For several reasons, many investors seek to formalize their business in a European country legally. This region has clear legislation, financial monitoring, and reporting rules recognized worldwide. Entrepreneurs, having fulfilled all procedures when registering a business, confirm the legality of work and fulfillment of international standards, thereby ensuring a good reputation in the market and opening themselves to wider opportunities for business cooperation.
It is worth remembering that each country has the right to set its own tax rates in the EU. The most significant tax rate for business is corporate income tax (CIT, which can vary from 9% to 35%), there is also VAT (VAT, on average up to 20%), capital gains tax, dividends, etc. In some countries, there are local taxes that depend on the particular municipality or canton where the business was registered, such as in Switzerland. Many European countries have signed double tax treaties, which exempt businesses from additional costs. In some jurisdictions, such as Lithuania, there is a grace period for paying tax contributions. To optimize costs, before investing, it is worth considering the list of European countries with the lowest taxes and their requirements for doing business.
European regions with favorable taxation
When choosing the lowest tax countries in Europe to do business in, one should take into account not only the main taxes such as CIT, VAT, and social contributions but also other taxes such as environmental levies, property taxes, customs duties, etc. Resident companies pay taxes on income earned inside and outside the country.
Resident companies pay taxes on income earned inside and outside the country, while non-resident companies deduct only from profits earned inside the country.
If we compare the CIT rate, the most favorable jurisdictions in the EU are Hungary at 9%, Bulgaria at 10%, and Cyprus at 12.5%. The highest CIT was introduced by Portugal – 31.5% and Germany – 29.8%.
Latvia and Estonia have reformed their tax schemes and proposed replacing corporate income tax with a cash-flow tax model to increase economic growth and new capital formation. If a company reinvests or retains profits without paying dividends to shareholders, then no tax is levied.
Slovakia and France have the highest employer-paid social levies at 35.2% and 40%, while the lowest are in Lithuania at 1.77% and Romania at 2.25%.
Luxembourg has one of the lowest VAT rates in the EU at -16%, Germany at -19%, while in Hungary it is already -27%. The lowest VAT, in non-EU countries, remains in Switzerland -8.1% and Andorra-4.5%. The amount of VAT is regulated by the EU Directive of 2022, which states that the minimum standard rate should be -15%.
Estonia has allowed the filing of tax returns electronically, which significantly optimizes the process of interaction with state authorities. Most countries require payment of all taxes once a year, except Bosnia and Herzegovina (12 times a year).
In addition, the number of additional taxes, such as on waste, roads, sale of property, etc., varies significantly from country to country, from 3 additional tax payments in Norway to 31 in Serbia.
It is also worth not forgetting the length of registration, as is the case in Italy and Ireland, where you need to collect a lot of documents. Also, the successful ownership of businesses affects the specifics of the region, Denmark, Holland, and Estonia have more developed IT sectors, in Portugal tourism, etc.
To choose the best solution and open a business should take into account the totality of factors and features of the economic zone. Among the priority areas can be identified several countries such as Bulgaria, Czech Republic, Gibraltar, Cyprus, Estonia, and Andorra.
Bulgaria
Bulgaria is attracted by its simplicity and low costs of doing business (office rent, utilities, low salaries of employees). Bulgaria now seeks to attract IT professionals from Eastern Europe by offering picturesque sea views and ease of doing business. The country ranks 38th in the Global Innovation Index.
Bulgaria cannot be classified as a tax-free country in Europe as corporate and income taxes are 10%, dividend tax is 5%, interest tax is 10% and social tax is 19.02%. Although, they are considered to be among the lowest for European countries.
The advantages of the jurisdiction are more than 70 signed double taxation treaties, and simple and fast business registration (up to 5 days for €145). The difficulties include the fact that it is necessary to interact with government agencies in person or hire a representative, as well as with banks.
To obtain the status of a resident you need to stay in the country for 183 days and pass the guest test.
To qualify for permanent residency you need to:
- Perform an investment immigration program: invest in real estate – €312 000 create a business with investments from €256 000 invest €3 million in an already established business, and purchase €512 000 government bonds for 5 years.
- Apply for a long-term visa, then for permanent residence.
Bulgaria partially entered the Schengen zone in March 2024. This means that even having citizenship in an EU country will have to go through passport control when passing land borders.
Czech Republic
The Czech Republic, with its stable business climate and excellent location, is also actively developing the IT market. The IT industry is forecast to grow by$2.34 billion by 2028, with a growth rate of 3.64%.
The Czech market offers such conditions:
- Corporate tax although not one of the lowest income taxes in Europe, but still optimal – 19%.
- Income tax – 15% (if income is up to €6720, if the amount is higher – the rate of 23%).
- Social contributions – 24.8%.
The capital city of Prague has become the best city in Europe and the fifth in the world for those who work remotely, thanks to its architecture, comfort, developed service, and a large number of cultural events.
The Czech Republic offers the advantages of the EU zone, compliance with all directives and laws, the possibility of visa-free travel in the Schengen area, and a minimum initial capital of CZK 1.
To obtain residency you need to apply for a long-term visa, but it is quite a complicated process. There are no investment programs for citizenship, but family reunification programs have been developed.
Gibraltar
Gibraltar is a small overseas territory of Great Britain, where English law applies.
Gibraltar can be considered as a country with the lowest rates:
- Corporate tax -12,5%.
- Social security payments from 10%.
- For individuals, tax depends on income: from 7% to 29% (income less than £25 thousand), from 17%-29% if income from £25 thousand – 100 thousand.
- No VAT, on property, or capital gains.
To obtain tax resident status you must open a business, and stay in the territory for 183 days or more.
Trusts, banks, and financial organizations prefer to open their offices in this jurisdiction because of the absence of taxes on investment income.
Cyprus
Maritime climate, low tax rates, privileges of the EU zone with access to 500 million consumers, and favorable location are the main positive characteristics of Cyprus. Various funding programs and grants are open for startups.
Cyprus is included in the rating with the most optimal European tax rates:
- Corporate tax – 12.5%.
- Profit tax – 20%.
- VAT – 19%, companies with a turnover of less than €1 million can pay a flat rate instead of VAT.
- Tax on dividends, rent, interest -17%.
- Social insurance – 8.8%.
- For individuals, taxes depend on income: 20% – income over €19 thousand, 30% – over €36 thousand, 35% – over €60 thousand.
More than 55 double taxation treaties have been signed including India, UK, and USA.
Citizenship in Cyprus is hard to obtain, but it gives advantages such as the right to live, work, and move freely throughout the EU. One of the possibilities for obtaining a residence permit is the purchase of real estate worth €300 thousand or more, the purchase of a share in a company worth €300 thousand, or an increase in the company’s capital by such amount. It is necessary to confirm the legality of the origin of funds.
The difficulties of creating a business include bureaucracy, lack of IT specialists, operating costs for opening and registration, rent, and utility bills.
Estonia
Estonia has digitized 99% of its public services, is actively developing the IT sector, and attracting new specialists.Estonia has created an e-residency program, where entrepreneurs from other countries can establish a new business in Estonia with a digital certificate, sign documents for government agencies and banks with an electronic signature, submit declarations, and make requests.
According to Startup Blink Report 2023, Estonia has the highest number of startups per population – 1090 per 1 million people. The total number is more than 1500, with a turnover of about €1.5 billion per year. More than 10 unicorns are registered, including Skype, Playtech.com, Wise, Bolt, etc.
The country strives to develop the economy, that’s why there are such conditions for business here:
- Corporate tax is 20%, but if profits are reinvested, it is not paid.
- Income tax -22%.
- Social insurance -33%.
- About 40 treaties on the avoidance of double taxation have been signed.
- Minimal costs for business registration.
One of the options for obtaining citizenship is an investment of €1 million.
Andorra
Andorra can lead the ranking of what countries have the lowest taxes since it introduced income tax only in 2015.This jurisdiction provides residence permits for investors (€600 thousand) and company founders (living for more than 6 months and a deposit of €15 thousand).
The main advantages of Andorra:
- Income tax of 10% is only payable if income is over €40k, up to €24k -0%.
- Corporate tax from 0% to 10%.
- When selling cryptocurrency – up to 10%.
- VAT – 4.5%.
- No tax on property, gift, inheritance, or wealth.
- Minimum initial capital for legal entities – €50 thousand.
The Principality provides a high standard of living, a visa-free regime with Spain and France, and confidentiality of banking transactions.
Summary
Doing business in Europe is not the same as paying high taxes. Many of the countries aimed at developing IT start-ups and attracting technical specialists create optimal conditions for work and investment in this sector.
Also, small states, and principalities, interested in investing in real estate or securities of the state, are ready to provide PJM or reduce tax rates.
When choosing a country to establish a business or move to live in, it is better to take into account not only the low tax rates but also a combination of other factors such as climate, service, developed online services, the cost of utilities, travel, and additional local fees.