Many European countries interested in the foreign investment offer preferential tax systems for investors participating in investment programs. These are states such as the UK, Malta, Cyprus, Bulgaria, Hungary, Spain, and others.What are the tax rates and the main types of taxes in Europe that everyone who plans to invest in a foreign business needs to know? Our article tells about this.
Who is considered a tax resident
With regard to personal income tax, most EU countries use two approaches at once. They are used on the basis of the determination of the tax residence of an individual. However, the criteria by which this status is assigned are interpreted by laws in different ways.
In the countries of the European Union, the most frequent criterion is the place of physical presence. An individual acquires a tax resident’s status if, regardless of citizenship, he has actually been in the territory of this state for at least a specified period during a certain period (as a rule, 183 days a year).
The actual presence criterion is valid in Italy, Spain, Portugal, Germany, Bulgaria, Hungary, and other countries. It is noteworthy that in Italy and Spain, in addition to this, the criterion of “center of vital interests” is also used. In Slovenia, Poland, and Portugal, both criteria are used to determine an individual’s status: “place of usual residence” and “center of vital interests”.
The categories of subjects of taxation in European countries also differ. Three approaches can be distinguished.
The subject of taxation is each individual with income separately, regardless of his marital status (Italy, Austria, France, Slovenia, Slovakia, Poland, Lithuania, and Latvia).
The taxation subject is a married couple whose income is considered a common joint income (Portugal, Luxembourg, and Malta). In Germany, Spain, Ireland, and Norway, spouses are given the right to choose between individual and joint declarations.
The subject of taxation is the family, considered in the general case as a group of persons living together and leading a common household.
Eu Vat Laws
VAT in Europe worries every entrepreneur who plans to open a business through investment. All EU countries charge different value-added taxes, so you should not expect general VAT EU rules for the whole of Europe. Moreover, some goods are subject to preferential rates; there are also products for which VAT is zero.
In most EU countries, VAT is different for residents and those who do not have this status. Citizens and those with a residence permit in the EU are entitled to benefits and reduced rates. The highest rates of VAT in European countries are between 23 and 25.5%. These are mainly Scandinavian countries, where the standard of living is very high. Even preferential rates are also high there and amount to about 8 – 12%.
In addition to the Scandinavian region, countries such as:
- Hungary (standard rate 27%, preferential rate – from 5 to 18%);
- Greece (standard 24%, reduced – 6-13;);
- Poland (23% and 5-8%, respectively);
- Portugal (23% and 6-13%);
- Croatia (25% and 5-13%).
But most often, VAT in Europe ranges from 20 to 21%, this is the most common indicator in European countries. It is quite comfortable to do business in countries such as:
- Austria (20% standard and reduced rate of 10-13%);
- Spain (21% and, accordingly, from 4 to 10%);
- UK (standard 20% and 0-5% reduced rate);
- Bulgaria (20% and 0-9%);
- Lithuania (21% and from 5 to 9%);
- Netherlands (21% and 0-9%);
- France (20% and 5.5-10%).
Taxes in Europe for legal entities
The European Union’s direct tax policy aims to harmonize and level the playing field, ensuring healthy competition, free movement of capital, and creating a favorable tax environment. Governments seek to standardize tax rates and oblige companies to pay taxes exactly where they make a profit. In turn, business tends to the opposite: to reduce the cost of taxes and pay them where it is more profitable.
With regard to indirect taxation, a unified system of EU VAT laws has already been developed, and measures are being taken to harmonize the tax rates of the participating countries. But with regard to direct taxes, such as corporate tax and withholding tax on dividend payments, countries have yet to develop a unified corporate tax system.
Types Of International Taxation
The main difference between income tax in Europe is that it is impossible to evade it. If in some countries informal earnings are found everywhere, in Europe this is extremely rare. Therefore, these types of taxes in Europe are paid from all the money earned.
This type of tax varies greatly in different countries that offer residence permits, permanent residence, and citizenship by investment.
Malta and Cyprus, which are very popular with investors, offer to pay up to 35% of income.
In Greece, this tax reaches 45%.
The Spaniards pay tax on all income, including those from abroad. The rate is applied from 24 to 52%, depending on the total amount of income. If income exceeds 300,000 euros, the resident of the country deducts 52% of all earned.
The main tax in the UK is the income tax. It is calculated based on an individual’s income and is progressive – the higher the income, the higher the tax rate. Thus, incomes below £34,370 are taxed at a rate of 20% and not exceeding £42,475 at a rate of 40%. Income tax for amounts exceeding this threshold is 45%. The current tax-exempt income is £9205.
France is considered a country with one of the most stringent tax systems. The main feature of the income tax in France is that not a specific individual is taken for its calculation, but the taxpayer’s family. With an annual income of €9,7 thousand tax is not paid; with income up to €26 thousand – 14%, up to €71 thousand – 30%, up to €153 thousand and above – 41%. Interestingly, for those who have a high income of €250, 500, and more thousand, there is also an additional tax of 3-4%.
The exception is the Principality of Monaco, which has no income tax. But the total cost of living in this microstate and real estate prices are very high, so moving here is not for everyone.
Bulgaria offers an income tax of 10%, which is one of the lowest in Europe.
Many immigration programs offer to buy real estate as one of the options to acquire a residence permit or citizenship. Therefore, everyone who is considering moving to Europe through investment needs to know about property taxes in Europe.
The Austrian authorities have established a tax on real estate from 10 to 14% of its amount. The exact percentage depends on the region. Also, every year you need to pay land tax if a foreign citizen bought real estate in Austria.
In Bulgaria, the tax is set by the municipalities. In the capital, the rate is 2.5%. Citizens and those who do not have a Bulgarian passport pay the same rates. Legal services upon purchase are calculated depending on the house, and this amount is about 4% of the value of the object. The annual tax will take from you 0.1 – 0.45% of the amount of housing. But if this is the only place of residence, then the amount will be reduced by 2 times. Also, the amount of tax will be reduced if you do not live at this address permanently but come on vacation.
Residents of the UK pay tax on land from £ 400 to £ 1000 per year on which the property stands if they do not own this land. If an expensive property is owned, then the tax amounts start at £ 7,000 per year. The maximum is £ 218,000 for a building worth £ 20 million or more. If foreigners buy real estate in the territory of Foggy Albion, they have to pay tax to the British municipality.
In Hungary, taxes are almost symbolic, amounting to a few euros per year per square meter, and they are paid mainly only for resort properties. But if a resident of another country has a house in Hungary and decides to sell it, he will also pay tax.
In Greece, the type and amount of tax depend on when the building license was issued. If before January 2006, a stamp duty of 3% is paid on the purchase. If later than January 1, 2006, then VAT is paid at the rate of 23%. The amount of annual tax for city apartments is determined depending on the number of square meters, and the rate ranges from 2 to 13 euros per square meter. If we are talking about a plot in a rural area, then the area is measured in hundred parts. In this case, you need to pay from 3 to 9 euros for ten acres.
The annual property tax in Spain is 200 – 1000 euros (the amount depends on the area’s prestige). Also, the Spaniards pay a tax on income from renting houses, and the value of this tax determines the value of the object. And if you, being a foreign citizen, bought a house within Spain and it costs more than 700,000 euros, then you pay once a year a luxury tax (depending on the amount of the purchased home).
If you buy a home in Cyprus as a foreigner, then in addition to its cost, pay an additional 2 to 7% tax, then every year pay from 0.2 to 0.35% of the purchase amount. The Cypriot authorities do not tax real estate if it costs less than 170,000 euros. Obligatory taxes to the municipality every year in the amount of 50 to 170 euros.
In order for a foreigner to buy a home in Malta, they issue a permit, which costs 233 euros and pays a notary 1-1.5% of the purchase price. They also pay stamp duty of 5% of the object’s amount. Maltese are not obliged to pay an annual tax, but there is a land tax of 50 – 250 euros per year. If you rent it out, you will be taxed from 20 to 35% (depending on the profit).
Individuals do not need to pay the annual real estate tax in Monaco, but when buying a home, you will have to pay lawyers from 13 to 17% of the amount of the purchased property. At the same time, only companies with the status of a member of the Chamber of Commerce of the Principality can buy and sell real estate. Agencies cannot conduct such activities.
Where are the lowest taxes in Europe?
A number of countries have set the standard VAT at 18-19%. These are the states with the most comfortable value-added taxes in Europe for doing business:
- Cyprus (19% and 5-9%);
- Malta (18% and 5-7%);
- Germany (19% and 0-7%).
And a country that is not part of the EU is Switzerland, where the standard tax rate is 8%, and the reduced ones are from 2.5% to 3.8%.
To give a resident of any of the EU countries status, a foreigner officially registers his company on its territory. The government will provide especially favorable conditions for business if a foreign citizen participates in the program for investors. Such types of international taxation have been developed and approved by many European states in order to attract financial injections from abroad into their economies and stimulate the segments that need help most.