Taxes in Europe: Differences and Similarities

Yuri Yurenev is a renowned specialist in international law and residence permit programs at Consuls Law Firm. Yuri Yurenev is a renowned specialist in international law and residence permit programs at Consuls law firm. Taxation issues for individuals are extremely important in Europe, as tax rules differ from one EU country to another, despite the desire for harmonization. harmonization. The term "natural persons" includes citizens, foreigners and stateless persons.

Associations of citizens and tax entities

In some countries, associations of citizens are also considered separate entities for taxation purposes. For example, the United Kingdom recognizes associations, partnerships, communities, and unions as individuals. One of the most important criteria for tax payment in any country is the level of economic connection with the state.

Principles of tax policy

There are two main principles of tax policy: the principle of territoriality and the principle of residency. A tax resident is an individual who has the status of a tax resident in a specific country, regardless of where the income is earned.

Determination of tax residency

In most EU countries, physical presence criteria are used to determine tax residency. An individual becomes a tax resident if they reside in the territory of the state for at least the established period (usually 183 days in a year).

Taxation criteria in different countries

The criterion of actual presence is used in Italy, Spain, Portugal, Germany, Bulgaria, Hungary, and other countries. In Italy and Spain, the principle of "center of vital interests" is also applied. In Slovenia, Poland, and Portugal, both criteria are used: "place of habitual residence" and "center of vital interests."

When it comes to resolving tax issues abroad, it's important to consult an experienced tax advisor like Yuri Yurenyev to receive proper legal support and avoid unwanted consequences.

Taxation of individuals in Europe

In Europe, there is a diverse taxation system for individuals. In Lithuania, for example, income from employment, copyright, and civil contracts is taxed at a rate of 15%, while income from profit distribution is taxed at a flat rate of 15%. If the income exceeds 104,277.6 euros, the tax rate ranges from 20% to 32%.

The tax system in other European countries

• Slovakia:It taxes the income of individuals. Income from dividends is taxed at a rate of 7%, while income from capital gains is taxed at a rate of 19%.
• Switzerland:The effective personal income tax rate can range from 12.20% to 26.15%, depending on the income.
• Latvia:The income tax rates range from 20% to 31.4%. Income from capital gains is taxed at a rate of 20%.
• Poland:The tax rate ranges from 18% to 32%, however, income up to 8000 Polish zlotys is exempt from taxation.
• Italy:It provides for tax rates ranging from 23% to 43% depending on income.
• France:tax rates vary from 0% to 45%, depending on the level of income.
• Germany:Tax rates range from 14% to 45%. Additionally, a solidarity tax of 5.5% is levied.
• Spain:The personal income tax rates range from 19% to 45%, while the savings tax ranges from 19% to 23%.

Each country has its own characteristics in the tax system that must be taken into account when developing tax planning strategies.

Investment income that is subject to taxation comes from a variety of sources: dividends and other financial receipts from participation in companies, interest and other income from capital transfers to third parties, as well as increases in the value of assets. In Slovenia, tax rates vary depending on the level of income: starting from 16% for amounts up to EUR 8,500 and reaching 50% for amounts above EUR 72,000. Capital gains, interest, dividends and rental income are subject to a flat tax rate of 27.5%.

The United Kingdom offers its own tax rates: 20% for incomes up to £37,500 and 45% for incomes over £150,000. European countries are striving for the unification of tax rates for companies to create competitive conditions and a favorable tax environment. Businesses are focusing on optimizing expenses and reducing tax payments in countries where it is most advantageous.

Indirect taxation already includes the VAT system for EU member states; however, direct taxes such as corporate tax and dividend tax still require work on unification. Table 2 provides information on VAT rates in various European countries. For example, Switzerland sets a general rate of 7.7%, with a reduced rate for certain goods and services. Reverse charge VAT applies to a number of transactions and services for companies not registered for VAT purposes.

VAT rates in different countries of Europe

In Germany, the VAT rate is 19%, but there is a reduced rate of 7% for certain goods, such as food and books. Small businesses with a turnover of no more than 17,000 euros in the previous year and 50,000 euros in the current year are exempt from paying VAT.

The UK has a VAT rate of 20%, but individuals conducting transactions over £85,000 sterling, must register to pay the tax.

In Estonia, the standard VAT rate is 20%, but there are certain categories of goods to which this tax rate does not apply.

VAT rates in other countries

Slovakia

The VAT rate in Slovakia is 20%, with a 10% rate applied to specific goods such as pharmaceuticals and medical products.

France

In France, there are different VAT rates for various categories of goods and services, ranging from 2.1% to 10%.

Czech Republic

Czechia has set the VAT rate at 21%, while some goods, such as medications and books, are subject to a 10% rate. Businesses operating in Czechia are required to register for VAT if their turnover exceeds 1,000,000 Czech crowns over a 12-month period.

Conclusion

In different countries of Europe, VAT rates vary depending on the type of goods and services, which creates a diversity of tax rules and requirements for businesses. Each country has its own specifics and exceptions that need to be taken into account when conducting commercial activities.

Lithuania

Lithuania has a unique VAT system within the EU. One of the interesting aspects is the possibility of supplying goods to VAT payers in other EU member states. Companies whose turnover exceeds 45,000 euros are obliged to register. The variety of categories of goods and services is striking: from books and transportation to firewood and medical care. transportation to firewood and medical care. For foreign companies, registration is possible only through a fiscal agent if there is no trade between EU member states.

Latvia

In Latvia, the VAT rate is 21%. Among the categories of goods are diplomatic supplies, food products, medicines, and other items. Registration for VAT is mandatory for individuals conducting transactions above a certain threshold. Foreign companies must also register before starting business in the country.

Spain

Spain applies different VAT rates depending on the types of goods and services. Special attention is given to essential goods and international transportation. All taxpayers conducting operations in Spanish territory are required to register for VAT.

Italy

Italy, Slovenia, Poland, and Hungary represent different taxation methods. The Italian tax code includes VAT taxation on a range of goods and services, such as food products and electronic publications.

The issue of taxation of multinational companies and non-residents is one of the key problems in the tax system. An example is the double taxation of income from foreign subsidiaries: corporate tax in the country where the subsidiary operates, dividend tax, and corporate tax in the parent company's country. However, these issues are largely addressed by bilateral agreements on the avoidance of double taxation (DTA), which establish special conditions for the distribution of tax obligations between countries.

Directives and Regulation

Additionally, the Council of the European Union adopted two directives in the 1990s: one concerns taxation in mergers, divisions, acquisitions, and the purchase of company shares, while the other deals with the taxation of parent and subsidiary companies. All other aspects of corporate taxation remain entirely under the jurisdiction of the member states.

Harmonization and Fiscal Sovereignty

The harmonization of corporate taxation in the European Union remains problematic due to the desire of member states to maintain fiscal sovereignty. Nevertheless, some countries, such as Hungary, Switzerland, Germany, and Lithuania, continue to develop their strategies in direct taxation while adhering to the core principles of the EU.

Table: Corporate Tax in European Union Countries

• Hungary:Tax - 9%. Basis: income according to the accounting books.
• Switzerland:The tax is 8.5%. Basis: net profit from trading activities, passive income, profit from capital gains. Usually, the overall tax rate ranges from 12% to 24%.
• Germany:Tax - 15%. Basis: profit from trading operations, passive income, profit from capital gains. The overall rate reaches 30-33%.
• Lithuania:Tax - -. Basis: profit from trading operations, passive income, profit from capital gains.

These differences in income tax rates are due to both differences in legislation and different national tax practices. different national tax practices.

Reduced tax rate in the UK

The reduced tax rate in the UK, which is 5%, applies to micro-companies with a small number of employees and an income of less than 300,000 euros. These companies are exempt from initial tax obligations. Additionally, they have the opportunity to receive benefits on income recognized from the sale of research and innovation results.

The standard tax rate in the United Kingdom

The standard tax rate in the United Kingdom is 15%. It applies to the profits of resident companies from trading activities, various incomes, and capital gains. However, for international companies that take advantage of tax avoidance schemes, a rate of 25% is applied.

Reduced tax rate in the UK

The UK currently has a reduced tax rate of 17%, which has been reduced from 19% for profits earned after April 1, 2020. The new rate will not be activated until a year from now, when companies pay their 2020 taxes.

The standard tax rate in Poland

In Poland, the standard tax rate is 19%. It applies to both profits from trading activities and income from capital. However, for small businesses or new companies with a turnover of less than 1.2 million zlotys, it can be reduced to 9% on capital gains.

The main tax rate in Slovenia

The main tax rate in Slovenia is 19%, applied to the entire profit of the company, deducted from total expenses. However, certain funds, pension funds, and venture companies are exempt from tax obligations.

Taxpayers in Slovenia

Taxpayers in Slovenia, if their profit from the previous year does not exceed 50,000 euros or 100,000 euros (provided they have at least one employee for at least five months), can opt for a one-time deduction of 80% of their annual income instead of specific expenses.

The standard tax rate in the Czech Republic

The standard tax rate in the Czech Republic is 19%. Taxable income is calculated according to accounting rules, taking into account tax adjustments. All expenses related to earning, maintaining, and securing profit can be deducted if they are documented by the taxpayer.

The standard tax rate in Estonia

The standard tax rate in Estonia is 20%, applied to the distributed profits of a of the company. As of January 1, 2019, a reduced rate of 14% has been introduced for regular dividend payments, calculated on the basis of the average taxable amount of dividends distributed over the previous three years.

Taxation of dividends in Europe

There are various rules and rates for taxing dividends in different European countries. Here are some of them:

Slovakia

In Slovakia, the tax rate is 20% and is calculated based on the balance sheet profit, taking into account all deductions. This country aims to attract investments due to its relatively low dividend tax rate.

Spain

In Spain, the tax rate is 21% and is calculated as the difference between the total income and the company's expenses. This allows companies to account for various costs and expenditures, reducing the tax base.

Italy

Italy applies a 25% tax on the profits of resident companies, including income from commercial activities and passive income. For inactive companies, the rate is higher at 34.5%, which can become a significant financial burden.

France

In France, dividend tax is calculated on the basis of the data presented in the company's financial statements. of the company's financial statements. There are also reduced tax rates, e.g. 28% for companies with revenues of up to 500,000 euros and 33.33% for large companies with revenues over 250 million euros.

Hungary

In Hungary, individuals and non-residents are taxed at a rate of 15% on received dividends.

Estonia and Latvia

In Estonia and Latvia, the dividend tax is 0%, however, there are exceptions for recipients from the "blacklist" of countries.

United Kingdom

In the UK, English companies are exempt from dividend tax when paying out in accordance with domestic legislation.

Slovenia and the Czech Republic

In Slovenia and the Czech Republic, the rates are 15% and 35%, respectively, although they can be lowered by agreement between the countries.

Lithuania

Lithuania imposes a 15% tax on dividends paid to non-residents.

The variety of dividend tax rates in Europe highlights the need for careful planning and consideration in international financial transactions. Each country has its unique requirements and restrictions that can significantly impact the tax obligations and financial condition of companies.

Global tax rules for dividends

When ownership of shares in subsidiary companies exceeds 10% for a year, dividends are exempt from taxation. This applies not only to residents but also to non-residents located in EEA countries.

In Poland, the dividend tax rate for non-residents is 19%. Since 2020, new rules apply to cross-border payments exceeding 2 million PLN per year.

Dividend tax rates in different countries

In Germany, the tax rates on dividends for residents and non-residents are set at 25% and 26.375%, respectively. For non-residents, it is possible to get a tax refund, which reduces the rate to 15.825%.

In Italy, the tax on dividends for non-residents is 26%. In France, the tax rate on dividends for non-residents is 30%. In Switzerland, the withholding tax on dividends for non-residents is 35%, but for affiliated companies from the EU and Switzerland, the tax can be zero.

In Slovakia, the dividend tax is 35%, but if there is a double taxation avoidance agreement, the payment of dividends is exempt from tax.

Conclusion

Thus, dividend tax rates vary across different countries, which is important to consider when investing abroad. Remember that it is essential to be aware of the tax rules and legislation of the country where you plan to invest.

Conclusion

The diversity of tax systems in European Union countries requires careful study and understanding for those planning to live or do business in this region. Taxation principles, such as territoriality and residency, play a key role in determining the tax obligations of individuals.

Tax residency criteria and taxable items may vary from country to country, which emphasizes the importance of consulting with experienced tax professionals when making financial decisions. Understanding what income is taxed and what rates apply will help you manage your finances effectively and avoid unexpected tax consequences. finances and avoid unexpected tax liabilities.

Researching the tax systems of various European countries allows for the selection of an optimal taxation strategy that aligns with individual needs and goals. Pay attention to the details of tax legislation and seek professional advice to ensure financial stability and compliance with the laws in your chosen European Union country.