Defense tax on corporate profits: preparations should begin this year

On 25 September 2024, the Estonian government submitted a draft law on the defense tax to the Parliament, which introduces a temporary defense tax consisting of three components, including a 2% tax on corporate profits. Most companies will have to pay the defense tax for the first time on 10 September 2026.

The law is planned to come into force on 1 January 2026 and will be in effect until 31 December 2028.

The taxable profit under the law will be the accounting profit, which can be reduced with some exceptions (to avoid double taxation). No classical corporate income tax system with classical exceptions will be introduced as valid in other countries, which may create a problem in certain areas of activity (like holding companies and real estate companies) where the company has made a book profit (e.g. due to revaluation) but there is no actual cash available for paying the income tax.  

Taxable profit

Resident companies and non-resident companies with a permanent establishment in Estonia will be subject to defence tax on their profits.

The tax base will be the profit before income tax recognized in the income statement presented as part of the annual report. If the company is in a loss, there will be no obligation to pay the defense tax Losses for previous periods cannot be carried forward or back to offset profit.

To avoid double taxation, dividends received from other companies will be deducted from the profit (tax base) as long as defense tax or tax in a foreign country was paid on the profits from which the dividends are being paid and the dividend recipient has a holding of at least 10% in the company paying dividend. It is permitted to deduct received dividends only if they were included in the pre-tax profit for the reporting period. That in turn depends on how the received dividend is recognized in accounting. If the holding is recognized using the equity method, a received dividend is not recognized as income in the income statement. In that case, the dividend cannot be deducted from pre-tax profit.

Profit attributed to an Estonian resident company’s permanent establishment abroad can also be deducted from pre-tax profit if this was included in the company’s pre-tax profit.

Public sector companies (those under the dominant control of the state, local government, or another public-legal entity) that receive targeted financing are subject to a special rule, where the pre-tax profit for the reporting year, under the net method of targeted financing, is subject to the security tax.

Taxation period

The taxation period is the company’s financial year. The company is required to declare to the Tax and Customs Board all profit subject to the defense tax earned during the financial year or profit attributed to the permanent place of business, and to pay defense tax to the Tax and Customs Board’s bank account by the 10th day of the ninth calendar month of the following financial year.

Examples:

Note: if the financial year is different from the calendar year, defense tax is assessed in 2026 on pre-tax profit for the previous financial year proportionally to the number of months that coincided with 2026. The pre-tax profit for the financial year starting in 2028 will be taxed proportionally to the number of months that coincide with 2028.

Example:

Advance tax payments

Companies will be required to make an advance defense tax payment to the Tax and Customs Board’s bank account by the 10th day of the third month of each quarter. It is calculated as follows:

• on one-fourth of the pre-tax profit earned in the previous financial year, if the deadline for making the advance tax payment is after 1 July;
• on one-fourth of the pre-tax profit earned in the financial year before the previous one if the deadline for making the advance tax payment is before 1 July, unless the annual report for the previous financial year has been submitted;
• on one-fourth of the pre-tax profit earned in the previous financial year if the deadline for making the advance tax payment is before 1 July and the annual report for the previous financial year has been submitted.

Thus, the advance tax payments must be paid by 10 September, 10 December, 10 March and 10 June.

Credit institutions, insurance companies and publicly listed companies have to pay the advance tax payments on profit earned in the previous quarter.

If a company has outstanding annual reports yet to be filed, the most recent annual report will be used as the basis for calculating the advance tax payments.

Note: In 2026, advance tax payments must be paid by 10 September and 10 December on half of the profit for the previous financial year (except for credit institutions, insurance companies and listed companies).

Example 1: the financial year is the same as the calendar year

The company’s financial year coincides with the calendar year. The company files annual reports for 2025–2028 on 30 June of the respective years. Since the 2025 report is filed by 30 June 2026, it is not possible to collect advance taxes for Q1 and Q2 of the first year. Thus, the advance payments for 2026 are made only in Q3 and Q4, but the payments are assessed on half of the profit for the previous year, i.e. FY 2025.

Profit in euros in 2025–2028

Calculation of advance tax payments in 2026–2028 (euros):

The deadline for submitting the (annual) declaration for defense tax and paying the tax in the above example is 10 September. The defense tax declaration is to be filed regarding the previous financial year and advance tax payments are deducted from the tax obligation. Excess amounts are transferred to a prepayment account.

Calculation of the defense tax for 2026–2028 (euros):

Example 2: the financial year is different from the calendar year

The company’s financial year runs from 1 July to 30 June. The company files its annual reports on 31 December.

The advance payments must be made based on the profit reported in the annual report for the financial year ended in 2025, thus the first advance tax payments in this example are declared on profit from 1 July 2024 to 30 June 2025.

Calculation of advance tax payments in 2026–2028 (euros):

The deadline for filing the defense tax (annual) declaration and paying the tax is 10 March. Since the financial year runs from 1 July to 30 June in this example, the profit for the financial year ended in 2026 is taken as the basis for the defense tax in 2026 proportionally to the number of months that coincide with 2026. Thus, in this example, defense tax is paid on 10 March 2027 on half of the profit for the financial year from 1 July 2025 to 30 July 2026. 

Calculation of defense tax 2026–2028 (euros):

Conclusion

Once the defense tax act comes into force, companies will start declaring and paying a 2% defense tax on their profit quarterly. The first advance payments must be made by 10 September 2026 (except for credit institutions insurance companies and listed companies). 

Companies should now collaborate with their accountants and auditors to understand the implications of the new tax for them. Although the defense tax is payable for the first time in 2026, impact assessments should be conducted already this year since the basis for advance tax payments will be the 2025 financial year.