The tax burden has declined almost by three times in the years 2000 to 2006. The reason for this was the introduction of then unique tax reform in the year 2000 as a result of which enterprises do not have to pay income tax on their profits. The tax reform based on the hope that reduction of the tax burden would encourage businesses to reinvest their remaining profits which together with the potential foreign investment inflow creates good preconditions for increasing employment and economic growth. The aim of the study was to assess the impact of profits’ non-taxation on corporate investment behaviour, the structure of investments, economic growth and long-term economic sustainability.

„Estonia’s goal has been to keep the tax system as simple and exception-free as possible, but at the same time to attract foreign investors.“ – Andres Võrk

The analysis found that tax reform has a significant positive impact on the investment volumes  and a slight negative effect on the investment structure, but also positive impact on companies’ ability to cope with economic crises due to increase in liquid assets. Positive effect was also found on productivity and GDP.

Generally, the entrepreneurs think that the system has positively influenced the investments, productivity and employment. Nearly 80% of entrepreneurs favoured a valid tax system to alternatively proposed classical system with significantly lower tax rate.


  • The reform has increased the business investments.
  • Investments have grown the most in service and small enterprises.
  • Current tax system does not inhibit investment in other/new companies.

Corporate sustainability

When compared with Latvian and Lithuanian enterprises, Estonian companies have:

  • The share of outside capital in the total capital has decreased by an average of 10%.
  • The share of loan capital in the total capital has decreased 7%.
  • The share of cash in assets has increased 2% to 3%.


  • The growth of labour productivity has been 11% higher in Estonia over the five years than in Latvia or Lithuania.
  • The productivity has increased the most in the service sector; in small enterprises the productivity growth has been more modest than the relative growth of investments.

Income tax revenue

  • Operating costs and profit before tax have more than doubled.
  • Payable income tax decreased significantly compared to the situation where the old system would remain in force.