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Estonian Lawmakers Approve Income Tax Cut

by Ulrika Lomas,, Brussels

21 June 2011

The Estonian parliament has recently voted in favour of plans to reduce the country’s flat personal income tax rate from 21% to 20% from 2015. Parliament has also voted to reduce the current cap on individual income tax deductions from next year.

Commenting on the latest decision, Estonia’s finance ministry stated that the measure would serve to reduce the country’s overall fiscal burden. The 1% cut is expected to result in a shortfall in revenues for the state of around EUR70m (EUR57m of which due to a loss in individual income tax revenues and a further EUR13m due to a loss in corporate income tax revenues).

Changes to the country’s income tax law as a result of the outcome of the recent parliamentary vote also include lowering the ceiling of claimable deductions from taxable income from EUR3,196 currently to EUR1,920 from 2012.

Estonia’s flat rate of income tax was endorsed earlier in the year when the ruling coalition parties won a majority of seats in the March 6 elections. Indeed, determined to overcome the economic crisis, the ruling coalition has fought to keep the ‘flat tax’, which is currently levied at 21% on both individual and corporate income, a factor seen as important to maintaining business confidence in the country. The opposition Centre Party had campaigned to remove the flat tax system and replace it with a progressive system of taxation.

Estonia is seen to have made substantial progress in its recovery from the economic crisis, when the economy contracted by 3.6% in 2008 and by 14.1% in 2009, with unemployment reaching nearly one in five. However, unlike countries such as Latvia, Greece and Ireland, Estonia did not receive a bailout and instead implemented substantial budget cuts upfront. The value-added tax (VAT) rate was increased from 18% to 20%, excise duties on certain products were raised, pension, sickness and unemployment benefits were adjusted and public functions were consolidated.

TAGS: tax | business | value added tax (VAT) | law | budget | corporation tax | Estonia | excise duty | unemployment | individual income tax

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