The government plans to introduce a 2 percent corporate income tax starting in 2026, which has been termed a "defense tax."

There are numerous companies operating in Estonia whose owners are tax residents of other countries. To avoid double taxation, Estonia has signed double taxation avoidance agreements with many countries, currently in force with 62 nations.

Kristjan Järve, a partner and head of tax at Grant Thornton Baltic, told ERR that tax treaties apply to taxes of a similar nature even after the signing of the agreement.

"Therefore, if the defense tax is introduced as an increase in income tax, it will not affect the application of tax treaties. From the perspective of non-resident owners, a tax treaty only provides a more favorable withholding tax rate on dividend payments; it does not regulate the taxable base or the corporate tax rate in Estonia. Since dividends are generally not subject to withholding tax in Estonia, the introduction of the security tax will not have a direct impact on tax treaties," he explained.

Thus, according to the auditor, tax treaties do not provide more favorable treatment for the taxation of corporate profits, but they do prevent double taxation – depending on the treaty, the non-resident owner's country of residence is obligated to avoid double taxation either through a credit method or an exemption method.

Järve added that a potential issue for such companies could be the rather high corporate tax rate – a 2 percent increase is set to take effect on January 1 next year, and the 2 percent defense tax rate will come into effect at the beginning of 2026.

"While the incurrence of this cost can be deferred by retaining profits, except for the 2 percent component of the defense tax, it becomes difficult to use profits earned in Estonia at the owner's level when necessary. The non-resident owner may have to contend with a fairly high effective tax rate or risk issues with the Estonian tax authority if they attempt to loan profits to a foreign owner," Järve said.

In response to a question about whether existing double taxation avoidance agreements need to be amended and how complex this process might be, Evelyn Liivamägi, deputy secretary general for financial and tax policy at the Ministry of Finance, stated that work on the defense tax is still in its early stages, and it is therefore not possible to answer that question yet.

Erle Kõomets, head of the Ministry of Finance's tax policy department, noted that it is difficult to say how long it takes to conclude a double taxation avoidance agreement with another country.

"Countries have different expectations and interests, and each agreement is unique. Sometimes, even reaching negotiations can take years – if, for example, one country is interested in the agreement and the other is not, extensive preliminary work may be required. Once negotiations have started, it's not uncommon for there to be three rounds: one round per year, sometimes two," she said.

In general, according to Kõomets, reaching an agreement in less than two years is quite exceptional. Furthermore, once an agreement is reached, it must be signed and ratified by both countries, which also takes time.

"For example, Russia has yet to ratify the agreement negotiated with Estonia in 2000, which, given the current circumstances, might actually be a good thing," she said.

If an existing agreement needs to be amended, this can be done more quickly, but it still depends on the circumstances. Kõomets pointed out that some minor technical details, such as changing the name of an institution, can usually be agreed upon through correspondence. However, substantive changes to the provisions may take as long as negotiating the original agreement.

The Ministry of Finance has promised to develop detailed rules for collecting the defense tax from companies by the end of August.

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