Chamber’s 11 Recommendations for Improving the Proposed Security Tax Bill

The Chamber submitted 11 recommendations to the Finance Committee of the Riigikogu to simplify, clarify, and improve the transparency of the proposed security tax, while reducing companies' motivation to conceal profits.

The security tax bill under consideration consists of three components: a 2% tax on corporate profits beginning in 2026, a 2% tax on turnover from July 1, 2025, and a 2% tax on individual income from 2026 onward. The government aims to raise approximately €2.5 billion through this new tax.

The Security Tax Should Remain Temporary

Although the bill specifies that the security tax will be in effect for three years (until the end of 2028), the Chamber emphasized in its communication to the Finance Committee that the tax must remain temporary. Its term should not be extended in future years nor made permanent.

Funds Must Cover Additional Defense Costs

Revenue from the security tax should be fully allocated to enhancing Estonia’s defense capabilities and security investments, providing additional funding beyond the defense budget already planned. To increase transparency, the Chamber proposed that the state maintain a separate accounting record for the revenue generated by the security tax, reporting annually how much was collected, how it was allocated to defense expenses, and how much additional funding was contributed from other tax sources. It is essential to avoid a scenario where security tax revenue is directed to defense, but the share of other taxes allocated to defense is simultaneously reduced, resulting in no real increase in defense funding.

Avoid Double Taxation

The Chamber urged that the profit tax component of the new tax avoid double taxation, especially for companies within a corporate group. For instance, if a subsidiary with pre-tax profits pays profit tax, that profit should be deducted from the parent company’s pre-tax profit to reduce the parent’s tax liability. Otherwise, both the subsidiary and the parent company would pay tax on the same profits, leading to double taxation.

Allow Offsetting Profit Tax Paid Against Dividend Tax

Currently, the bill does not allow businesses to offset security tax payments against dividend tax. This could discourage companies from paying the security tax and increase their motivation to find ways to reduce taxable profits. To counter this, the Chamber proposed adding a provision allowing companies to deduct previously paid profit tax from dividend tax, either fully or partially, when dividends are distributed. For instance, if a company pays profit tax and later pays dividend tax, it should be able to reduce the dividend tax amount by the amount of profit tax already paid.

Public Disclosure of Profit Tax Paid

The Chamber also suggested a provision requiring the Tax and Customs Board to publish the amount of profit tax paid by companies on its website each quarter. This would help the public see which companies are paying profit tax. Currently, the Tax and Customs Board publishes the aggregate amount of taxes paid by legal entities, including labor taxes, turnover, and employee numbers, each quarter.

Pay Interest on Overpaid Profit Tax

The bill specifies that profit tax payments will be made in advance, which may result in companies paying more than the 2% tax on pre-tax profits for a fiscal year. This effectively amounts to an interest-free loan to the state. The Chamber deemed this solution unfair and proposed that the Tax and Customs Board be required to calculate daily interest of 0.06% on any overpaid profit tax and to automatically credit this interest to the company’s prepayment account.

Profit Tax Is Not Broad-Based Enough

While the bill's explanatory note states that the tax indirectly contributes to protecting company assets, only about 60% of active companies would contribute through the profit tax, as the remaining companies do not generate profits. Therefore, the Chamber believes that the proposed profit tax is not sufficiently broad-based or equitable.

Additionally, we emphasized that having pre-tax profit does not necessarily mean a company has sufficient liquid assets to pay profit tax. Liquidity issues could arise, for example, if a company made a profit in the previous fiscal year and therefore must make advance payments, despite incurring losses in the current year.

The security tax bill is still under review in the Riigikogu, so it remains to be seen to what extent the Finance Committee will adopt the Chamber’s recommendations.

According to the bill, the security tax will apply from January 1, 2026, through the end of 2028, with an exception that the VAT rate will increase to 24% from July 1, 2025.