To attract foreign investment and encourage the growth of companies already in the country, several European countries have corporate taxation to meet this objective. Each country has its own tax structure, with tax rates and deductions that can significantly influence business profitability.
According to OECD data, the average corporate tax rate in Europe is around 21.7%, although there are wide variations between countries. In this article, you will learn about corporate tax in Spain and Germany, which has higher tax burdens.
Is the UK an attractive destination for businesses?
One of the most attractive destinations for investment and professional growth has been the United Kingdom. Thanks to its flexible regulatory framework and strong financial system, many foreigners were betting on this country.
However, after Brexit and recent changes in its tax legislation, this has affected the perception of companies from outside the UK and fewer and fewer are coming to the country to invest.
Corporate income tax rate in the UK
If you are thinking of going to the UK to invest, you should bear in mind the following considerations:
Current UK corporate tax rate
Currently, in the UK, the corporation tax rate is 25%, increased in 2023 from 19%. The increase was prompted by the need to address the economic challenges following the pandemic and Brexit.
How recent changes impact UK companies
This increase has been a watershed in how foreign companies look to the UK for investment, reducing their competitiveness against other European countries with lower tax rates. However, the government has realized this and has implemented some incentives to encourage investment in the country.
UK tax incentives and deductions for businesses
The UK offers several tax deductions and tax reliefs, such as the ‘Super Deduction’, which allows companies to deduct 130% of their investments in machinery and equipment.
Corporate tax rates in major European economies
If you are thinking of investing in a European country, here is a breakdown of the top investing countries:
Germany – 29.9% (including trade tax)
Germany applies a combined corporate tax rate of 29.9%, taking into account both the federal corporate tax and the business tax which varies according to the region.
France – 25% (standard rate, with some reductions for SMEs)
France has reduced its tax rate in recent years, bringing it to 25%. Reduced rates are available for small and medium-sized enterprises (SMEs), encouraging business growth.
Spain – 25% (lower rates for startups and small businesses)
In Spain, the general corporate tax rate is 25%, although new companies can benefit from a reduced rate of 15% during their first two years of profit-making activity.
Italy – 24% (plus regional tax, bringing total burden to ~27.9%)
Italy applies a general rate of 24% plus a regional tax which brings the effective tax burden to approximately 27.9%.
Estonia – 20% (unique system with tax deferral on reinvested profits)
Estonia offers a unique system in Europe: companies only pay tax when they distribute profits, which encourages reinvestment and business growth.
UK vs. Europe: Is the UK rore or less expensive for businesses?
Although the UK has a high inheritance tax, it is a good country to invest in because of the incentives it offers. However, countries such as Estonia and France offer more attractive conditions for reinvestment and business growth.
Other business taxes to consider in Europe
When it comes to international tax planning advice, you will find that there are other taxes to consider in Europe.
VAT rates and their impact on businesses
Another tax that companies in Europe have to pay is VAT. In Europe, rates vary from 17% in Luxembourg to 27% in Hungary.
Social security contributions and employer costs
Social security contributions also affect the cost of operating in different countries. In France, contributions can exceed 30% of gross salary, while in the UK they are lower, at around 13.8% for employers.
Dividend and capital gains tax implications
These taxes also vary depending on the European country where you choose to invest. For example, in Germany, dividends are subject to a 26.38% withholding tax, while in the UK the maximum rate is 39.35%.
Now that you are more or less clear about the taxes you have to face in different European countries, which one best suits your needs?