Are you planning to set up a company in Europe? Then you should consider where you can find the lowest business tax rates. Taxes are not the only important factor you should consider, but it is a good start.
Types of Business Taxes in Europe
The most important types of tax you should consider when setting up a European company are as follows:
- Corporate tax, which is usually based on the profits of the business and the one the tax investors look at first. It is calculated based on the revenues, with the deduction of the expenses. Expenses may be deducted depending on the country, the type of business, and the tax regime the business is subject to. Currently, the average corporate tax in Europe is around 22%, the high end being around 30% in Germany, and the low 9% in Hungary.
- VAT, or value-added tax, which is normally included in the price of goods and services. If you conduct B2B trade, you can reclaim VAT from your purchases, based on your expenses. The average standard VAT in Europe is around 21%, with the highest in Hungary at 27%, and the low end around 15%. Mind you, in each country VAT may be a lot lower than the standard for specific product categories, such as food or books.
- Capital gains tax, which is a levy on profits when an investment is sold, whether it is stocks, assets, real estate, or the business itself.
- Local business tax, which may vary not only country by country, but also by region, territory, or municipality.
Taxes by Country
Standard corporate tax in Poland is 19%, although a lower tax rate is available at 9% to businesses with a yearly revenue below EUR 2 million. This tax includes capital gains too, so there is no separate capital gains tax. Standard VAT is a bit higher than the EU average at 23%, but food, books, and newspapers enjoy a preferential status at 5%.
Company formation options in Hungary let you take advantage of not only the 9% corporate tax, but also the simple and quick setup procedure in just 4-5 business days, available to all nationalities. For businesses with a yearly revenue below ca. EUR 8 million, an even more favorable tax regime is available, which is most convenient for service providers, with low material and high personnel costs. VAT is high at 27%, and local business tax is between 0-2%, depending on the municipality, while dividend tax is 15% on profits taken out of the business. At the same time, employees may be eligible for various types of tax benefits in Hungary, most of them concerning personal income tax.
The 12.5% corporate tax in Ireland is quite low in Europe, but it comes with a 23% VAT and a 33% capital gains tax, while certain types of passive income (especially if generated outside Ireland) are taxed at a higher rate, at 25%. Company setup takes about a week, and some startups may qualify for tax relief in the first 3 years, which makes Ireland an attractive destination to many investors.
While the standard corporate tax is 15%, businesses with less than 10 employees and a yearly revenue below EUR 300,000 may enjoy a reduced corporate tax rate at 5%, or even 0% if they also meet a few other conditions. Since capital gains are treated as the normal taxable income of the company, they are taxed at the standard rate, while VAT is exactly the EU average at 21%. Lithuania is also 11th in the World Bank’s latest global ranking of best places to do business in.
Corporate tax in Slovenia is 19%, regardless of the size of the business, complimented by a capital gains tax that depends on the holding period: 25% in the first 5 years, then 20% up to 10 years, and 15% up to 15 years. In exchange, the tax is reduced to 0% after 15 years. VAT is 22%, just a bit above the EU average. As an alternative to corporate tax, shipping companies may request being taxed per tonnage instead of based on their profit if they match strict criteria while operating maritime transport.
The Czech Republic: 19%
Czechia is in the middle of each field considering tax rates. Corporate tax is 19%, which applies to all business profits, including capital gains, although dividend tax for profits taken out of the company by Czech residents is just 15%. Standard VAT is also the EU average at 21%. Company setup takes less than a week, while the minimum share capital is below EUR 1, a token sum.
Switzerland: 8.5% (plus taxes on the local level)
While Switzerland is not a member of the EU, it has close ties to the European Union and is a popular destination for those looking for their European headquarters. Its corporate tax is complicated because it is made up of taxes levied on the federal, cantonal, and municipal levels. The federal corporate tax rate is 8.5% on profit after tax, but considering each level, effective corporate tax is between 12%-20%. At the same time, standard VAT is extremely low, below 8%.
Other factors for business setup in Europe
When you are planning to set up your new business in Europe, consider not only the available tax rates but several other factors that might be important to your business specifically. These include information on whether any licenses are required in your field of operation, whether you want to trade goods or services, or whether you want to employ a local workforce or plan on importing talent from your own country of origin (which will require a work permit for each employee). The size of your operation will also have an important role, affecting not only the applicable tax benefits but also the complexity of planning.
Choose the country that makes the most sense for your own operation, considering taxes as well as other aspects.