Taxation

Pan European tax

European Taxation

Each country has its own Fiscal strategies allowing them to support their population, some are feudal in the extreme others promote entrepreneurial growth, in general taxes are raised as a way to protect the country look after the population and promote growth to provide more taxes and possibly lower taxes for the population. We have looked at the major economies in Europe.

In this article we will be highlighting the tax details in the following European countries:

United Kingdom

Switzerland

Spain

France

Germany

The United Kingdom is the only country that operates tax on a remittance system in Europe, all others operate on a worldwide earnings system. This applies to income come received from all sources and corporate income. Switzerland has several different approaches to tax for the individual and corporate, but they operate on a worldwide income basis.

Apart from the UK the rest of Europe and the majority of the countries in the world operate their Fiscal year on a calendar basis, that is 1st January to 31st December

The changes in the rates will be adjusted as and when notified

 

United Kingdom

The United Kingdom operates tax on a remittance-based system, this means only those who live and work in the UK who are citizens are subject to income tax on their UK earnings and amounts earned overseas which are remitted to the UK. If the individual has a property in the UK but resides overseas they are not subject to tax on the overseas earnings, however, if they rent out the property, they will be subject to tax is the income exceeds the allowances. On this basis, the individual is considered and must apply for the status of “Resident, but not ordinarily resident for tax purposes”. Resident citizens who have overseas businesses, providing they do not remit those profits back to the UK will not suffer tax, hence why many English-owned companies are Tax Haven based in the Caribbean Islands and other Tax friendly states. UK corporations based in the UK may not have their overseas income subject to UK corporation tax, this must be applied for in advance. This explains why the UK has many a thriving tax consultancy, enabling their clients to reduce their tax liabilities using the UK tax laws.

The UK Fiscal year though 12 months commences on 6th April running through to 5th April the following year and is due to historical events which the UK politicians will not change the Law.

The UK operates a progressive tax rate with minor variations in Scotland where the rate is 1% less than the UK.

 

Personal Income Tax rates

Tax Rate 0% 20% 40% 45%
Tax Bank UK GBP 0-12,750 12,751-50,270 50271-150,000 Above 150,000

The 0% tax rate and the Tax Band is the personal allowance everyone can claim against their earnings, other allowances are as below

  • Minimum Married couples’ allowance                                      £ 3,640
  • Personal allowance for each person                                        £12750
  • Married couples’ allowance                                                      £ 9,415
  • Transfer Tax Allowance                                                             £ 1,260

A married couple on the basis of the above, a single person earning £12,750 has no tax liability, a married couple or a long term partnership would not pay tax on earnings of £34,952, and is personal allowance for each plus the maximum married allowance, The Transfer tax allowance is where one party in a marriage or partnership has an excess of allowances and the other does not, the excess is then transferred to the party which has an excess tax payment,

National insurance Contribution, a tax to cover the costs of running the National Health Service, medicines outside of hospital must be paid for at a reduced rate. It also supports the UK State Pensions provided the contributions have been over 35 years. The calculation of NIC is complex.

  • Primary threshold                                                                                  £190 weekly
  • Lower earnings limit – NIC is not payable below this                          £123 weekly
  • Upper earnings limit – Nic is not charged above this limit                  £967 weekly
  • Secondary threshold                                                                             £175 weekly

Percentage of NIC payable

  • Married women’s rate between primary and upper earnings limit      7.1%
  • Employers rate above secondary threshold                                         15.05%
  • Between Primary threshold and upper earnings limit                          13.25%
  • Above upper earnings limit                                                                     3.25%
  • Class1A rate on employer-provided benefits                                        15.05%
  • Married women’s rate above upper earnings limit                                3.25%

 

Self Employed Class 2 and Class 4 NIC’s

  • Class 2 weekly amount (share Fishermen)                                           £3.80
  • Class 2 exceptions limit                                                                          £6,725
  • Class 4 % rate between upper and lower limit                                      10.25%
  • Class 4 lower profits Limit                                                                      £9,880
  • Class 4 upper profits limit                                                                       £50,270
  • Class 4 Rate above upper profits                                                           3.25%
  • Class 2weekly amount                                                                            £3.15
  • Class 2 weekly amount (Volunteer Development Workers)                 £6.15

 

The NIC Rates for the year ending 5th April 2023 have a surge of 1.25% included for all classes of NIC’s.                            

  • Corporation Tax main rate for year ending 5th April 2024                     25%
  • Corporation Tax Main Rate for year ending 5th April 2023                    19%
  • Small Profits rate for the year ending 5th April 2024                              19%

 

Corporation Tax Bands

For the tax year ding 5th April 2023, the tax rate is 19% regardless of the profits, for tax year ending 5th April 2024 the bands are

  • Net taxable profits £50,001 to £250,000 the rate will taper upwards to 25%
  • Net taxable profits £0 to £50,000 corporation tax rate will be 19%
  • Net taxable profits above £250,001 will have tax applied at 25%

 

Tax Allowances against Income

Apart from the above-mentioned tax allowances, there are other allowances that can be claimed, there are many. However, if Boomfii is engaged we can advise at the time, we have not covered capital gains taxes and allowances, dividends tax, and a raft of tax allowances and benefits which are claimable.

 

Switzerland

Switzerland is the Helvetic confederation of 26 states know as cantons, with Uri being one of the first to join in 1291 and Jura the last in 1979. The confederation has a population of about 8.8 million, four languages and English being the widely spoken one, despite this the confederation has been the most successful in the world. There is a federal tax system supported by Cantonal and communes., each of which have a different personal tax rate. Switzerland is a direct democracy country where the population vote on major policy changes such as tax rate and immigration. All residents are taxed on a worldwide basis from all sources, however, there are exceptions:

Residents who do not have earnings in Switzerland are not remitted back can claim 100% tax allowance, but this must be applied for.

Lump-sum taxation, is in two parts and is based on aggregated estimated lifetime income and one-off tax payment can be paid, or an annual lump sum, high-income earners benefit, and the annual tax rate can be very low.

Passive income for Corporations and individuals is on the basis your income is derived outside of Switzerland for individuals. Corporations must demonstrate they do not have a business in Switzerland. Passive income has a very low tax rate in the region of 4% and is negotiable.

A non-Swiss citizen with earnings overseas, not remitting them to Switzerland can use the rental value of the house or apartment to calculate their taxes. Again, has to be applied for.

The Swiss tax year is from 1st January to 31st December

The federal government levies a graduated rate of 0.77% on an income of Euros 29,800 to 13.5% on incomes above Euros 755,200 for the tax year ending 31st December 2022. But to this will be added the cantonal and commune taxes which will take the rate up to about 40%, on salaries above Euros 755,200.

  • Married Allowance is a Federal Allowance and is set at CHF 2,600
  • Allowances against tax depend on the canton where the individual lives and are:
  • Third Pillar – is the contributions company and private pensions
  • First Pillar – is the unemployment scheme and the state pension and basic health care
  • Social security falls into 3 segments known as Pillars
  • Second Pillar – is the occupational pension part of the state pension
  • The above three can be claimed and deducted as a tax expense, but you must ask for the forms and complete them.
  • Allowance in the cantonal tax for a maximum of CHF 13,000 of the federal tax paid,
  • Child allowance is a federal allowance for each child under 18 or in full-time education CHF 6,500

Switzerland does not have a National Health System; the individual must purchase medical insurance from a reputable supplier. Medical insurance can be offset against your income and depends on various conditions, but the individual must complete the appropriate forms for the claim to be made. For companies, it is allowable against corporation tax.

Swiss Vat standard rate is 7.5% a lower rate for hotels is 3.7%, for food, books newspapers the rate is 2.5% for medical insurance, educational and cultural services VAT is 0%.

  • Property Tax is in essence a land tax and depends on the commune where the individual lives and is a maximum of % of the property value
  • Church Tax is a voluntary tax, and the rate depends on the canton and the commune.
  • Other Taxes include dividend tax, wealth tax, capital Gains/Inheritance tax, and several others.

Under Swiss law travel and food allowance is paid by the company and is offset against corporation tax

Swiss Corporation tax federal rate is 8.5% cantonal and commune taxes range between 11,9% and 21.6%, but due to allowances can be much lower.

If the individual is resident does not earn a salary but receives an income will pay tax on the basis of a lump sum, or on the rental values of the property and can claim passive income, passive income also applies to corporations.

Boomfii can give advice as to the approximate income tax you will pay, this also depends on what the federal and cantonal system allows.

 

Spain

Spanish Taxes are based on worldwide income from all sources and are applied to citizens and residents, whilst taxes on earnings are deducted monthly, they are paid over on a quarterly basis.  There are rules relating to those who are temporary residents living in Spain and permanent residents and Spanish Citizens. Spanish income is comprised of All earned income excluding  Taxable income from savings, profits that are not an asset transfer income which the receiving company’s equity exceeds the transferring company capital..

Under the law if you have an earned income less than Euros 22,000, you do not need to complete a Tax return as the Employer does this for you, as a self-employed person. Other income exceptions are a net oncome after allowances of Euros 8,000, Bank investment of less than Euros 1,600, rental income of less than euros 1,000.

Tax Rates and bands on earned income

Euros from Euros to Federal Tax % Regional Tax % Total Tax %
0 12,459 9.50 9.50 19.00
12,451 20,200 12.00 12.00 24.00
20,201 35,200 15.00 15.00 30.00
35,201 60,000 18.50 18.50 37.00
60,001 300,000 22.50 22.50 45.00

 Personal Allowances against personal income tax

Spanish personal allowances depend on age, disability number of children ling with you at your home location and aged parents who need support.

Allowance Details  Allowance Euros
Single person under 65 years of age 5,550
Single person between 65 years & 5 years 6,710
Single person Above 75 years of age 8,100
1st Child 2,400
2nd chid 2,700
3rd child 4,000
4th child 4,500
Children under years an additional 2,800
Expenses working away from home etc 2,000
Under the marriage laws an additional  3,400

 

Contributions to the Spanish social security system

Charitable contributions

Payments to unions to a maximum of Euros 500

Expenditures to renovate or rent a home

Capital Gains Taxes

Capital Gains Taxes

Capital gains tax is tax from the sale of assets or investments. A resident of Spain needs to pay taxes on assets sold worldwide. A non-resident is liable to payment of capital gains tax for the sale of Spanish property.

Capital gains tax is charged as follows:

  • For the first €6,000 a charge of 19%
  • €6,000–€50,000 a 21% charge
  • €50,000–€200,000 a 23% charge
  • More than €200,000 a 26% charge.

For property sales such as a home, you are eligible for the exclusion if you are above 65 or below 65 and selling your family home.

 

Rate % Type Applied
21 Standard All goods & services except
10 Reduced Food, Utilities Restaurants
4 Reduced Food, Pharma, books etc
0 Zero Gold International Transport

Property Taxes

Property taxes are Spanish tax rates paid by people who have a property in Spain. It applies to Spain residents and non-residents. The tax is levied based on the property value rate. The rate depends on the type of property (rural or urban) and the municipal location.

The local municipality charges tax for an increase in the value of the sold property. The tax calculation is based on the duration of ownership and the property value.

Property taxes are paid by the property seller except for property donation.

 

Inheritance Tax

The Spanish inheritance tax is the tax charged on people who earned a right to inherit property in Spain. The tax rule applies to both residents and non-residents. The tax is subject to payment upon receiving the said property.

The tax payment is dependent on the relationship between the taxpayer and the receiver and the wealth of the donor.

Some powerful autonomous communities have the privilege of changing the inheritance taxes regulations. However, the EU court ruling in 2014 led to reforms on inheritance tax regulation which were affected from 1 January 2015. The court ruling established that the autonomous communities' change of state regulations was biased and a breach of the agreement. However, despite the laws, the inheritance law tax rates are bound to modify from the autonomous communities.

Inheritance laws in Spain differ from one region to another. It’s therefore vital you check the Spanish tax rate rules in your region. The Spanish tax rate should be imposed equally on every individual with the same qualification as the other.

 

Spanish Tax On Pensions

The Spanish pension system is mandatory for all residents. The pension system is composed of state, company and employee and private pension. To be eligible to receive your pension you must have made social security payments.

Some situations such as maternity leave, joblessness, and workplace fatalities are exclusions to your contribution period.

 

How To Become A Spanish Tax Resident

To become a tax resident of Spain you must have lived in the country for 6 months or more in a calendar year. It can be consecutive days or not. Being a tax resident means you are obligated to pay different taxes such as tax gains, income taxes and more.

To become Spanish tax resident, you need to meet the following criteria:

  • Spend more than 183 days in a year.
  • Your centre of interest in the country such as business.
  • Families like children, parents or spouses (legally married) are in Spain.

Entry into the country within the first 6 months you are eligible for tax payment, even if your stay is indefinite. With the exception, if you moved from the UK. The reason is because of the UK/Spain tax treaty.

If you move into Spain after the first 6 months, you are regarded as a non-resident if you have not spent 6 months or more. However, you are considered a resident by the authorities if your visits have been frequent except if you live in a tax treaty country.

 

UK/ Spain Double Taxation Treaty

The UK and Spain have signed a double tax treaty for residents who are residents in both the UK and Spain. That is under the UK and Spanish rules consecutively.

The agreements entail the following:

  • You are considered a tax resident in the country where you have a permanent home.
  • If your permanent residence in the two countries, tax resident is paid in the country where your centre of interest lies.
  • If the above is indeterminable, you are considered a resident in the country you spent more time in during the year. If still undeterminable the authorities will make a decision based on your nationality.

Ensure you take caution and understand the treaty timing laws before you decide to move. If you are unsure, get expert advice from a tax professional.

 

Registration For Tax Payment In Spain

For a Spanish resident or non-resident, you need to register with the tax authority to pay taxes. You will need to get a foreign identity card number. You can get the card through the application from the local foreign office or police station within 30 days of entry into the country.

To register you fill the modelo 30 form. The registration is done, whether you are a resident or non-resident. Moreover, it’s done based on whether for the first time registration or details change.

 

Spanish Tax Year Returns Filing

Every Spanish resident or non-resident needs to file a tax return within the first year after registration. The tax year filings run from 1 January-31 December. Also, remember, in Spain, there is no time extension on tax returns filing. Therefore it’s important to pay before the tax due to avoid fines and penalties.

Tax returns filings are excluded in the following cases:

  • An income of less than €8,000
  • An income of less than €1,600 bank investment
  • Income from the rent of less than €1,000
  • An employment income of less than €22,000. Below this, the income tax is deducted by the employer.

 

Exclusive Tax Payments For Foreigners On Contracts

Spain has a special tax payment system for foreigners working on assignments or contracts with a Spanish company. The income tax varies with the amount of individual income.

 

The Spanish tax rates on such are as follows:

  • Income of up to €600,000 pays a tax rate of 24%.
  • Income exceeding €600,000 pays a 47% tax rate.
  • 3% tax rate for income above €200,000 from capital gains.

 

Tax Liabilities In Spain

Tax liabilities depend on how you hold your assets and take income. Spain is a favourite destination for expatriates. The tax on income in Spain is high. The rich individuals and families fear living in Spain and becoming residents because of the high taxation rates.

However, there are ways you can reduce the annual tax payments. If you are thinking of becoming a Spanish tax resident, you need to look deeper and understand the tax system. With the help of professional tax advisors, you can be able to reduce tax liabilities. A tax expert can help take advantage of tax planning opportunities.

Every individual situation is different and may not work for each person. Therefore, consider your needs, what you want to achieve and what works best for you.

The Spanish tax rate is high and complicated. Ensure before you become a Spanish resident, you get all the information. As mentioned above, tax experts can help you make brilliant decisions based on tax planning opportunities.

Also, tax payment is very vital in Spain. Ensure to pay before the tax due. This is to avoid unnecessary fines and penalties. Also, remember tax evasion from a Spanish resident is a crime. Always stay updated with the Spanish tax rate because of the regular state tax law changes.

Each individual is entitled to an equal tax payment system whether rich or poor. Tax payment should be charged according to the tax authority laws.

 

Corporation Taxes

Spain, like other countries have several categories of corporations as below:

  • SLL – Sociedad Limitada Laboral
  • SLNE – Sociedad Limitada Nueva Empressa
  • SL – Sociedad Limitada Private limitad compay
  • SA – Sociédad Anonyme a public limited company
  • SC – Sociedad Civil this is a partnership
  • S.COOP - Sociedad Cooperativa
  • CB – Comunidad de Bienes

All the above designations depend on the number of shareholders, capitalisation, and some minor distinctions

All companies must produce annual audited accounts, The audit limit is Euros 6 million income. All companies must submit annual accounts to the Registro Mercantil

 

Corporation tax rates

There are two rates in the general rate is 25%

There is a lower rate of 15%and applies to the first two years profitable trading

Company tax returns must be completed within 6 months and 25 days (205 days) after the year-end, Taxes are normally paid in April, October, and December at a rate of 18% of the previous company accounting year and tax liability.

A separate accounting method is applied to larges companies whose turnover in the previous year exceeds a set limit.

Tax is calculated in the normal way starting with the Profit after all expenses, make adjustments for depreciation and goodwill, and adding back disallowable expenses. Disallowable expenses are penalties and fines, corporation tax payments, gifts and donations other than approved organisations, asset improvement expenses.

 

Physical capital gains are taxed as profits.

There are two reliefs against corporation tax, Group relief is only available to resident holding companies. Rollover relief, amounts of profit held after asset sales and awaiting investment into new assets.

 

France

The French tax system is based on worldwide income. However, there is a twist to this known as Household Composition, that is how many people reside in the house. The French Current year taxes are calculated on prior-year earnings, they operate a Pay as you earn system based on the previous year's earnings. An annual tax return must be produced by no later than the 4th Thursday of the month and any underpayments my=ust be paid over with the return,

In determining your tax liability, the French tax authority will first establish your total income, called your revenu brut global.

They will then make certain adjustments to obtain your net taxable income, called your revenu imposable.

Your tax liability will then be calculated on a progressive basis, having regard to the composition of your household, the level of your income, and the allowances to which you may be entitled.

In order to minimise the impact of higher rates of taxation on those with dependants, the size and circumstances of the household is taken into account in determining the total amount of income tax that should be payable.

This is called the quotient familial.

The method used is to divide the household into ‘parts’ (or 'shares') corresponding to the size and circumstances of the household. The total income of the household is then divided by the number of members in it.

A notional tax charge is created for a single ‘part’ on a progressive basis using the income tax bands. The resulting figure is then multiplied by the number of ‘parts’ to give the tax liability for the household.

Thus, for a couple the number of household parts would be 2. Assuming a net income of €30,000, then the value of each part would be €15,000. The income tax payable on €15,000 would then be assessed, and the resultant figure multiplied by 2.

On this basis, a single person would start paying at higher rates of tax than a three person household on the same income because, in the latter case, tax is calculated on the partial share of the income of each member of the household.

As might be expected there is a complicated set of rules for calculating the number in each household to take account of the varied circumstances of families.

Broadly speaking, however, each adult counts as one part/share and each child a half part/share, although the third and any subsequent children or dependants count as one part/share.

Thus, in a household with two adults, the household income would be divided by two, whereas in a household with two parents and two children the household income would be divided by three.

The rules are slightly more generous for single-parent households and those where there are disabled dependants or adults in the household.

Unmarried couples in a civil partnership are treated the same as married couples.

The following table summarises the position for most households.

Key: A = Married/Civil Partnership; B = Widowed Person; C = Divorced/Separated (living alone); D = Single.

The calculations are complex

Household Parts

Dependants A B C D
0 2 1 1 1
1 2.5 2.5 2 1.5
2 3 3 2.5 2
3 4 4 3.5 3


Disabled persons or those with disabled dependants are granted an additional half (.5) share in each case.Source: Code général des impôts

The position of single persons with a child is complicated, as follows:

  • If you are living in a 'free union' with another person you are granted 1.5 parts.
  • If you are divorced and living alone it is 2 parts.
  • If you are widowed it is 2.5 parts

Where a divorced couple have joint custody of any children then the rate of the part for each parent is reduced to .25 for each child.

In order to ensure that those with large incomes do not benefit over generously from this system the amount of tax allowance for dependants is also limited to a maximum sum, although it is generous and should not be relevant to most expatriates.

The level of ceiling depends on the size, nature, and composition of the household, but as a general rule, it is €1,570 (2021 for 2020 income) for or each half part. The ceiling level is considerably higher for single-parent households for their first child. See the next section for more on this.

 

Income Bands and Rates

The Income payable in the current year is based on the earnings of the previous year. The rates and bands for the current year are applied to the previous year, exemptions (allowances) for the current year are applied to the previous year (unlike other countries where current year allowances are applied to current year income)

Euro Taxable Income 2021 Declared in 2022 Tax Rate %
0 – 10,084 0.00
10,085 – 25,710 11.00
25,711 – 73,56 30.00
73,517 – 158,122 41.00
Over  158122 45.00

 

Income Tax Allowances and deductions

Under the French system, the taxpayer is allowed to deduct 10% of the salary as a personal allowance with a maximum allowance of Euros 12,652.

The maximum Child allowance for each child is Euros1,570.

Pension scheme payments are allowed subject to an upper limit.

Corporation Tax, the rates are applied to the previous years profits and are paid on a quarterly basis going forward, normally mid-month on or about the 15th

 

Tax Rate % Tax Band Euros
28.0 0 – 500,000
33.3 Above 500,000

 

There is a reduced tax rate for small to medium-sized companies whose turnover is less than Euros 7.63 million at 15% on the first 38,120 euros profit. To qualify for this the scare capital must be 75% fully paid up and belong to physical persons.

VAT (TVA – Taxe sur la Valeur Ajoutee)

The standard VAT rate is 20% applied to all goods and services

There are two reduced rates of 5% and 10% which apply to Food, Gas and Electricity, Passenger Transport, Hotels, pensions, gites and ruraux, cultural including cinema books etc., and Qualifying works on private residences.

There is a special rate which applies to medicines, television licences etc.

Local Propertyu Tax – Taxe d’Habitation and Taxe Fonciere

This is the same as the council tax on a property, both taxes are payable by the property owner on an annual basis.

French Wealth Tax- Impot de solidarite sur la fortune based on the taxpayer's net wealth as of 1st January.

Net worth of taxpayer - Millions Euros Tax %
800,000 to 1,300,000 0.50
1,300,001 to 2,570,000 0.70
2,570,001 to 5,000,000 1.00
5,000,001 to 10,000,000 1.25
Above 10,000,000 1.50

 

Capital Gains Tax

The basic rate of capital gains tax is 19%.

Tapered relief against the tax is granted over 22 years of ownership, commencing from the 6th year of ownership, as follows:

  • No allowance for the first 5 years of ownership.
  • Between 6 and 21 years of ownership: 6% allowance per year.
  • For the final 22nd year of ownership: 4% allowance.

This means that property owned for 10 years would be granted a 30% discount on the tax, and one held for 15 years would be granted a 60% discount.

 

Italy

Italy like the rest of Europe income and corporation tax is based on worldwide income, the fiscal year runs from 1st Jan to 31st December and like France the current years taxation is based on the previous year’s income. The tax is paid through the individual’s tax return based on a self-assessment, where the individual has estimated the tax payable in the current year based on the previous year’s income.

Tax payments schedule:

1st Estimated payment due 30 June, 40% of the previous year tax

2nd Estimated payment due 30 November 60% of the previous year’s tax

3rd Payment this is the actual and is the difference between actual tax due less the 1st and 2nd payments

 

Tax Bands and Rates

Earnings Euros Rates %
0 – 15,000 23.00
15,001 – 28,000 27.00
28,001 – 55,000 38.00
55,001 – 75,000 41.00
Above 75,001 43.00

 

Tax Allowances

Personal allowance against income tax Euros 1,840

Social Security

Social Security is charged at all earnings levels there are no allowances

Personal Rate                    9.49%

Company rate                   30.00%

 

VAT

Rate % Type Applied to what
22 Standard Applies to all except below
10 Reduced Food, Pharma, Water other
5 Reduced Food social & people trans
4 Reduced Food, medical, papers, books
0 Zero International Transport

 

Corporation Tax

Applicable rates

Italian corporate entities are subject to a corporate income tax, known as imposta sul reddito sulle società or IRES, and to a regional production tax, known as imposta regionale sulle attività produttive or IRAP.

The standard rates are as follows:

  • 24% for IRES.
  • 3.9% for IRAP.

Up to FY 2016, the IRES rate was 27.5%. Specific rules apply to banks and financial entities.

Different IRAP rates are applicable for certain entities (i.e. banks and financial entities, insurance corporations, entities with a determined governmental exclusive right to provide services).

Regions have the power to slightly increase or decrease IRAP rates.

General rules

IRES

The IRES taxable base is determined according to the worldwide taxation principle, which states that, regardless of the location/jurisdiction where the income is produced, to the extent that the income is legally attributable to an Italian resident entity, the income is taxed in Italy. IRES is charged on the total net income reported in the financial statements of the company as adjusted for specific tax rules. Non-resident companies are taxed only on Italian-source income.

IRAP

There are different methods of computation for the IRAP taxable base, depending on the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, cannot be taken into account when determining the IRAP taxable base.

For sales and manufacturing companies, the IRAP taxable base is broadly represented by the company’s gross margin in its financial statements. In addition to the non-deductible items mentioned above, interest income and expense and provisions for bad debts are excluded for the purposes of the IRAP taxable base.

For banks, the IRAP taxable base is broadly defined as follows:

  • Intermediation margin reduced by 50% of dividends.
  • 90% of amortisation costs relating to fixed tangible and intangible assets.
  • 90% of other administrative expenses.
  • Net value of adjustments and reassessments for bad debts.

Special rules apply to financial institutions, other than banks, and holding companies.

IRAP is levied on a regional basis, and regions are allowed to increase or decrease the standard IRAP rate up to 0.92%. Companies with facilities in different regions must allocate their overall taxable base to the different regions on the basis of the employment costs of personnel located at the various sites. Facilities become relevant to the calculation of IRAP if they have been established for more than three months. Italian companies with permanent establishments (PEs) abroad, as well as shipping companies qualifying for the tonnage tax regime (see Tonnage tax below), are not subject to IRAP on the income earned through these PEs.

The deduction of labour costs for IRAP purposes depends on the type of hiring contract. In particular:

  • Full deduction for costs related to employees hired with an open-ended contract.
  • Deduction is limited to contributions for compulsory insurance against accidents (i.e. Istituto Nazionale Infortuni sul Lavoro or INAIL) for temporary employees.

Substitutive tax on reorganisations (mergers, de-mergers, contributions in kind)

Corporate restructurings, such as mergers, de-mergers, and contributions in kind, are, in principle, tax-neutral even if, for financial accounting purposes, the transaction results in the recognition of higher values of the assets or of goodwill. Companies may elect to obtain partial or full recognition for tax purposes of the step-up in the financial accounting values of assets or of the goodwill arising from the corporate restructurings, provided they pay a substitutive tax.

The substitutive tax is calculated on the step-up in tax basis and is based on progressive rates of 12% to 16% (i.e. 12% up to EUR 5 million, 14% from EUR 5 million to EUR 10 million, and 16% over EUR 10 million) to be paid by the deadline of the tax payment of the fiscal year in which the reorganisation took place or the following fiscal year. The substitutive tax may also be paid in three annual instalments of 30% in the year of the election, 40% in year two, and 30% in year three plus interest at the rate of 2.5% per year on the deferred amounts. The substitutive tax is not deductible for the purposes of IRES or IRAP.

In addition, stepped-up values of goodwill and trademarks acquired from the reorganisation transactions carried out since 1 January 2016 may be depreciated for tax purposes over five tax years, instead of 18 years, by paying a substitutive tax of 16%. Substitutive tax needs to be paid by the deadline of the tax payment of the fiscal year in which the reorganisation took place. Payment in instalments is not allowed. The higher tax depreciation arising from this election is effective from the tax period subsequent to the one in which the substitutive tax is paid. For example, if a merger transaction occurred in year one and the substitutive tax was paid in year two, the increased tax depreciation would begin in year three.

Free step-up on reorganisations (mergers, de-mergers, contributions in kind)

Under certain conditions, a free step-up of the tax basis of capital assets in case of mergers, de-mergers, and contributions in kind is granted up to EUR 5 million. The law provides for a free tax step-up regime for both corporate and regional tax purposes for companies receiving assets upon mergers, de-mergers, or contributions in kind which take place between 1 May 2019 and 31 December 2022. That means that the increased accounting value of goodwill, tangible assets, and intangible assets accounted for by the receiving entity will be recognised for tax purposes. The benefit applies to mergers, de-mergers, and contributions in kind that occur between companies not belonging to the same group and under the condition that such entities carried out their business activity for at least two years.

 

Germany

Income and corporation taxes in Germany like the rest of Europe is based on all worldwide income. German Income Tax is a progressive tax

Tax Bands and Rates

Tax Rate % Single Persons Married Person
0 0 – 9,744 0 – 19,488
14 9,745 – 57,918 19,489 – 115,836
42 57919-274,612 115,837 – 549,224
45 Over 274,613 Over 579,225

 

Social Security

Social security is charged on the total salary there are no allowances

Social Security Type Rate % Employee Employer
Health Insurance 7.30 Yes Yes
Pension Insurance 9.30 Yes Yes
Unemployment 1.20 Yes Yes
Care Insurance 1.525 Yes Yes
Total 19.33 Yes Yes

 

 

VAT

German Vat is one of the lowest in the EU, the regulations are the VAT Rate must be above 15%

VAT Rate % Applied to
19 The standard rate applied to all except below
7 Medical, water
0 International Transport

 

Corporation Tax

Germany taxes its corporate residents on their worldwide income. However, most double tax treaties (DTTs) exempt income attributable to a foreign permanent establishment (PE). Non-residents with PE or property income are taxed by assessment on German-source income; those earning royalties and dividends are taxed by withholding at source. Interest paid abroad is, in most cases, free of German tax altogether.

German business profits are subject to two taxes, corporation tax and trade tax.

Corporation tax (Körperschaftsteuer)

Corporation tax is levied at a uniform rate of 15% and is then subject to a surcharge of 5.5% (solidarity surcharge). This results in a total tax rate of 15.825%.

Trade tax (Gewerbesteuer)

The trade tax rate is a combination of a uniform tax rate of 3.5% (base rate) and a municipal tax rate (Hebesatz) depending on where the PEs of the business are located. Currently, municipalities with at least 80,000 inhabitants currently levy trade tax at a rate of between 8.75% (Hebesatz of 250%) and 20.3% (Hebesatz of 580%).

The basis for this tax is the adjusted profit for corporation tax purposes: in particular, 25% of all financing costs over 200,000 euros (EUR), including the implicit financing costs in leasing, rental, and royalty payments, are added back to taxable income.

If the basis for the two taxes is identical (unlikely in practice), the overall burden on corporate profits earned in Munich would be approximately 33%. In Frankfurt, the burden would be 32%. In Berlin, it would be 30%.

 

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