Comparing Corporate Tax Systems in Europe, 20223
On October 19, we released the International TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
Competitiveness Index 2023, a study that measures and compares the competitiveness and neutrality of all 38 Organisation for Co-operation and Development (OECD) countries’ tax systems. In the coming weeks, we will illustrate how European OECD countries rank on each of the five components of the Index: corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
es, individual taxes, consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible.
es, property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
es, and cross-border rules. Today, we look at how European countries’ corporate income tax systems compare within the OECD.
Unlike other studies that compare tax burdens, the Index measures how well a country structures its tax code. A tax code that is competitive and neutral promotes sustainable economic growth and investment and raises revenue for government priorities with minimal distortions. Our corporate income tax component scores countries not only on their corporate tax rates but also on how they handle net operating losses, capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company’s long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances.
s, inventory valuation, and allowances for corporate equity; whether and to what extent distortionary patent boxA patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns.
es and research and development (R&D) tax incentives are granted; the application of digital services taxes; and the complexity of the corporate income tax.
Click here to see an interactive version of OECD countries’ corporate tax rankings, then click on your country for more information about its tax system’s strengths and weaknesses.
Latvia and Estonia have the best corporate tax systems in the OECD. Both countries have a cash-flow tax on business profits. This means that profits only get taxed when they are distributed to shareholders. If a business decides to retain or reinvest its profits instead of paying dividends to shareholders, there is no tax on such profits.
In contrast, Portugal has the least competitive and neutral corporate income tax system in Europe (Colombia ranks the lowest in the OECD). At 31.5 percent, Portugal levies one of the highest combined corporate tax rates on business profits, including multiple surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services.
es. Only limited net operating losses can be carried forward and carried back; purchases of machinery, buildings, and intangibles cannot be fully expensed.
To see whether your country’s corporate tax rank has improved in recent years, check out the table below. To learn more about how we determined these rankings, read our full methodology here.
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