Ranking – the best countries to run a company in Europe

Romania, Hungary and Croatia are the 3 countries with the most favourable conditions for small and medium-sized enterprises (SME) in Europe. They were ranked among the 10 countries that offer the lowest taxation on business income in the European Union.

Low income tax rate is important for entrepreneurs but taxation of dividends is also important. Benefits should also include an affordable overall tax scheme for a company, low levels of bureaucracy, time-efficient tax and reporting settlements, and low risk of public abuse.

Ranking
final
Country CIT
(lowest rate)
Dividend tax
(lowest rate)
Bureaucracy
(least time)
Corruption
(lowest level)
1 Romania 1 2 3 9
2 Hungary 2 1 6 8
3 Croatia 5 4 4 7
4 Bulgaria 4 3 10 10
5 Poland 3 8 9 5
6 Ireland 6 9 2 3
7 Estonia 10 5 1 2
8 Czech Republic 8 6 7 6
9 Germany 7 10 5 1
10 Slovenia 9 7 8 4

The above ranking is based on the analysis of 10 selected European countries based on the following criteria:

  • tax rates (CIT and dividend withholding tax);
  • dividend tax;
  • estimated time spent on bureaucracy;
  • level of corruption in the country.

Lowest tax rates for companies in the EU

Low tax rates are one of the main criteria for SMEs. The lower the taxation in a given tax jurisdiction, the more attractive it will be for an entrepreneur. Relatively low tax rates operate in 10 EU countries.

Country CIT rate VAT
(rate
standard)
Tax
dividend
(WHT)
Selected:
benefits and reductions/
comments
Turnover & lt; €1 million Turnover & gt; EUR 1 million
Bulgaria 10% 20% 5% – tax exemptions in municipalities with high unemployment rates

– lower tax for gambling companies
(8-12%)

Croatia 10% 18% 25% 10% – 50% VAT reduction – for those investing in the development of free economic zones (at least HRK 1,000,000)
Czech Republic 19% 21% 15% – friendly system of allocating expenses to tax costs
– high social security costs
Estonia 0%
(without dividend payment)
20%
(upon payment of dividends)
18% 14% – VAT refunds up to 1 working week
– no social security contributions
Ireland 12.50% 23% 25% – higher CIT rate of 25% for investment income

– convenient, uncomplicated tax regulations

Germany about 15.825%
(effective rate with solidarity surcharge 5.5%)
19% 25% – additional tax Gewerbesteuer – amount set by municipalities, exempt up to 24 500 EUR

– Gewerbesteuer does not apply to liberal professions

Poland 9%
(revenue & lt; EUR 2 million)
19%
(revenue & gt; EUR 2 million)
23% 19% – frequent changes in tax regulations
– lower CIT for small entrepreneurs
Romania 1% or 3%
(on revenue)
16%
(on income)
19% 5% – 1% tax on income with at least 1 employee
– technology companies exempt from taxes on profits in R&D activities
Slovenia 19% 22% 15% – higher depreciation rate on machinery
– favourable investment tax relief
Hungary 9%
(revenue < EUR 1.68 million)
19%
(revenue > EUR 1.68 million)
27% none – no withholding tax on dividends
– high VAT

Income (or revenue) tax rates among selected countries range from 1% to 20%. However, this is only one point to evaluate the profitability of doing business in a specific country. Actual savings on fiscal burdens will depend on several aspects, including but not limited to the following:

  • actual or projected revenues;
  • the amount of costs arising in the business and the possibility of deducting them from revenue;
  • the available tax exemptions and reductions in the country;
  • the amount of withholding tax on dividends paid.

Where can you save on taxes?

Let’s consider an example to understand the amount of total tax burden in each country.

Assuming that the company’s annual revenue amounted to 500 000 EUR, the costs amounted to 250 000 EUR and the dividend paid amounted to EUR 100 thousand, the tax due would be as follows:

Country CIT
(in thousands EUR)
Dividend tax
(in thousands EUR)
Total
(in thousands EUR)
Romania 5 5 10
Hungary 22,5 22,5
Bulgaria 25 5 30
Croatia 25 10 35
Poland 22,5 19 41,5
Ireland 31,25 25 56,25
Czech Republic 47,5 15 62,5
Slovenia 47,5 15 62,5
Estonia 50 14 64
Germany 39,5625 25 64,5625

When we compare tax burdens in various countries to the taxes paid in Poland, we can see that businesses can save from EUR 6 thousand to even EUR 31 thousand annually.

The CIT rate in Poland has been reduced to 9% of income since 2019. This tax is comparable in its height to those functioning in Bulgaria or Croatia. However, Poland has a relatively high tax rate on dividends (19% +4% of solidarity charge over ca. 222 th. euro). Among the countries mentioned above, only Germany and Ireland pay a higher tax (25%). Withholding tax on dividends does not have to be paid at all in Hungary. In Romania and Bulgaria 5% tax has to be paid on such payment.

Taking into account the total fiscal burden from CIT and dividend tax, Romania, Hungary and Bulgaria provide the least.

Time spent on bureaucracy

One of the additional aspects of assessing the favourable tax system of a given country is the estimated annual time spent on so-called bureaucracy. Information on the time spent on tax settlements and payments in European Union countries can be found in the Doing Business reports. The current ones include data from 2020.

Country Annual time (h)
Estonia 50
Ireland 82
Romania 163
Croatia 206
Germany 218
Hungary 227
Czech Republic 230
Slovenia 233
Poland 334
Bulgaria 441

The least amount of time was spent on tax returns in Estonia and Ireland. In Romania, this time was two and three times longer, while it did not exceed 170 hours per year. Bulgaria turned out to be the leader in bureaucracy among the mentioned countries with more than 400 hours per year spent on tax settlements. Poland is just behind it – over the last year entrepreneurs there spent over 300 hours on tax issues.

Level of corruption

Doing business can also be affected by the level of corruption in a country. Corruption exposes the business to increased unexpected costs, which will reduce sales margins. It also makes it difficult to “hide” such events in the financial results.

The report on the level of corruption in the world was prepared by Transparency International. It awarded points from 0 to 100 for each country. The higher the score, the lower the level of corruption in a given country.

Country Points
(lowest level of corruption)
Germany 80
Estonia 75
Ireland 72
Slovenia 60
Poland 56
Czech Republic 54
Croatia 47
Hungary 44
Romania 44
Bulgaria 44

The lowest risk of corruption is in Germany, Estonia and Ireland. It can be noted that countries with the lowest tax rates (up to 10%) have a higher level of corruption – below 50 points. Four of the above-mentioned countries were assessed in this way: Croatia, Hungary, Romania and Bulgaria.

Summary – choice of tax jurisdiction

Making a decison on a location to start business depends on many factors.

If an entrepreneur wants the lowest possible fiscal burden, it is worth checking the affordability of the tax legislation. In addition, low taxes are often found in countries where there is a higher risk of public scams. Sometimes slightly higher tax rates may also be acceptable. For example, a particular state may provide an ample opportunity for business deductions, in addition to little bureaucracy.

Romania taking the first place in the ranking seems to be an optimal choice. Among the above countries, none of them offers revenue or income tax at 1%. There is a need to pay tax on dividends, although usually at a rate two to five times lower than in many countries.

The total amount of savings on the fiscal burden in Romania is significant during the year. The time spent on bureaucracy is also one of the lowest among analysed countries. The biggest drawback seems to be the risk of corruption occurring in this country, but propablity that the risk materializes is still low for SMEs. However, it should be taken into account that this phenomenon occurs in every country. The threat of corruption cannot be completely eliminated anywhere.

If you are interested in establishing a company in Romania contact us. Our team has already established nearly 100 companies in Romania.

Low income tax EU states

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