All people and companies making money in a European country have to pay taxes. A foreign national becomes a tax resident in a European country after living there for more than 183 days. Consequently, foreigners living in Europe permanently also have to pay taxes there. Twenty-seven European countries form the European Union but each national state sets its own tax rates. Treaties on double taxation avoidance are in force if they exist.
Even though the EU does not have a uniform law that would regulate the taxation matters, it passes relevant directives from time to time. Below we discuss the types of taxes charged in European countries, the difference between personal and corporate taxes, and the requirements to those foreigners who would like to obtain tax residence in Europe.
Before we go on, however, we would like to give you a teaser. The table below lists the European countries that charge the lowest taxes:
| Tax | Rate, % | Country |
| Personal income | 10 | Bulgaria and Romania |
| Corporate income | 9 | Hungary |
| Standard VAT | 16 | Luxembourg |
Please follow the link if you want to find out about the European countries with the highest taxes.
Types of taxes in Europe
Tax rates and taxable incomes are different in different European countries. The EU legislation sets some harmonized tax rates such as excises, for example. Payment of taxes is conditioned by the payer’s status and the origin of his/ her income. Companies pay taxes directly to the internal revenue agency of the country where they are located. Individuals can pay taxes in person but if they are salaried workers, the employer pays their taxes on their behalf. Tax scales can be fixed or progressive.
Types of taxes payable in Europe:
- Personal income tax. The tax is charged in the country where the person makes an income or in the country of the person’s tax residence. If the person works in Europe but he/ she is not a tax resident there, the person’s income made in Europe is taxed but his/ her other incomes made elsewhere are not.
- Corporate income tax. A company is taxable in the country where it is registered and where it performs business operations. National governments set the tax rates. A resident company in Europe is taxed on its income regardless of where it is made. A foreign company is taxed only on the income made in the European country.
- VAT. In accordance with EU legislation, all member states have to charge at least 15% as the standard VAT and at least 5% as the discounted VAT. National states are free to set their own VAT rates as long as they keep within the limits. The VAT is included in the price of goods and its amount has to be indicated in the receipt.
- Harmonized excise duties. These are indirect taxes that have to be paid by the ultimate consumer. In accordance with the EU legislation, excises are charged on alcohol, tobacco products, and electricity. The EU sets the minimum rates and each country is free to raise it.
- Social contributions. These can be obligatory or voluntary. People make social contributions to have pensions, unemployment compensations, and paid sick leaves. An EU citizen is covered only in one country, normally, in the country where he/ she works. However, if an unemployed person relocates to another EU country, he/ she is entitled to keep getting unemployment compensation from the country that he/ she has left.
In some European countries, additional taxes are charged such as ecological taxes and transport taxes payable by car owners. In Austria, Germany, and Finland, parishioners have to pay a church tax.
Personal taxes in Europe
As a rule, it’s enough to stay in a European country for 6 months to become a tax resident there. In some cases, however, the person has to have residential accommodations and some ‘vital interests’ in the country to qualify for tax residency. To let people avoid paying taxes in two countries at a time, the EU member states have signed treaties on avoidance of double taxation. In addition to that, many EU countries have similar agreements with national states outside the Union and outside Europe.
What income is subject to personal taxes?
Not all types of income are taxed in the EU. For instance, if a person sells old clothes or old furniture, his/ her income is not going to be taxed in France. Similarly, a private tutor making less than 305 EUR per month is not taxed in the country. The following types of income are taxed in Europe:
- Salary. Salaries are most often taxed at progressive rates in Europe. The personal income tax is the lowest in Romania and Bulgaria – 10%. Residents of Finland pay the personal income tax at the highest rate of up to 56.5%. As a rule, the employer is responsible for paying the tax on behalf of the employee.
- Inheritance and gifts. Some European countries do charge taxes on these items while others do not. Sometimes, inheritance and gifts are taxed at the personal income tax rate applied in the country. The tax rate is the smallest in Bulgaria (0.4%) and it is the highest in some regions of Spain (87.6%). The tax has to be paid by the person acquiring inheritance or a gift.
- Dividends. You will find the lowest dividend tax in Greece: the rate is 5%. The dividend tax rate in Denmark is 42% and it is the highest rate in Europe. The tax has to be paid by the person acquiring dividends.
- Capital gains. In Belgium, Czech Republic, Luxembourg, Slovakia, Slovenia, and Switzerland the tax is charged only in some cases. The lowest capital gains tax rate is in Greece (15%) and the highest rate is in Denmark (42%). The tax has to be paid by the person acquiring capital gains.
Corporate taxes in Europe
Resident companies are taxed on their global income while foreign companies have to pay taxes only on the income made in the European country where they operate. Commercial companies have to make the following types of payments in Europe:
- Corporate income tax and VAT. Profits of all companies are taxed in Europe. The lowest corporate income tax rate is in Hungary (9%) and the highest is in France (25%). In addition to that, business companies have to pay VAT. The lowest tax rate is in Luxembourg (16%) and the highest is in Hungary (27%).
- Social contributions. Also referred to as social taxes, social contributions are payable by all employers in Europe. The lowest social tax rate is in Lithuania (1.77%) and the highest is Slovakia (35.2%).
- Customs duties. Quite a few European countries are members of the Customs Union, which makes them exempted from customs duties when trading with each other. However, if a European company imports goods from a foreign country, it has to pay customs duties.
As you can see, the tax rates differ significantly in different European states and this factor should have a bearing on your choice of the country if becoming a tax resident in Europe is on your mind.
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