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Imagine how many great business ideas were never realized due to the fear of their creators. Reasons for this fear may differ from case to case.
The most common one is an unfavourable business atmosphere in the country of residence of the creator. These can be a high level of corruption, the complexity of running a company, and unfavourable taxation for business.
Globalization has simplified the process of opening a business abroad. You can choose any country with an attractive business environment to establish a company. This article aims to highlight countries with the lowest corporate tax rates in the world.
Cyprus is an attractive destination for businesses because of its favourable corporate taxation. The corporate tax rate in Cyprus is one of the lowest in Europe, at 12.5%. This rate applies to all profits generated from activities in Cyprus, regardless of where the company is registered.
Additionally, there are several other incentives available for businesses operating in Cyprus. A reduced rate of 10% is applied to profits from certain activities. According to the special tonnage tax regime, EU companies operating in the shipping industry are excluded from direct taxes in Cyprus.
Furthermore, dividends received by companies from other EU countries are exempt from taxation.
Cyprus has a broad network of double taxation treaties with other countries. It helps to reduce or eliminate double taxation on income earned abroad.
The business environment in Cyprus is generally positive and conducive to business growth. The country has a well-developed infrastructure, an educated workforce, and a stable political and economic environment.
The government of Cyprus has implemented some reforms to improve the business climate. It includes reducing bureaucracy and streamlining the process of setting up businesses.
According to the 2022 International Tax Competitiveness Index Rankings, Estonia has the most favourable taxation system for businesses in the world.
A zero corporate tax rate is applied to undistributed profit. The rate for companies that pay dividends to shareholders at the end of the taxable year is 20%.
Estonian legislation also provides for a reduced 14% rate. It is applied if both of the following conditions are met:
- The company distributes profit regularly;
- Distributions do not overreach the average taxable dividend amount calculated during the last three years.
Such corporate taxation allows directing all profits to the company’s growth without paying taxes. That is why Estonian corporations are growing fast.
As the Estonian company pays corporate tax only on distributed profit, there is no need to pay dividend tax in most cases. The only exemption – is when the company distributes profit under a reduced 14 % rate to individuals. Then a 7 % withholding tax (WHT) on dividends is applied. Please note that separate WHT on dividend payments to legal entities is not used in any case.
Despite preferences, Estonia is reputable jurisdiction without offshore or tax heaven status.
Corporate income tax in Switzerland is levied at the federal, cantonal and communal levels. The federal corporate income tax rate is fixed at 8.5%. Cantonal and municipal taxes vary in different locations. Depending on the settlement, the Swiss company pays between 11.9% and 21.6% corporate tax. The average rate in Switzerland is approximately 13%.
Income from dividends received by an individual is taxable under one of the following regimes:
- General taxation. Dividends paid to residents and non-residents are subject to a 35 % WHT. As a result, dividend income is included in regular gross income and taxed at the general rate.
- Privileged taxation. Qualified investors owning 10% or more of the authorized capital are entitled to a discount for the taxation of dividends. The dividend tax rate for qualified investors is 70% of the federal rate and 50% to 80% of the cantonal rate.
- Tax-free. Dividends are generally paid from undistributed profit. However, dividends paid out of reserves from capital contributions are tax-free for individuals. The number of dividends paid from the reserve cannot exceed half of the total amount of dividends. This rule was introduced in 2020 to avoid a full exemption from dividend WHT.
Ireland’s standard corporate tax rate is 12.5%, for which most Irish companies fall.
The Irish government has also introduced several measures designed to make Ireland an attractive destination for investors. It includes a range of reliefs, such as the Knowledge Development Box and the Start-Up Relief.
The Knowledge Development Box (KDB) stimulates innovation by providing reduced corporate taxation to profits derived from qualifying intellectual property assets. Qualifying assets are those which are produced from Research & Development (R&D) activities. It includes a computer program development, an invention protected by a patent, or an intellectual property certified by the Controller of Patents but not patented yet. The KDB provides a reduced rate (6.25% instead of 12.5%) payable on such profits arising from qualifying IP assets.
Start-Up Relief is a reduction of the corporate tax for the first five years of operation. The relief can be applied to the profits from the new trade and to the chargeable gains made on assets used in the trade. Companies may be entitled to full relief if their annual profit is €40,000 or less, and partial relief if it is between €40,000 and €60,000.
In conclusion, Ireland is an attractive destination for companies looking to invest in Europe with a range of taxable reliefs and a competitive rate of taxation.
Hungary offers a competitive corporate taxation system, with a standard rate of 9%. After reducing the corporate tax from 19% to 9% in 2017, Hungary became the lowest-income tax country in the EU. This rate is applied to all companies headquartered in the country, regardless of their size or business type.
Companies that receive income exclusively from royalties are taxed at a rate of 4.5%. This rule applies if the company contributed to the creation of intellectual property.
Hungarian companies are also entitled to pay a local business tax (LBT). Each municipality determines its LBT rate. In any case, it cannot extend 2% of the taxable base. The tax base for LBT is the net sales revenue decreased by the cost of goods sold, the cost of intermediary and R&D services and material costs. From January 1, 2023, the minimum amount of LBT is HUF 50,000 (about EUR 130).
As an EU member state, Hungary provides some incentives. One of the most important is the development tax allowance, which can reduce corporate taxation by up to 80%. This reduction applies considering the amount, the industry, and the region of the investment.
In addition, there are further tax incentives for companies that support sports and film-making.
Dividends received by a Hungarian company are exempt from corporate taxation. The only exception is when dividends are distributed by a controlled foreign company (CFC). Dividends paid to a natural person are subject to a 15% WHT. The dividend WHT rate for foreigners may be reduced by a Double Taxation Treaty.
Hungary is a suitable solution for investors seeking access to the EU market while receiving tax benefits.
Lithuania has competitive corporate taxation with a rate of 15 per cent, significantly lower than the EU average of 21.2 per cent.
Corporate tax is applied to the company’s profits, which includes income from commercial/trading activities, capital gains, passive income, and income from a CFC of a Lithuanian company.
Lithuanian legislation provides preferences for micro-companies. Micro companies are subject to a zero corporate tax rate in the first year of operation and a 5% rate in subsequent years. The following conditions must be met to obtain the micro company status:
- Average number of employees doesn’t exceed 10;
- Annual income of up to EUR 300,000.
A reduced 5% corporate tax rate also applied to R&D income.
The following dividend WHT rates are applied:
- Dividends received by a Lithuanian company are taxed at a rate of 15%. Dividends are tax-free if the parent company owns at least 10% of the subsidiary for at least 12 months.
- Dividends received by a resident natural person are subject to a 15% WHT.
- The withholding tax applied to dividends paid to a foreign company is 15%. The reduced WHT rate may apply under Double Tax Treaty or when an EU parent-subsidiary directive applies.
- Dividends paid to foreign individuals are taxable by a 15% WHT rate unless it is reduced under a Double Taxation Treaty.
Lithuania offers many advantages for businesses looking to expand into Europe or set up operations in the region. It also has some investment funds to help foreign investors get started in Lithuania.
Bulgaria has one of the most attractive corporate taxation systems in Europe. The corporate tax rate is only 10%, which is one of the lowest in the EU. This rate applies to all corporate profits, regardless of the size of the company.
Companies registered in Bulgaria and ones operating in Bulgaria through a branch must pay corporate tax in Bulgaria. Besides, companies without commercial activities in Bulgaria may also be subject to corporate taxation. It occurs when a company receive income from transactions or the rental of property in Bulgaria.
Companies engaged in certain types of activities are not subject to corporate tax. Instead, they are required to pay an alternative tax. For example, companies involved in gambling activities pay a gambling tax. It is calculated on the number of bets placed or the number of machines operated. For them, the rate is 15% of the bets for each game or the value of each machine.
The following taxation rules are applied to dividends:
- Dividends paid to a Bulgarian company and companies registered in the EU/EEA are not subject to taxation.
- Dividends paid to individuals and non-resident companies are taxable under a 5% WHT. Other rates may apply to citizens of countries which has concluded a Double Taxation Treaty with Bulgaria.
As one of the candidates for joining the EU, Montenegro implemented a tax reform at the beginning of 2022. Under the new tax regime, a progressive corporate tax rate was introduced in Montenegro. Depending on the company’s profit, a tax rate between 9% and 15% is applied under the following conditions:
- The 9% rate applies if the company’s profit does not exceed EUR 100,000.
- The 12% rate applies to the profit between EUR 100,000 and EUR 1,500,000. As a result, the company should pay EUR 9,000 + 12% of the profit within the above limit.
- Finally, a company whose profits exceed EUR 1,500,000 must pay 177,000 euros + 12 per cent of the profits that exceed the above threshold.
There are some exemptions. For example, a Montenegrin production company is entitled to a tax incentive for eight years if it operates in an economically underdeveloped region. The maximum amount of this exception cannot exceed EUR 200,000. This incentive does not apply to companies involved in agricultural production, transport, steel production, shipbuilding, catering and other principal industries.
Dividends paid between residents are subject to a 15% WHT. For foreign individuals and companies, the WHT on dividends may be reduced under Double Taxation Treaty.
Overall, the business environment in Montenegro encourages foreign direct investment due to its open economy, stable political environment, and EU membership perspectives.
In conclusion, low-tax countries are attracting more businesses and investors, providing a better environment for economic growth. The countries highlighted in this article offer low corporate tax rates, tax reliefs, and a stable business environment. By providing incentives for innovation and reducing bureaucracy, these lowest-income tax countries have become some of the most attractive destinations for businesses looking to invest in Europe. As globalization continues to simplify the process of establishing a company abroad, it is crucial to consider a country’s tax system and business environment before investing. Do not forget to engage an experienced fintech law firm who will assist in choosing a favorable jurisdiction that will meet your business goals as much as possible.