European tax rates vary greatly across the continent, ranging from sky-high rates of 59% in Finland to a rock-bottom 9% in Hungary.
Finland’s tax rate shouldn’t come as a surprise - Northern European countries are well known for their high tax rates, but also for their extensive social security coverage. Nations with lower tax rates are less likely to be able to afford comfortable safety nets for their citizens.
Corporate tax rates across Europe are higher than average in the Northern European countries too, which pushes some companies to make the decision to move their operations to places with better tax rates, and overseas investment is significant.
This article compares both personal income and corporate tax rates between European countries, and the impact low and high rates have on citizens and businesses.
First of all, we need to understand what the European tax rate is. On average, the Personal Income Tax Rate in the European Union averaged 40.24%t from 1996 until 2021. It peaked in 1996, reaching an all time high of 47%, and a record low of 36.6% in 2011.
That said, a deep dive into individual countries reveals a stark difference between northern Europe and the Baltics. In 2022, Finland had the highest Personal Income Tax rate in the world at 56.95%, sitting just below Cote d’Ivoire’s 60%. Taxes in Finland reportedly don’t bother the Finns, as the nation has a progressive tax rate. This means the wealthy are taxed at a much higher rate than low income earners and the middle class. Similarly, the legal system penalises wealthy offenders with higher fines than the regular population. Actually, many European countries use a progressive tax system to be more fair to their citizens, taxing them at rates based on individual earning power: you’ll find these systems in Germany, France, Belgium, Lithuania, Latvia, Croatia and Sweden, to name a few.
As of 2021, Finland’s corporate tax sat at 20%, which is significant but also outpaced by its neighbors. Portugal hits corporations with 31.5% tax rates, and Germany isn’t far behind, demanding 29.94%. On average, the European Union average is 21.9%.
The lowest corporate tax rate in Europe is found in Lithuania where just 15% is charged, Ireland with 12.5% and Hungary with 9%. It’s because of these rates that Ireland has been in the spotlight, having attracted the likes of Apple, Microsoft and Pfizer. According to a former senior Irish tax official, approximately 30% of Ireland’s corporate tax comes from those three companies.
Lithuania has been deemed a preferred location for start-ups, with favorable conditions for the development of ideas and products. As the market and business network is small, businesses are required to be dynamic, innovative and ready to make quick decisions which will prepare them for the future when they scale.
While the residents of Latvia, Lithuania and Estonia have extremely different levels of wealth and poverty, the Baltic states are largely considered to be economic marvels since their emergence from the Soviet Union.
Surprisingly, Denmark and Norway are likely to be more attractive to corporations than Western Europe, with corporate tax rates sitting at 22% and below. Sweden’s corporate tax rate is even lower, at 20.6%. The largest companies in Sweden, however, are Swedish: think Volvo, H&M, Ikea and Electrolux, all loyal to their home nation and likely enjoying the stable economic conditions, educated workforce, swift business processes, renewable energy and sophisticated consumers.
According to the World Bank, Denmark is one of the best places in the world to do business due to the ease of the processes and advanced use of technology, compared to China, Hong Kong, New Zealand and Singapore.
Southern Europe is a mixed bag when it comes to both personal tax income and corporate tax rates. Malta, for example, has long been considered a ‘tax haven’ because of its low tax rates for foreign companies, but has been the focus of many tax probes and criminal investigations in recent years. Personal income for citizens is charged at a progressive rate with a range of 0% to 35%, so the higher the income, the higher the tax rate.
Spain's tax rates are in the mid-range for European countries, and is balanced by free healthcare and other social security systems for tax-paying citizens and residents. Similarly, Italians pay incremental tax depending on earnings, and enjoy the benefits of social safety nets.
While Portugal’s corporate tax rates are sky high, residents in Portugal for tax purposes are taxed on their worldwide income at progressive rates varying from 14.5% to 48% for 2021.
On average, European countries collect corporate income tax at 21.9%, which when measured against 180 jurisdictions was below the worldwide average of 23.54% in 2021. It stands that corporations can benefit greatly from being in European countries that offer lower tax rates: Apple is estimated to have saved US$15 billion by taking advantage of tax benefits in Ireland.
That said, across the board, corporate tax rates are declining: in 2000, the average corporate tax rate was 32.6%, and has decreased to today’s rate of 21.9%.
While the EU works with EU countries on the coordination of economic policies and corporate and income taxes, personal income tax rates across Europe are largely decided by the nations themselves and are influenced by economic conditions.