The coalition agreement of the tripartite coalition formed by the Reform Party, the Social Democrats and Eesti 200 states that a portion of the defense tax will be collected from 2 percent of companies' profits. However, Finance Minister Jürgen Ligi (Reform) has now proposed an alternative version: collecting tax revenue from 2 percent of companies' payroll funds.

"The basis for calculation changes. The company still pays the tax; it's still a tax on the employer, but the basis for calculation is more trackable, more controllable and that is the payroll. We have a good handle on labor; it's registered, we know the salary figures, and taxing this wouldn't create significant bureaucratic burdens," Ligi explained.

It's not yet clear which option would generate more revenue for the state budget, but Ligi believes that using the payroll as a tax base has the advantage of providing more stable state budget revenue.

"Neither option is decided, and both need more work. Both have pros and cons. The advantages of this alternative, which is why it's being considered, include less bureaucracy, easier implementation, easier control and likely more stavble state budget revenues," Ligi said.

However, member of the Riigikogu Finance Committee Tanel Kiik (SDE) called Ligi's proposal absurd, arguing that it would increase inequality between companies. Kiik pointed out that the hardest hit would be companies with large workforces.

"This would mean that certain companies, particularly labor-intensive ones – in industries like manufacturing, production, transport and others – would face an even higher tax burden compared to the current proposal. Meanwhile, companies with smaller workforces, which might be more profitable, would face a lower tax burden," Kiik explained.

"For me, it's absurd that we would actually increase the tax burden on companies that already contribute more to employment and employee income through employment relationships, while overlooking companies that might, for example, engage in schemes that reduce tax revenue for the state," he added.

"It's too early for too many comments. But of course, we consider this possibility and will try to mitigate these risks. There are risks in both cases," Ligi responded.

From the companies' perspective, according to LHV macroanalyst Triinu Tapver, a tax based on labor costs is more predictable compared to a corporate income tax, as labor costs can be better planned.

"However, this could have the effect that employers might become less willing to hire new workers or would carefully reconsider whether they need new employees. On the other hand, there could be pressure to slow down wage growth," Tapver added.

The government plans to start taxing companies in 2026.

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