Hotel and restaurant association seeks VAT cut as closures mount

Estonia’s Hotel and Restaurant Association is calling for the value-added tax rate on catering services to be cut from 24 percent to 13 percent, ERR reported. The association says the sector is nearing a crisis, with profitability, investment capacity and jobs under pressure.

More than 25 restaurants have closed over the past year, including six featured in the Michelin Guide, according to the association. The proposed tax cut is intended as an economic measure rather than social price support, with the goals of increasing tourism exports, the tax base and the sector’s ability to invest.

Since January 1, 2025, accommodation, or accommodation with breakfast, has been subject to a 13 percent VAT rate. Goods or services provided alongside the accommodation are not included. The association says this rate shows that tourism’s core services compete on the international market and that catering is an essential part of the same visitor journey.

The sector’s net profit margin fell from 4 percent to 1.4 percent in a year, while total profit declined by 65 percent. Labour costs also rose from 27.8 percent to 34.2 percent of turnover.

The association says businesses cannot simply raise prices because a 10 percent increase would lead to an estimated 12 percent fall in visits. Most companies have halted investments and are operating using their equity, it said.

If the current situation continues, around 600 companies and 2,800 jobs could disappear by 2028, mainly outside Tallinn, according to the association. It said the problem was structural rather than a matter of restaurant management, noting that many high-end restaurants also made losses in 2025.

The actual situation may be worse than the statistics indicate, the association said. Data from the Estonian Tax and Customs Board showed that the catering sector’s tax arrears stood at 14.5 million euros in April 2025, exceeding the sector’s total annual profit of about 14 million euros. Not all companies had yet submitted their 2025 reports, it added.

In a survey conducted by the association, 73 percent of respondents said they would hire additional employees if VAT were reduced, while 57 percent said they would be ready to invest. At present, 72 percent of the restaurants surveyed have halted investments.

The association also said a lower rate would support more reasonable prices for customers. It described the Michelin Guide as valuable marketing and noted that Estonia has been included for a fifth consecutive year, with 43 restaurants listed.

According to the association, foreign tourists spend an average of 120 euros a day, including 34 euros on catering. Restaurants and food are also among the main reasons tourists travel, it said. Tourism generates exports, with catering accounting for 2.21 billion euros, or 6.8 percent of Estonia’s total exports.

The association said 81 percent of restaurants would increase the share of Estonian products on their menus if the tax rate were reduced. A stronger restaurant sector would provide local producers with a stable buyer, while higher turnover and stronger businesses could generate more tax revenue for the state over the longer term.

The proposed tax cut would have an estimated net impact of about 63 million euros a year on the state budget, according to the association.