The race for the lowest corporate income tax has begun
On your mark, get set, go! The race to the bottom has begun.
Prime Minister Viktor Orban recently announced to decrease the Hungarian corporate income tax rate to 9%, making Hungary the cheapest EU member state for corporate profits even ahead of Bulgaria at 10%. The reduction is a further step in “Orbanomics" to stabilise Hungary’s economy and bolster its competitiveness.
MANY COUNTRIES ARE CONSIDERING TO REDUCE THE CORPORATE INCOME TAX
Hungary, however, is far from the only EU member state to lower its taxes to attract foreign investment.
In the Nordic states Denmark gradually lowered its corporate income tax rate over the last decade from 28% to 22%, while Finland went from 26% to 20% and Sweden from 28% to 22%. A similar evolution can be found in Southern Europe, where Portugal went from 27.5% to 21%, Italy from 37.25% to 31.4%, and Spain from 35% to 25%. However, the biggest leap can be found in the United Kingdom, which went from 30% to 20% (and soon 17%), and fresh Prime Minister Theresa May threatened to further reduce the rate after the Brexit. In reaction, even the Netherlands is considering to further reduce its rates of 20/25%.
BELGIUM CORPORATE INCOME TAX?
In the meantime the Belgian corporate income tax rate remained at a steady 33,99%, without any change whatsoever. Even the additional crisis contribution hasn’t been changed since its introduction in 1993. The only EU member state seemingly doing worse than Belgium is Malta. Don’t be fooled, however. Under the imputation system up to 6/7ths of the corporate tax paid can be refunded upon a distribution, leaving an effective tax rate of 5%.
In fact, not Bulgaria or Hungary or even Malta have the lowest effective tax rate in the EU. The honor in a way actually belongs to Estonia. Indeed, Estonian companies are not subject to corporate income tax. However, truth be told, any distribution of the profits are subject to a distribution tax of 20% (similar to Belgian withholding tax on dividends), but the potentially perpetual deferral of tax perhaps allows for an even greater incentive for companies.
CAN BELGIUM RETAIN ITS COMPETITIVENESS?
The question then remains how Belgium can retain its (fiscal) competitiveness; the notional interest deduction gets copied by more and more other states (under better conditions), the advantages of an educated, multilingual and flexible workforce are met with concerns of strikes, and the openness to international trade is countered by a climate of hostility against the wealthy who facilitate this trade.
The race has begun, and so far Belgium has missed completely its start. Let us hope it turns out to be a marathon rather than a sprint.