Republic of Estonia: Selected Issues

International Monetary Fund

No 2026/244, IMF Staff Country Reports from International Monetary Fund

Abstract: This Selected Issues paper examines the effects of distributed-profit tax regimes on firm investment, focusing on Estonia’s 2000 reform and Latvia’s 2018 corporate income tax reform. Using firm-level ORBIS data and a difference-in-differences framework with event-study extensions, the analysis compares investment outcomes with firms in Finland. The findings show no sustained increase in investment rates among Estonian firms following the reform, while Latvian firms experienced a decline in investment rates after the 2018 reform. The evidence suggests that distributed-profit taxation does not automatically generate broad-based increases in capital investment, with outcomes varying across firms and depending on complementary policies. In Estonia, smaller and less leveraged firms appear to have benefited more, while reforms had pronounced effects on liquidity and leverage. Overall, the findings indicate that distributed-profit taxation may primarily influence firms’ balance-sheet and liquidity decisions rather than capital accumulation, highlighting trade-offs between investment incentives, tax revenues, and the sustainability of the corporate tax base.

Pages: 50
Date: 2026-09-03
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