CMS Expert Guide to Tax regimes in Central and Eastern Europe

Introduction

CMS is extremely proud of its tax expertise in Central and Eastern Europe, which is among the best in the region. This expertise is a key part of our offering in Europe and a vital step in becoming the best European provider of legal and tax services.

The CMS Tax Connect guide to tax regimes in Central and Eastern Europe is one of the fruits of our close cooperation within the region. Having been around for some time, the guide has now been updated and extended to offer a unique overview of the tax systems of 15 countries in an informative and concise format, as they apply on 1 January 2013 (or later).

Each country is introduced through a “Tax at a glance” section. Here, we have compiled the key tax facts that you need to know. For instance, you can quickly find out what currency is used in Bosnia and Herzegovina, or whether Croatia is a member of the OECD. The country files then deal with the primary features of the tax system in question. They provide an overview of the most important features of the system. These country files are a highly convenient, simple way of getting an idea of the basics, so that you know what to ask in a discussion of your specific business situation.

The primary value of the country files lies in the overview they give of the region. This makes them indispensable for exploring the trends and policies that characterise the tax systems in CEE. For instance, you will learn that it is unusual to have a general corporate income tax rate of over 20%, with the exception of Slovakia and Austria. This is a fact worth noting amidst the drive to reduce budget deficits, as it proves that tax competition and the “race to the bottom” is far from over. On the contrary, the region is increasing its efforts to attract foreign investors in order to boost its economies.

Also of interest is the increase in VAT rates. Only Bosnia-Herzegovina currently has a general VAT rate below 18%, with more and more countries implementing a rate in the mid-20s. Hungary even has a general VAT rate of a whopping 27%. These higher tax rates offer a never-before-seen incentive to decrease VAT leakage, turning VAT planning into a priority.

At CMS, we understand that our clients would prefer not to have to deal with each jurisdiction in the region individually. That is why all our tax personnel – who work across the region as one team – are trained in international tax matters and can coordinate projects across jurisdictions, whether they are based in Tirana, Ljubljana or Prague. In this way we can deliver the seamless service which our clients value so highly.

CMS does not operate through “hubs” or out of “virtual offices”. Our tax personnel are local experts and professionals working in offices from Moscow to Vienna, Sofia to Warsaw, and Zagreb to Kyiv. This ensures that you have access to the hands-on experience and language skills you will need in the region, in order to communicate with the tax authorities effectively and quickly resolve any tax issues that may arise.

We have enjoyed putting this guide together and hope that you will find it useful.

Tax at a glance in CEE

Albania

Currency:

Albanian LEK (ALL)

EU Member:

No

OECD Member: 

No

Corporate income tax rate:

10% flat rate

VAT rates:

20% (standard rate), 10% (reduced rate), zero-rate and exempt rates

Group regime:

No

Exemption on dividends:

Yes

Thin capitalisation regime: 

Yes, debt-to-equity ratio 4:1; Applicable to long-term loans obtained not only from related parties but also from other parties, excluding banks and other financing institutions.

Transfer pricing regime:

Yes

Is it a major topic in your country?

Not yet, however, major legislative changes are expected in 2013-2014

Austria

Currency:

EUR

EU Member:

Yes

OECD Member: 

Yes

Corporate income tax rate:

25%

VAT rates:

20% and 10%

Group regime:

Yes

Exemption on dividends:

Yes

Thin capitalisation regime: 

No

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Bosnia and Herzegovina

Currency: 

The Convertible Mark (BAM)

EU Member: 

No

OECD Member:

No

Corporate income tax rate: 

10%

VAT rate:

17%

Participation-exemption regime: 

No

Group regime: 

Yes – for companies within the same political entity

Exemption on dividends: 

Yes

Thin capitalisation regime:

No

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Bulgaria

Currency:

The Bulgarian Lev (BGN)

EU Member:

Yes

OECD Member:

No

Corporate income tax rate:

10% flat rate

VAT rates:

standard rate - 20%; reduced rate – 9%

Participation-exemption regime: 

Yes, when dividend received by EU/EEA entity

Group regime:

None

Deduction of foreign losses: 

Foreign losses may be offset against income from the same country. Such losses may be carried forward for five years. No carry-back

Exemption on dividends:

Yes, subject to limitations.

Thin capitalisation regime:

Yes, debt-to-equity ratio 4:1; Applicable to long-term loans obtained not only from related parties but also from other parties, excluding banks and other financing institutions.

Percentage holding required: 

None

Thin capitalisation regime:

Yes

Transfer pricing regime: 

Yes

Is it a major topic in your country?

Yes

Croatia

Currency:

The Croatian Kuna (HRK)

EU Member:

Yes, since 1 July 2013

OECD Member: 

No

Corporate income tax rate:

20%

VAT rates:

25%, 10% and 5%

Group regime:

Yes

Exemption on dividends:

No

Thin capitalisation regime: 

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Czech Republic

Currency:

The Czech Crown (CZK)

EU Member:

Yes, since 2004

OECD Member: 

Yes, since 1995

Corporate income tax rate:

19%

VAT rates:

basic rate 21%, reduced rate 15%

Group regime:

No

Exemption on dividends:

Yes (10% holding required for at least 12 months)

Thin capitalisation regime: 

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Hungary

Currency:

The Hungarian Forint (HUF)

EU Member:

Yes, since 2004

OECD Member:

Yes, since 1996

Corporate income tax rate:

10% and 19%

VAT rates:

5%, 18% and 27%

Participation-exemption regime:

Yes

Group regime:

No

Exemption on dividends:

Yes (irrespective of percentage holding)

Thin capitalisation regime: 

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Montenegro

Currency:

EUR

EU Member:

No

OECD Member:

No

Corporate income tax rate:

9%

VAT rates:

0%, 7% and 19%

Participation-exemption regime:

Local dividends only

Group regime:

Yes

Exemption on dividends:

No

Thin capitalisation regime: 

No

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Poland

Currency:

The Polish Zloty (PLN)

EU Member:

Yes, since 2004

OECD Member:

Yes, since 1996

CIT rate:

19%

Corporate income tax rate:

19%

VAT rates:

23%, 8%, 5% and 0%

Participation-exemption regime:

Yes

Group regime:

Yes, applies only to CIT. Unpopular with taxpayers due to several restrictions

Exemption on dividends:

Yes. The EU or EEA beneficiary must not be exempt from tax in its country of residence and must hold not less than 10% of Polish company’s shares for at least two years (with respect to Swiss shareholders, the minimum shareholding is 25%)

Thin capitalisation regime:

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Romania

Currency:

RON

EU Member:

Yes, since 2007

OECD Member:

No

Corporate income tax rate:

16%

VAT rates:

24%, 9% and 5%

Participation-exemption regime:

No

Group regime:

No

Exemption on dividends:

Yes

Thin capitalisation regime: 

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Russia

Currency:

The Russian Ruble (RUB)

EU Member:

No

OECD Member: 

No

Corporate income tax rate:

20%

VAT rates:

0%, 10% (medicines, food, children’s clothes), 18%

Participation-exemption regime:

Yes: for dividends, 50% of share capital + one year holding; for capital gains, 5 year holding starting from 2011

Group regime:

Yes (since 01/01/2012)

Thin capitalisation regime: 

Yes, debt-to-equity ratio: 3:1

Transfer pricing regime:

Yes (new since 1/1/2012)

Is it a major topic in your country?

Yes

Serbia

Currency:

The Serbian Dinar (RSD)

EU Member:

No

OECD Member:

No (observer status)

Corporate income tax rate:

15%

VAT rates:

0%, 8% and 20%

Participation-exemption regime:

No

Group regime:

Yes

Exemption on dividends:

Domestic dividends: yes; foreign: some tax credit rules

Thin capitalisation regime: 

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Slovenia

Currency:

The Euro (EUR)

EU Member:

Yes, since 2004

OECD Member:

Yes, since 2010

Corporate income tax rate:

17%

VAT rates:

22% and 9.5%

Participation-exemption regime:

Yes

Group regime:

No

Exemption on dividends:

No

Thin capitalisation regime: 

Yes

Transfer pricing regime:

Yes

Is it a major topic in your country?

Yes

Ukraine

Currency:

The Ukrainian Hryvnia (UAH)

EU Member:

No

OECD Member:

No

Corporate income tax rate:

19% (16% effective from 1 January 2014)

VAT rates:

0%, 20% (17% effective from January 2014)

Participation-exemption regime:

No

Group regime:

No

Exemption on dividends:

Yes, if paid from domestic sources or certain qualifying foreign sources. Exemption applies irrespective of percentage holding for dividends received from residents; holding must be at least 20% for dividends received from non-residents

Thin capitalisation regime: 

No (instead, there are rules similar to earnings stripping restriction)

Transfer pricing regime:

Yes (limited).

Is it a major topic in your country?

Not yet, however, major legislative changes are expected in 2013-2014