Part II

Developments in the Member States

Current topics and prospects; policy orientation

After a deep economic recession in 2008-2009 the recovery of the Estonian economy has been rapid and strong.
The GDP growth rate reached 8 % in 2011, much higher than expected in the 2011 spring forecast. The rapid
growth was mainly driven by strong export performance, but private consumption and investment also played a
role. In 2012 the GDP growth is expected to decline to 3.2 %, due to global slowdown and weaker external
demand. The unemployment rate reached 16.9 % in 2010, but is expected to decline to 12.5 % in 2011 and further
to 11.2 % in 2012. The general government budget position became negative due to the economic recession in
2008 and 2009, but turned positive again in 2010 (0.2 % of GDP) and 2011 (0.8 % according to Autumn 2011
Commission forecast). This was a result of a higher than expected rise of tax revenues, but was also affected by the
sales of tradable "Kyoto" units (AAUs) in 2010-2011. The end of AAU sales and the fact that the bulk of funds
received from these sales needs to be invested in 2012-2013 will deteriorate the general government budgets
position somewhat in 2012-2013 (the deficit is projected to be -1.8 % of GDP in 2012 and -0.8 % of GDP in 2013
in Autumn 2011 Commission forecast), but thanks to a projected strong GDP growth, will not raise the level of
public debtto-GDP ratio, which is expected to remain at around 6 %, the lowest level in the EU.

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The prudent fiscal policy stance is reflected also in tax policy. The long-term plan to cut the income tax rate by one
percentage point annually has been frozen and the personal and corporate tax rates have been kept at 21 %, the
level reached in 2008. Also the basic allowance (the amount of tax-free income) has remained close to 2008 levels
at 1 728 in 2011. The income tax rates (personal and corporate income) are planned to be reduced to 20 % in
2015.
The long-term aim of the tax policy is to shift the tax burden from income and employment towards consumption
and the environment. Most of the excise duties have been increased in 2010, including those on alcohol, tobacco,
transport fuels, liquid fuel and electricity. Excise duties on transport fuels and natural gas were increased also in
2009. In January 2011 the excise duty on tobacco was increased again by 10 %, and similar increases are planned
for 2012 and 2013. In January 2011 also an excise duty of 0.15 per GJ was imposed on oil shale used for
production of heat.
The tax burden on consumption has been affected also by the rise of the standard VAT rate by two percentage
points to 20 % in July 2009 and the removal of reduced rates on certain products (medical equipment, distant
heating), as well as the rise of the reduced VAT rate from 5 % to 9 % in 2009.

Main features of the tax system

Personal income tax
Estonia is one of the Member States applying a flat-rate system to the PIT. The single tax rate, 21 % since 2008,
has been applied on all labour and personal capital income (dividends, interests, capital gains, royalties etc.). Only
income exceeding a given threshold is taxed. The amount of the basic allowance has been increased yearly from
EEK 12 000 ( 767) in 2003 to EEK 24 000 ( 1 534) in 2006 and EEK 27 000 ( 1 726) for 2008-2010. In 2011 it
was set at 1 728. State pensions are subject to an additional allowance of 2 300. Mortgage interest payments
and training expenses can also be deducted from taxable income. The total amount of allowances is limited to
3 195 per taxpayer during the period of taxation, or to no more than 50 % of the taxpayer's income.
The basic allowance makes the personal income tax system as a whole progressive, in the sense that the average
tax rate increases with the income level, although the marginal tax rate remains constant.
Personal income tax is shared between the central and local governments; the latter receive 11.4 % of taxable
income, the remainder goes to the central government level. The central government is entitled to the entirety of
the income tax paid by non-residents and to the income tax paid on pensions and capital gains.
Corporate taxation
The corporate tax system was reformed in 2000 with the aim of providing more funds for investment and
accelerating economic growth. The basic idea of the reform was to postpone the taxation of corporate income until

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Taxation trends in the European Union