The report on the current taxation regimes of the CEE covers 22 countries: it includes the Visegrad countries, Southeast Europe, Russia, Ukraine and the Baltic states. Its purpose is to help investors compare the fundamental factors of competitiveness.
I. TAXES ON EMPLOYMENT
On the whole, the proportion of taxes and contributions on employment continues to decrease, apart from Macedonia and Lithuania, where a multi-rate, progressive tax was introduced, which increases the tax burdens of private individuals. Croatia and Latvia significantly increased the limit of the lower tax rate, which is favourable news for employees. Poland is also easing its approach and has increased its tax-free amount. Currently, it is equal to PLN 8,000.
The total wage cost of employers in the region is still close to 160% of the net wages on average. Hungary slightly improved its particularly poor indicator in 2017/18, minor improvement is expected this year. Poland achieved a result of 121% of the average net salary.
The system of social contribution payments has been completely overhauled in Romania and Lithuania. The mainly unchanged tax burdens are now borne by the employee instead of the employer for the most part. Poland has also experienced changes in this respect. The reform included pensions and introduced a long-term saving mechanism. Contributions are to be paid in a clear and transparent manner in order to contribute to the transparency and simplicity of the whole system.
II. VALUE-ADDED TAX
Governments continue trying to build upon the growth of private consumption, giving an increasingly prominent role to consumption-type taxes, value-added tax in particular, when planning fiscal revenues. The average VAT-rate is around 21%; Russia increased the rate by 2 pps. The 25% and 27% rates in Croatia and Hungary are particularly high. A decrease of 1 pps is expected in Croatia next year. In Poland, the basic VAT rate is 23%. There are also two preferential rates: 8% and the lowest 5%. In the near future, the two highest rates are expected to be reduced to 22% and 7% respectively.
Governments are trying to combat tax evasion practices with digital technologies. The goal is the comprehensive monitoring of the sales process, uncovering untaxed transactions, and diminishing tax fraud. In 2018, Hungary introduced online invoicing with favourable first impressions. Similar solutions are expected to spread across the region. Poland is also taking action in this area - the use of online fiscal cash registers is gradually being introduced to tighten up the VAT system and to modernize payments. The split payment mechanism is also introduced.
III. CORPORATE INCOME TAX
Corporate income tax rates differ across the region: the highest (Germany, 33%) and lowest rates (Hungary and Montenegro, 9%) are separated by 20+ percentage points. The limits of the tax competition, however, are gradually coming into focus: only Greece reduced corporate income tax (by 1%) as of 2019. Poland introduced a preferential rate of 9% for small taxpayers. Overall, the average tax rate in the region is around 17%.
The European Union has made deliberate efforts to restrain the tax competition and to prevent tax evasion techniques. The Anti Tax Avoidance Directive (ATAD) has been applied by Member States since 1 January 2019. This determines, for instance, how much of the interests paid for corporate loans can be deducted from the income tax base, it has set into motion the unification of offshore regulations, and it is also the source of the coming transposition of exit taxation.
All CEE countries with traditional income tax schemes allow losses generated in previous years to be carried forward and used against the positive tax base of subsequent years (generally, up to 5-7 years). Only 6 countries allow it without a limitation of time. States in the region still tend to impose withholding taxes on payments of interest, dividends and royalties (at rates of 15%, or even 19-20%). Poland also belongs to this group, moreover, recently modernized WHT regulations impose a high tax rate of 19% or 20% on the surplus of over PLN 2 million. You will be able to apply for a refund or an opinion exempting you from this tax for a period of 6 months. Lithuania, Estonia and Hungary continue not to impose withholding tax on capital gains. In two-thirds of the CEE region, taxpayers are allowed to prepare IFRS-based separate financial statements and to use these also for taxation purposes. In more than half of the countries the tax system supports research and development (R&D) activities in some form or another. Slovakia, Serbia and Poland have all taken steps in this direction recently.
As of 2019, it is possible to opt for corporate group taxation in Hungary as well, just like in Austria, Poland, and Bosnia-Herzegovina. Russia is removing the possibility to setup consolidated tax groups.
IV. TRANSFER PRICING
OECD’s BEPS (“base erosion and profit shifting”) initiative has drawn attention to intra-group and cross-border transactions. Transfer pricing regulations have already been introduced to the tax systems of almost all the countries concerned, with the exception of Montenegro and Macedonia (while in Bulgaria, the TP documentation need only be prepared at the specific request of the tax authority). The accompanying documentation obligations have been transformed recently. The fundamental objective of the OECD-prescribed country-by-country reporting (CBC-R) is to promote transparency by way of providing local tax authorities with the information necessary for assessing tax risks. In the past year, taxpayers in the CEE region also had to actively participate in launching the CBC reporting system. Poland has also implemented appropriate updates to the mandatory automatic exchange of tax information (including CBC-R).
Mazars Central and Eastern European Tax Guide 2019