For the eleventh year running, Estonia has topped the newly published 2024 International Tax Competitiveness Index (ITCI), maintaining its position as the most competitive tax regime. Estonia’s lead is largely attributable to its unique model of taxing distributed profits.
40 Indicators: Key Aspects of ITCI Evaluation
Each year, the Tax Competitiveness Index evaluates how tax systems in countries belonging to the Organization for Economic Cooperation and Development (OECD) support economic growth and investment, as well as how neutral they are toward different types of business activities.
The OECD member countries are compared across more than 40 indicators in five core categories:
- Corporate Tax;
- Individual Income Tax;
- Consumption Taxes;
- Property Taxes;
- Cross-Border Tax Rules.
The Index is designed to highlight those nations with efficient and transparent tax systems that can generate sufficient revenue for public needs while creating the fewest barriers to economic activity.
Key Changes and Trends in 2024
In 2024, many OECD countries introduced changes to their tax systems, which was reflected in their positions in the International Tax Competitiveness Index (ITCI). Some countries improved their indicators by reducing the tax burden and simplifying the rules, while others, on the contrary, lost positions due to higher rates and more complex tax mechanisms.
- Austria completed a planned reduction of its corporate tax rate to 23%, moving up from 17th to 15th place.
- Canada began phasing out its full expensing for capital investments and introduced a Digital Services Tax (DST). It also raised its capital gains tax rate. These changes led Canada to drop from 15th to 17th place.
- Czech Republic fell from 5th to 7th place after repealing accelerated depreciation for certain equipment categories and raising its corporate tax rate from 19% to 21%.
- Germany, conversely, reinstated accelerated depreciation for certain capital assets and relaxed restrictions on loss carryforwards, improving its position from 18th to 16th.
- Slovenia increased its corporate tax rate from 19% to 22%, settling at 22nd place.
- The United Kingdom enacted a full expensing regime for certain capital assets, climbing from 31st to 30th.
- The United States continues a phased rollback of 100% bonus depreciation for equipment (currently at 60%). However, the U.S. position on cross-border rules improved due to other countries adopting new global minimum tax rules (Pillar Two). Overall, the U.S. rose from 23rd to 18th place.
Changes in the tax systems of OECD countries demonstrate that even small adjustments can significantly affect their attractiveness for businesses and investors. Successful reforms, such as those in Germany and the United States, show that flexibility and adaptation to global trends can improve ranking positions. At the same time, raising rates and eliminating benefits—as seen in the Czech Republic and Slovenia—may lead to a decline in competitiveness.
Tax-Free Reinvestments: The Secret of Estonia’s Success
According to the 2024 report, Estonia retains its top spot thanks to features of its tax system, particularly its approach to corporate taxation, where reinvested profits are exempt from income tax. While Estonia’s corporate tax rate stands at 22%, it is only levied when profits are actually distributed as dividends. Reinvested profits remain untaxed.
Estonia’s personal income tax rate is 22%, although there is a progressive element due to adjustments in the tax-free allowance, making lower-income residents effectively exempt, while higher earners lose their tax-free allowance and pay more.
Estonia’s Tax System: Minimal Burden on Business
The Estonian system imposes no real estate tax on buildings or structures; only land is subject to tax, reducing the burden on property owners. Finally, profits earned outside Estonia are not taxed in Estonia, significantly facilitating international business expansion.
As a result, out of 38 OECD member states, Estonia ranks first in 2024 for the eleventh consecutive time. It is followed by Latvia, New Zealand, Switzerland, and Lithuania. Colombia remains at the bottom, with Italy, Portugal, France, and Iceland also appearing at the lower end of the index.
Notably, the main reasons for low rankings among the bottom-tier countries include either high overall corporate tax rates or overly complex systems featuring numerous exemptions, credits, and excessive taxation of property and capital.
Corporate Taxation
When assessing corporate taxation, the Index considers both the headline corporate tax rate and the quality of cost recovery mechanisms (i.e., how quickly and fully businesses can deduct capital investments). It also accounts for special preferences, the complexity of the system—including patent boxes, R&D incentives, digital taxes, multiple tax brackets, surcharges, and so on.
Where are the Highest Corporate Tax Rates in the OECD?
Across the OECD, the average combined corporate tax rate is 23.9%. The highest is in Colombia (35%), while the lowest is in Hungary (9%), followed by Ireland (12.5%) and Lithuania (15%). Other notable high-rate countries include Portugal (31.5%), as well as Australia, Costa Rica, and Mexico, each at 30%.
Corporate income taxes are often cited as one of the most influential factors affecting investment levels and economic growth. OECD analysis finds that corporate taxes most strongly hinder development, while personal income taxes have a moderate negative effect and property taxes have the least impact on growth.
Taxes for Individuals
In evaluating personal income taxes, the Index measures:
- Rates on earned income
- Progressivity (including the income threshold at which the top rate applies)
- The ratio of marginal to average tax rates
- Complexity (surcharges, social contributions, etc.)
- Dividend and capital gains taxation, i.e., the degree to which corporate earnings are taxed twice
High marginal rates tend to create greater distortions. For example, the report notes that Slovenia’s effective marginal rate can reach 67.5%, whereas Estonia’s is only 21.6%. It is also important to consider the income level at which the highest bracket applies and how overall tax policy either encourages or restricts additional employment.
How Income Level Affects Tax Burden
Value-Added Tax (VAT) is one of the most stable revenue sources for many governments. Key factors include the VAT rate (which typically ranges from around 10% to 27% across the OECD) and the breadth of the tax base (the share of final consumption that is taxed). The broader the base, the fewer distortions. For instance, New Zealand boasts one of the broadest VAT bases and a relatively low rate (15%), scoring highly in this category. In contrast, Italy applies a 22% VAT rate but has one of the narrowest bases, lowering its score.
Property Taxes and Cross-Border Taxation
This category encompasses taxes on property—how the real estate tax base is determined (land, buildings, or full property value)—as well as inheritance, gift, wealth, and financial transaction taxes.
Systems that tax only the land (as in Estonia) and do not impose additional capital-based taxes tend to be more neutral. In countries with multiple property levies (such as Italy and Colombia), the total burden on assets is higher, reducing the competitiveness of their tax systems.
Territorial Principle: The Key to High Competitiveness
Cross-border taxation practices also affect a country’s competitiveness ranking. Key aspects include the approach to taxing foreign-source income (worldwide vs. territorial), withholding rates on dividends, interest, and royalties, as well as the scope of tax treaties and anti-avoidance rules. Countries with a territorial approach and relatively low or zero withholding rates typically score better. Additional surcharges and global minimum tax requirements can increase complexity. Adoption of global minimum tax rules (including “domestic” top-up taxes) also plays a role in rankings.
Estonia: The Undisputed Leader
Estonia has held first place in the ITCI for eleven consecutive years, supported by four key factors:
- Corporate Tax on Distributed Profits. The nominal rate is 22%, but it only applies to dividends. Reinvested profits remain untaxed, giving companies more flexibility in managing capital investments.
- Flat 22% Personal Income Tax Rate. A single rate simplifies the tax system and reduces distortions. Dividends, having already been taxed at the corporate level, face minimal or zero additional tax at the individual level.
- Real Estate Tax Applies Only to Land. Owners do not pay tax on the buildings themselves, preventing double taxation and encouraging construction and property improvements.
- Territorial Tax System for Foreign Profits. Estonian companies generally do not pay domestic tax on income earned abroad (under certain basic conditions), simplifying international expansion.
Thanks to these features, Estonia achieves outstanding results in corporate taxation, personal income tax, and property tax. Even as international tax rules evolve—such as the introduction of global minimum taxes—Estonia remains one of the most attractive jurisdictions for business and investment.
Eesti Firma provides legal and consulting services for companies operating in various markets, including digital assets. Considering each client’s unique needs, Eesti Firma offers guidance and clarification on all matters related to the tax systems of Estonia and Lithuania, as well as current EU regulations.
Simplicity and Transparency: The Key to Success in ITCI
Estonia’s example serves as a benchmark for countries seeking to reform their corporate and individual taxation. Latvia (2nd place) has already adopted a similar “distributed profits tax.” The experience of top-ranked countries such as Estonia, Latvia, New Zealand, and Switzerland underscores that not only low nominal rates but also straightforward, transparent tax structures are crucial. As economies recover from crises and adapt to global reforms, countries must balance the need to compete for capital, talent, and entrepreneurship with ensuring sufficient public revenue.
For businesses and investors evaluating different jurisdictions, the ITCI provides valuable insights into long-term costs and regulatory risks. In this context, Estonia remains highly appealing for investment, owing largely to its unconventional yet highly effective corporate taxation model.
