If you’re thinking of starting a business in the European Union (EU), it helps to know which countries have the lowest tax rate. After all, the corporate income tax (CIT) can have a significant impact on your profit margins, so it should factor into your decision-making process — even if it’s not the #1 consideration.
Every European nation has some form of corporate tax in effect. Lithuania does offer tax-free eligibility in rare cases, but only on a temporary basis. The good news is that the average tax rate has been decreasing across the continent. While the average corporate tax rate was more than 31% in 2000, it now stands at just 21.7%. And depending on where you open up shop, you might be able to enjoy a much lower rate.
Types of Taxes That European Businesses Should Be Aware Of
There are actually a few different types of taxes you’ll need to be aware of if you conduct business in Europe:
Corporate income tax
The CIT is the most significant tax you’ll have to pay. Generally, you’ll have to pay CIT on all income earned from a permanent establishment (PE) within the country but not from foreign sales. Some countries impose a flat CIT on all businesses while other countries have thresholds depending on business size.
A value-added tax (VAT) is a type of sales tax that’s collected on a product at every stage of production. Though VAT tax is generally a fixed percentage, the amount paid by businesses depends on the cost of the product minus any materials that have already been taxed in a previous stage. The standard VAT tax in the EU is 21%. In light of the COVID-19 pandemic, some states have issued temporary VAT rate changes.
Capital gains tax
The capital gains tax is a fee paid on the profit from a sale of specific assets, including stock investments and real estate property. For a typical business operating in the EU, the capital gains tax will most often come into play upon the sale of business real estate or the sale of the business itself. Some European countries include capital gains as part of the standard CIT rate, but some countries impose a separate capital gains tax.
In addition, some European nations have local taxes that vary by municipality (or by canton, in the case of Switzerland). When researching companies in which to start a business, always check to see if local taxes apply, and then determine the specific local tax rate in the municipality where you plan to open your PE.
European Nations With the Lowest Corporate Tax Rates
If corporate taxes are of prime concern, you might want to avoid opening a business in Portugal, which has the highest combined CIT rate in the EU at 31.5%. Germany trails just behind at 29.94%. Other nations with comparatively high corporate tax rates in Europe include France (28.41%) and Italy (27.81%).
By contrast, the following seven countries have the lowest corporate income tax rates in Europe.
CIT rate: 19.7%
Switzerland has a moderate CIT combined with an extremely low value-added tax rate for corporate profits (8%). One notable thing about Switzerland is that it imposes no levy on capital gains, at least at the national level. Switzerland, though, is divided into 26 cantons, the member states of the Swiss Confederation. So while federal taxes tend to be very low, the precise VAT, CIT, and capital gains requirements can vary depending on the canton in which you do business.
CIT rate: 19%
Poland imposes a 19% flat tax for most businesses. This flat tax includes any profits earned from capital gains, so there’s no separate capital gains tax. However, in 2019, the country also introduced a lower 9% CIT for small-time taxpayers. This lower rate applies to most businesses with revenues less than €2 million in a given year. The standard VAT rate in Poland is 23%, but reduced VATs as low as 5% apply to certain goods like foods, books, and newspapers.
CIT rate: 19%
Like Poland, Slovenia imposes a 19% CIT. This rate applies to businesses large and small. In addition, the standard VAT is 22% and the capital gains tax is 27.5%. As in most EU nations, non-residents are taxed only on incomes earned through permanent establishments (PEs) in Slovenia. In addition, some companies are eligible to request a tonnage tax instead of CIT. In order to qualify for this tax scheme, you’ll need to meet strict criteria like operating in maritime transport in international shipping. If your business manages several tonnes of cargo at a time, this type of tax scheme can simplify your taxes and save you money, although most businesses won’t qualify.
CIT rate: 19%
Residents must pay CIT on all profits worldwide, though non-residents are only required to pay income earned from a UK-based PE. The UK also has a 20% VAT and an 18% capital gains tax. While the standard CIT is 19%, a lower 10% tax rate applies to profits related to a patent — this applies not just to patent royalties, but to any sale that involves the exploitation of a patent. One newer UK tax to be aware of is the Diverted Profits Tax (DPT). This national tax is levied at 25% in most cases and can apply when foreign companies structure their UK activities to avoid a UK PE (and thereby avoid UK taxes). The DPT was specifically enacted to address tax-dodging.
CIT rate: 19%
The 19% CIT in the Czech Republic applies to almost all business profits, including capital gains. There is a lower 15% CIT rate that applies to dividend income of Czech resident entities originating from non-resident entities, but this only applies to businesses centrally operating in the Czech Republic. The standard VAT rate in the Czech Republic is 21%, but reduced rates are available for goods and services like groceries, social housing construction, and books. There is no capital gains tax in the Czech Republic.
CIT rate: 15%
While the standard corporate income tax is 15% in Lithuania, some businesses can qualify for a reduced rate of 0% or 5%. For example, businesses with fewer than 10 employees and less than €300,000 in gross annual revenue may qualify under certain conditions. For the tax years 2020 through 2022, an increased CIT rate of 20% applies to the profits earned by credit institutions over €2 million. Capital gains are treated as part of a company’s normal taxable income and are taxed at the standard CIT rate, and the standard VAT rate is 21%.
CIT rate: 12.5%
Ireland has one of the lowest corporate income taxes in Europe, though it also comes with a 33% capital gains tax and a 23% VAT. Also, recent reports indicate that the CIT in Ireland will soon rise to 15%. Certain types of passive income — including dividends from certain rents, interest, and royalty payments generated by companies operating outside of Ireland — are taxed at a higher rate (25%). Nevertheless, Ireland still remains one of the most desirable locations in the EU for many entrepreneurs looking to set up shop.
CIT rate: 9%
Hungary has the lowest corporate income tax rate in the EU. Businesses pay a flat 9% of the positive CIT base and 15% on capital gains. There are a few caveats, though. First the VAT is much higher than the EU average, at 27%. Second, all local municipalities reserve the right to levy a local business tax (LBT). The LBT varies from one municipality to the next but is capped at 2%. For small and medium-sized businesses, the LBT cap is just 1% for 2021. You’ll be responsible for the local tax in any municipality where you have a PE that generates profit.
Other Things to Consider When Starting a Business in Europe
Keep the following in mind when planning your new European business venture:
- While low corporate taxes can be beneficial, you can’t just look at the CIT; you have to consider the whole tax structure (CIT, VAT, local taxes) to get the full picture. All of the nations on the list above have favourable terms when the various factors are weighed together.
- Many nations will require you to establish residency before you open a PE and apply for business licensing. Depending on where you hope to open up shop, these residency requirements can add considerably to your initial business investment.
- Make sure to factor in all other essential costs. For instance, you’ll need to consider real estate costs (which can vary significantly from one nation to the next), overhead, labour, and any other incidentals. If you run an ecommerce business, you’ll need to factor for things like web hosting, payment gateway services, and merchant services.
- Keep a close eye on the tax rates wherever you decide to conduct business, as these tax rates are constantly changing. You’ll need to work with a qualified accountant who can help you to stay on top of the endlessly complex tax codes found throughout the European Union.
There are a number of excellent reasons to start a business in the European Union, and the relatively low corporate taxes are certainly on the list. Just make sure to do your homework before choosing the next country to invest in.