: the Estonian model has survived

The security tax was adopted but never started to apply. In 2026 an Estonian company still pays tax on its profit only when the profit is distributed, at the 22/78 rate. What changed for business is mainly VAT, which is now 24%, and taxes on salaries, where the EUR 700 basic exemption applies. A financial model built on the rates in force is more reliable than any model built on scenarios from drafts.

If you are setting up a company in Estonia, preparing licensing or setting up AML for an international group, the COREDO team will help you build the structure and the documents. The work starts from your goals and the rules in force, not from forecasts.