For the twelfth year in a row, the Tax Foundation has declared Estonia’s tax code the most competitive in among the countries in the Organisation for Economic Co-Operation and Development.
According to the Tax Foundation, a Washington, DC-based think tank, Estonia’s top score is driven by four positive features of its tax system.
“First, it has a 20 per cent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 per cent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 per cent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions,” the Tax Foundation said.
While Estonia’s tax system is the most competitive in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories.
2025 international tax competitiveness index rankings. Chart by the Tax Foundation.
A determining factor of a country’s economic performance
“Latvia, which recently adopted the Estonian system for corporate taxation, also has a relatively efficient system for taxing labor income. New Zealand has a relatively flat, low-rate individual income tax that also largely exempts capital gains (with a combined top rate of 39 percent), a broad-based VAT, and levies no taxes on inheritance, property transfers, assets or financial transactions.”
According to the think tank, the structure of a country’s tax code is a determining factor of its economic performance.
“A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities. In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies.”
The Tax Foundation also points out that a competitive tax code is one that keeps marginal tax rates low.
High taxes drive investment elsewhere
“In today’s globalised world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can impede domestic investment and lead to tax avoidance.”
The least competitive tax codes among the OECD countries are in France, Italy and Colombia, according to the think tank.
The Organisation for Economic Co-operation and Development is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate economic progress and world trade. It is a forum whose member countries describe themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members.
The Tax Foundation is an American think tank based in Washington, DC. It was founded in 1937 by a group of businessmen to “monitor the tax and spending policies of government agencies.”
