Taxes in Europe are the main source of forming the state budget, financing social programs and maintaining economic stability. The EU has unified rules for levying taxes, including agreements between the members of the association on avoiding double deductions. The attractiveness of any country for investing and doing business is significantly influenced by the way its tax system is organized.

Taxes in the EU are paid by all residents, as well as by non-residents who carry out financial transactions. To obtain the status of a tax resident, a foreigner must meet two main conditions – actual residence in the country on the basis of residence permit or permanent residence permit for 183 days a year and the presence of the main vital interests on its territory.

General principles of taxation in Europe

The tax policy of the European Union is aimed at ensuring equal and fair conditions for taxpayers, organizing the smooth operation of the single market, and combating tax evasion. The power to adjust or cancel payments is vested in each of the member states, and the basic rules and principles of the union are respected by all:

• territoriality – income received in the state is subject to taxation regardless of the taxpayer’s place of residence;
• social protection – payment of taxes by the employed population and employers is made to finance health care, education, pensions and social programs;
• global income – income taxes are levied on residents regardless of the source of funds and its location;
• progressive scale – the rate of levies increases with the wealth of taxpayers, and this often determines what tax is paid in Europe on income or property.

The diversity of tax systems in European countries is due to the fact that they were formed historically and reflect the development process of each state. The parties in power, as well as the economic situation in a particular region or jurisdiction, also have a significant impact on the approach to levying taxes. Of great importance is the level of social security of the population – the higher it is, the greater the burden.

Developed countries, as a rule, have more complex mechanisms for collecting contributions, but provide for many exceptions and benefits. The distribution of the tax burden is influenced by the structure of the economy and the unemployment rate.

Political aspects affecting the tax system include the government’s orientation and strategy, participation in international organizations and economic unions. In social terms, many states seek to minimize inequality among the population – for this purpose they often introduce progressive tax on income and property of citizens.

Main types of taxes in European countries

Each state of the European Union has the authority to form its own tax policy, so the countries have different systems of levying taxes on the population. At the same time, an important aspect is the presence of international agreements on avoidance of double taxation – in case of their absence, residents have to pay deductions both at the place of activity and in the country of citizenship.

Taxation in Europe is designed to provide revenues to the state budget and at the same time create favorable conditions for doing business. When choosing a place for entrepreneurial activity it is extremely important to find a country with the most loyal rates of fees – this will minimize costs. With the support of the company’s specialists, you will be able to find a state for tax residency with the most favorable conditions, as well as get the opportunity to live in the EU, having a wide range of rights and privileges.

Value added tax (VAT)

A consumer tax levied on virtually all goods and services sold within the EU. The main purpose of VAT is to finance public expenditure, and its rates vary depending on the type of specific commodity item, e.g., food are taxed at a lower rate than luxury goods.

European taxation, as a system, provides a uniform rule for VAT, but each individual country may apply it differently. The standard rate ranges from 17-25.5%, but cannot be lower than 15%. EU states also apply a reduced levy of 5-14%, which applies to 18 types of goods and services set out in the EU VAT Directive 2006/112 (food, medical and agricultural goods, landscaping and construction services).

The charge is levied on products at all stages of the supply chain from the beginning of the production process to the sale to the final consumer. Goods exported to countries outside the European Union are not subject to VAT – they are charged in the state of import. There is a possibility of exemption from value added tax for some goods and services in the field of finance, health care and education, as well as products of small enterprises.

Income tax

Tax on wages, dividends, interest on deposits is paid by individuals on a regular basis.  As a rule, the collection rate is progressive – higher deductions are taken from high income. EU countries have the right to charge interest on the total world income of their tax residents. Income tax is levied to finance health care and education systems, as well as the implementation of social programs.

For citizens who have two places of residence in the European Union, there is a system of double taxation avoidance, which allows to determine which of the states can consider the payer as its resident. In this case, reduced rates and benefits are available to such persons on a par with citizens of the country.

Corporate tax

A tax of sole proprietorships, companies and enterprises, which is levied on profits derived from the performance of activities – it is used to finance public expenditures. The rate depends on the sphere of activity and the size of the company – in European countries, standard rates are from 25 to 37%, and progressive rates are 23-41%.  Tax is levied on distributed and undistributed income, with different rates for resident and non-resident companies.

Some jurisdictions offer corporate tax exemptions to firms engaged in innovation, startups, and companies that invest in research and development. The rate of the levy directly affects the volume of foreign investment – the lower the percentage, the more attractive the country is for investing money. At the moment the European Commission is working on new 2025 initiatives aimed at harmonizing corporate taxation in order to create a fairer system for the whole association.

Property tax

This refers to a levy on real estate and other expensive property, as well as transportation tax – such contributions are paid by individuals and legal entities on a regular basis. The funds received are directed by the authorities to finance local budgets, and the rate depends on the country, type and price of the object of taxation.

Most states of the European Union apply a progressive scale of rate formation – it increases with the growth of property value. In addition, privileges may be applied, for example, for families with children, people with disabilities, investors investing in certain areas of the economy.

EU property taxation plays an important role in attracting investment – buyers of land plots, residential and commercial real estate prefer countries with low fees. High rates reduce the number of individuals and companies willing to invest in expensive purchases.

Excise taxes

Taxes levied on the production or sale of energy, alcoholic beverages and tobacco products. Their purpose is to limit the consumption of goods harmful to health and replenish the state budget. Excise rates are formed on the basis of quantitative characteristics, for example, per kilogram, hectoliter or degree of alcohol.

The EU sets a minimum amount of excise taxes and reviews it regularly, and each state may levy the tax at higher or lower rates. Also, each member of the association may decide to exempt a particular producer or seller from paying such duties.

The exemptions are granted for the following categories of excisable goods:

• energy resources used as fuel for electricity generation, air navigation and navigation in EU waters;
• alcohol intended for the manufacture of other goods and which is not fit for human consumption or which has become so because of the addition of denaturants.

Some European countries have additional levies in addition to the basic levies, such as taxes on animals, inheritance, wealth, gifts and financial transactions.

Comparison of tax systems in European countries

The 1841 Foundation is a non-profit organization that compares tax systems in different countries. Its employees analyze the size of fees in 82 states in Europe and America, annually publishing reports “Tax Hell”. Specialists collect data on tax regimes and government efficiency indicators, and then form a table based on in-depth analysis of quantitative and qualitative indicators from open sources – published reports of the International Monetary Fund and the World Bank.

The quantitative domain takes into account fiscal pressure in the form of total taxes, the amount of public debt, the inflation rate, and the country’s GDP. Qualitative indicators include the rule of law, political stability, government effectiveness and accountability, and the fight against corruption.

Countries with high tax rates

According to the Tax Hell ranking, taxes in European countries are quite high, especially in Greece, Italy, Romania and Hungary. If we go beyond the study of The 1841 Foundation and analyze only corporate tax rates in 2025, the countries with the highest tax rates in Europe are Malta, Germany, Italy, Netherlands, France and Spain – their rates are 25-35%. Personal income tax is highest in Finland, Denmark, Austria, Sweden and Belgium, where it ranges from 50-56.95%.

The growth of the tax burden in European countries is mainly due to the high level of development of social security systems, which requires the states to provide adequate funding for health care, education and other important areas. By raising rates, the government gets an opportunity to develop infrastructure at its own expense.  At the moment, European countries also invest heavily in environmental programs and projects, as well as reduce taxes on cars with electric and hybrid engines.

Countries with low tax rates

According to the Tax Hell ranking, the EU countries with the most favorable tax environment are Switzerland, Denmark, Sweden and Norway. If we consider only tax rates without taking into account other factors used by The 1841 Foundation, the lowest taxes in Europe are levied on companies in Hungary, Bulgaria, Lithuania, Romania and Croatia, where the figures range from 9-18%. This factor attracts investors to these countries, as they can do business on more favorable and profitable conditions.

One of the main tools for attracting entrepreneurs and investors is also tax incentives, realized by the following means:

• patent boxes – these are reduced tax rates on income brought to entrepreneurs by their intellectual property (trademarks or patents);
• incentives – these are granted to start-ups, as well as to companies incurring expenses for personnel and equipment for research and development activities;
• state programs for investment in innovation – application of a reduced tax rate for capital investments of entrepreneurs in projects useful for the economy.

Special tax regimes in the EU

European Union countries actively use special tax regimes and the granting of special Non-Habitual Resident (NHR) status to attract foreign investors. Citizens of non-EU states can obtain the NHR status by moving to the European Union for permanent residence – according to the terms of the program the following advantages are open to such residents:

• privileges on import of personal property, payment of inheritance tax on property;
• exemption from levy on income earned outside the state of residence;
• reduction of the tax rate on income from labor activity of qualified specialists.

Among the countries that actively use the system of granting NHR status are Portugal, Malta and Ireland. Along with this way of attracting investments by European states, there are others, namely:

• minimal or zero corporate tax rates in offshore jurisdictions (Cayman Islands, Belize and British Virgin Islands);
• special customs and tax conditions in special economic zones for businesses in certain sectors of the economy, e.g., France, Croatia, Germany and Austria;
• low rates of fees fixed by law, e.g., in Hungary, Cyprus and Malta.

The advantage of moving to one of these jurisdictions is the opportunity to optimize taxation by reducing the burden, as well as to make more profitable use of investments and obtain additional asset protection. At the same time, such zones have certain disadvantages – strict requirements for obtaining and maintaining residency status, as well as strict control by the tax authorities.

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Choosing a tax jurisdiction for company registration

Investors planning to open a company in Europe, conduct a detailed analysis of the most important factors that determine the choice of country to conduct business. To find out which jurisdiction will suit you best, the following should be taken into account:

• purpose of using the status – tax optimization, doing business or protecting assets;
• type of planned activity – special economic zones and tax regimes in different countries are aimed at supporting business in different areas of the economy;
• residency requirements – one should take into account how long he/she should actually reside in the country to obtain the status of permanent resident and tax resident;
• government policy regarding levies on global income – some countries tax residents’ funds received abroad.

In addition to these factors, it is also important to assess the prospects of obtaining citizenship in the country – it can significantly simplify the conduct of business and allow you to enjoy additional benefits. The European Union passport opens wide opportunities for business throughout the union, as well as access to credit on favorable terms.

With the help of migration lawyers, you can obtain European citizenship under a simplified program in up to 14 months. You can learn more about the available ways of moving to the European Union during a free consultation with the company’s specialists. They will provide all the necessary information and will be able to choose the best method for you to obtain an EU passport fast and easy.