Many owners often ask themselves the question of protecting their companies from political and economic instability, diversifying risks by distributing business assets between the territories of different countries.
At the same time, one of the key points that, among other things, worries owners in the search for alternative or auxiliary jurisdictions for full or partial transfer of business – “what tax must be paid in case of doing business abroad.”
With this in mind, we have prepared a brief overview of certain aspects of company and entrepreneur taxation in some EU countries.
Certain Aspects of Taxation in Some EU Countries
The company InteliumLaw provides consultations on taxation issues and supports with the registration and maintanance of businesses in various jurisdictions.
In this article, we provide information on the taxation of businesses and their owners in certain popular EU countries. We draw your attention to the fact that this article is not legal advice and is of a general analytical nature, for full advice on taxation matters in the countries you are interested in, please contact our tax lawyers.
You can also contact Inteliumlaw which is an associated law firm with legal and tax support.
Business in Romania
The general corporate income tax rate in Romania is 16%.
However, Romania has quite attractive tax conditions for micro-companies. To acquire this status, the company’s revenue at the end of the previous tax year must not exceed 1 million euros. Micro-companies are eligible for a corporate income tax rate of 1% if they have one or more employees, or 3% if the company has no employees.
Although from January 1, 2023, it is planned to reduce the revenue threshold that allows the application of the specified regime to 500,000 euros, make requirement to have employees with the company mandatory, limit the use of such companies to provide consulting and management services. Even so, the regime will not lose its attractiveness.
In the country, there is an exemption from taxation for the reinvestment of profits in the purchase of certain types of equipment, in particular technological equipment, computers, etc.
At the same time, Romania offers the possibility of exemption from taxation of salaries of IT specialists under certain conditions, which makes it possible to significantly save tax costs on salaries of IT companies.
The country is known in the world for its preferential regimes for companies in the field of scientific research and development (R&D). Romania has been developing such innovative regimes since 2004.
Companies whose R&D activities are related to the development of technologies or research in the applied field have the right to receive an additional deduction of 50% of “acceptable” costs. At the same time, the project must meet certain conditions defined by tax legislation.
In addition, companies that exclusively carry out innovation and R&D activities of scientific research and technological development and related activities can claim a full tax exemption for ten years. Employees of such companies may be exempt from taxation on wages paid for the performance of functions within the framework of R&D activities.
Note that it is not so easy for companies to apply for R&D preferential regimes. Benefits are provided on a project-by-project basis. The company must prove the compliance of the project with the requirements of the legislation in order to apply the benefits.
The general tax rate for the payment of dividends from a company in Romania to a business owner – an individual is 5% (from January 1, 2023, the rate is planned to be increased to 8%).
The personal income tax rate is relatively low and amounts to 10% in Romania (there are exceptions for certain types of income).
Romania does not have a separate tax regime for self-employed persons or freelancers. A rate of 10% is applied to the income of such taxpayers minus the expenses allowed to be deducted.
Among the pluses, there are no rules on controlled foreign companies for individuals in Romania.
Business in Poland
The country has long established itself as an attractive territory for business registration. The authorities are doing everything possible to attract new entrepreneurs to work in the country.
The general corporate tax rate in Poland is 19%.
However, the country offers a special reduced income tax rate of 9% for start-up companies (for the first tax year) and small taxpayers (with revenue, including VAT, of less than the equivalent of 2 million euros)
From 2021, the country offers the possibility of applying a tax on withdrawn capital for active companies that have at least three employees and meet other criteria defined by legislation.
In this case, the tax will be paid at the time of the distribution of the profit and on the amount of the distributed profit at the rate of 10% for newly established companies and small taxpayers and at the rate of 20% for other companies.
The jurisdiction also has the possibility of applying an innovative regime for objects of intellectual property rights, which provides for the option of reducing the tax rate for income received from objects of intellectual property rights to 5%.
From 2022, companies that meet the requirements for R&D companies are eligible to apply a 200% employee expense deduction for the purposes of calculating the taxable income tax base. And taxpayers with the status of R&D centers – up to 200% of other allowable expenses.
Poland sets a progressive tax rate for personal incomes of 17% (12% from January 1, 2022) up to PLN 120,000 and 32% for incomes exceeding the specified threshold.
The general tax rate for the payment of dividends to an individual owner is 19%, for non-residents there is an opportunity to reduce it by applying conventions on the avoidance of double taxation.
In Poland, the rules on controlled foreign companies also do not apply to individual taxpayers.
Business in the Czech Republic
The income tax rate in the Czech Republic is 19%.
For R&D companies, the Czech Republic offers the possibility of applying an additional deduction from the tax base of up to 100% of specially defined expenses related to R&D activities incurred in the current tax year. Thus, a kind of double deduction of such expenses is allowed, which helps to reduce the tax burden on companies.
The general rate of tax on the payment of dividends to the owner – an individual is 15%, for non-residents there is an opportunity to reduce it by applying double tax treaties.
The Czech Republic applies a progressive income tax rate for individuals – for income up to 1.8 million Czech crowns (in 2022) – 15%, for income above the established amount – 23%. Unsystematic income up to 30,000 Czech crowns is not subject to taxation.
At the same time, the Czech Republic has a rather attractive simplified tax regime for private entrepreneurs (paušální daň). A self-employed person has the right to choose a tax regime with the payment of a fixed amount per month for 2022, which is 5,994 Czech crowns (equivalent to 242 euros), which includes income tax, health insurance contribution and social contribution.
The key condition for obtaining such a regime is the volume of income per year, which for 2022 should not exceed 1 million Czech crowns, and for 2023 – 2 million Czech crowns.
In the Czech Republic, the rules of controlled foreign companies for individuals have not been introduced either.
Business in Hungary
In Hungary, the general corporate tax rate is 9%.
In Hungary, there is a minimum tax base threshold of 2% of the total adjusted income. If the profit does not reach this minimum level, the taxpayer must either pay corporate tax on the minimum base or declare tax on a base less than the minimum, which may become the basis for tax audits.
Also, do not forget about the municipal tax of up to 2% (depending on the municipality of registration of the company) on the company’s revenue (after deducting only certain allowable expenses). If the owner is not aware of such a tax, the owner may face an unplanned increase in the tax burden. However, today in Hungary you can still find municipalities in which such a tax is not levied.
The country allows the deduction of up to 200% of the costs of R&D activities (double deduction).
The general rate of tax on dividends is 15% (for non-residents it may be reduced on the basis of international agreements on the avoidance of double taxation).
The general personal income tax rate is 15%.
Hungary offers a simplified tax regime for KATA entrepreneurs (which will change from September 1, 2022), allowing the payment of a fixed amount of tax of up to HUF 75,000 (depending on the chosen structure) to entrepreneurs who meet the conditions of the regime.
Note that the regime loses its attractiveness if the entrepreneur’s income reaches more than 44,000 euros per year. Therefore, this mode is more suitable for small taxpayers.
Alternatively, private entrepreneurs can choose to pay income tax after deducting allowed expenses at the rate of 9%.
The rules on controlled foreign companies in Hungary do not apply to natural persons.
Business in Cyprus
Cyprus is one of the most popular jurisdictions for tax planning and business.
In Cyprus, there are no simplified tax rules for entrepreneurs, and the income of individuals is taxed at a progressive rate of up to 35%. However, this is offset by fairly favorable conditions for corporate taxation and other tax initiatives.
The country has one of the lowest corporate tax rates in Europe at 12.5% and a number of tax benefits that allow you to achieve an even lower tax burden (in particular, conditional deduction of interest, IR box regime). The effective tax rate could potentially be reduced to 2.5%.
Cyprus has also implemented a number of initiatives for non-domiciled residents (individuals who do not originate from Cyprus and have not been tax residents of Cyprus for 17 years within the last 20 years. Among other things, wage tax discounts of up to 50% have been established.
Cyprus does not provide for taxation of dividends for non-resident beneficiaries and non-domiciled residents.
Cyprus has no rules on controlled foreign companies for individuals.
It should be taken into account that taxation regimes, including the application of tax benefits, in each of the jurisdictions have their own nuances and peculiarities.
Therefore, before making a decision on opening a business in one or another country, it is extremely important to get the advice of qualified lawyers with experience in the field of taxation. This is the only way to choose a jurisdiction that will optimally meet your needs and take into account the specifics of your business.