Attractive taxation
The Callas administration is committed to simplifying tax codes and creating a more business-friendly and competitive environment. For companies, the reform will reduce the time it takes to comply with tax rules and will also provide benefits to businesses that do not pay corporate income tax on reinvested and retained earnings.
The country applies a corporate income tax rate of 14% to 20% of distributed profits. As part of the government’s tax reform, a flat tax rate of 22% will be levied on distributable profits from January 2025.
The country’s tax system allows companies to reinvest their profits tax-free, while using capital and earnings to grow their business faster and with less cost burden. The current personal income tax rate is set at 20%. In January 2025, this figure will rise to 22%.
In Estonia, property tax applies only to the value of land, and not to the value of real estate or capital. Generally, Estonia exempts 100% of a company’s profits earned abroad from domestic taxes, provided that its headquarters or subsidiary is registered in the country.
Growing green
In its National Recovery and Resilience Plan, the Kallas government has identified sustainable energy and green transition technologies (green technologies) as key areas for investment and development. International companies are attracted by Estonia’s ability to use the EU’s European Just Transition Fund (EJTF) and other regional funds.
Neo Performance Materials, a Canadian manufacturer of industrial rare earth magnetic metals, alloys and powders, is building a €100 million plant in the northeastern city of Narva. The EJTF will finance approximately 19 million euros, which will help supply magnets to manufacturers of electric vehicles and wind turbines.
Estonia’s long-term plan to create a major green technology hub has also attracted the attention of Hastings Technology Metals. An Australian group is collaborating with the state-owned Estonian Investment Agency (EIA) to develop a rare earth hydrometallurgical plant in Estonia’s north-eastern Ida-Viru County.
“The creation of such a plant will help further develop the value chain of permanent magnets and electrification already operating here, and will also support Estonia’s and the European Union’s ambitions to achieve climate neutrality,” said Joonas Vänto, head of the Estonian Investment Agency. (Invest Estonia) on the organization’s website. “There is currently no sustainable permanent magnet production capacity in the EU that can meet the growing demand for wind turbines, electric vehicles, robotics and more.”
Increased protection
Estonia’s fledgling defense sector has contributed little to the national economy since the country’s independence. However, this all changed in 2020 when the government began to develop the smart defense sector – in line with NATO’s Smart Defense initiative – in a joint effort to increase the capabilities of member states and their ability to operate effectively together.
The country’s defense industry earned $220 million in 2020, with 35% of its output exported. In 2023, turnover reached $320 million, with 60% of production going to export markets.
The Ukrainian war accelerated defense production and revenues. The war caused mass panic among the Baltic countries, despite the fact that they are members of NATO.
All NATO allies are concerned that Russia might try to militarily retake territory it lost as a result of the collapse of the Soviet Union.
International interest arose around the government-backed defense construction program. In February 2023, Edge Group, a defense conglomerate based in the United Arab Emirates, acquired a 50% stake in Estonian defense industry flagship Milrem Robotics, a leading European developer of robotics and autonomous systems.
The expansion of Estonia’s smart defense industry has also opened up international markets for Marduk, a manufacturer of electro-optical anti-drone platforms used by Ukraine’s armed forces.
“We are gaining experience in Estonia and experiencing strong growth in light of new market opportunities abroad,” says Liet Rauno Lember, Chief Operating Officer of Marduk.
Dynamics of digital innovation
As one of the most digital countries in Europe, Estonia continues to strengthen its technology ecosystem. In 2023, the country’s small and midsize technology sector raised a record $85 million in early-stage funding.
The EIA estimates that the country has 2.3 fintech unicorns per million per capita, which is above its weight.
Government programs are promoting digital innovation and investing in IT-focused university programs, focusing on areas such as blockchain, big data analytics, artificial intelligence, cybersecurity, automation, robotics and open source computing.
By 2030, demand for highly skilled graduates in digital asset trading, digital lending, enterprise technology delivery, digital payments, asset management and digital capital raising is predicted to increase dramatically. In 2023, the Estonian fintech sector grew from 264 companies to 310 in 2022.
“Estonia has strong fundamentals and a clear outlook to ensure that the country remains an attractive choice for technology investors around the world. Our national development strategy, in particular the Digital Agenda 2030, sets an ambitious plan to develop digital literacy, cybersecurity and government e-services,” says EIA’s Vianto.
The Digital Agenda 2030 strategy combines with far-reaching research and development (R&D) programs that are expected to create 500 deep technology startups. The government expects public R&D funding as a percentage of GDP to exceed 1% by 2035.