In a territorial tax system, multinational companies mainly pay taxes to the countries in which they are physically located and earn their income. This means that territorial tax regimes generally do not tax corporate income in foreign countries. On the flip side, a global tax system, such as the system previously used by the United States, forces companies to pay taxes on global income regardless of where it is earned.
Countries adopt territorial tax systems through so-called “participation exemptions,” which may include full or partial exemptions for foreign-sourced dividend or capital gains income, or both. In this context, dividends can be used to repatriate profits made in a foreign subsidiary to the parent company, and capital gains arise, for example, when foreign subsidiaries are sold at a profit. Participation exemptions eliminate national tax on such foreign income by allowing companies to ignore all or part of it when calculating their taxable income.
We can distinguish three cases:
- A fully territorial tax system exempts all foreign source dividend and capital gains income
- A partially territorial tax regime exempts only a certain portion of foreign source dividend and capital gains income or exempts foreign source dividend income but includes foreign source capital gains income (or vice versa)
- A global taxation does not exempt any foreign source dividend and capital gains income
Of the 27 European OECD countries covered by today’s card, 19 have a fully territorial tax system, exempting all foreign-source dividend and capital gains income from domestic taxation. In the remaining eight countries, this income is partially exempt from national taxes. No European OECD country has a global tax system.
Of the eight countries with a partially territorial tax system, only Ireland fully taxes foreign-source dividend income and at the same time fully exempts foreign-source capital gains income. The reverse is the case in Poland (total taxation of capital gains income from foreign sources and total exemption of dividends from foreign sources). The remaining six countries have partial exemptions for foreign-source dividend and capital gains income, although Slovenia allows a 95% exemption on dividend income, but only a 47.5% exemption on earnings. in capital.
Many countries treat foreign source income differently depending on the country in which it was earned. For example, many countries restrict their territorial systems on the basis of a “blacklist” of countries that do not meet certain requirements. Among the countries of the European Union (EU), it is common to restrict the exemption from participation to EU member states or the European Economic Area (EEA).
|Dividend exemption||Capital gains exemption||Country limits|
|Czech Republic (CZ)||100.0%||100.0%||EU Member States and EEA Member States or Double Taxation Agreement|
|Denmark (DK)||100.0%||100.0%||EU Member States and EEA Member States or Double Taxation Agreement|
|Estonia (EE)||100.0%||100.0%||EU Member States and EEA Member States and Switzerland|
|Finland (FI)||100.0%||100.0%||EU Member States and EEA Member States or Double Taxation Agreement|
|France (FR)||95.0%||88.0%||Blacklist countries are excluded|
|Greece (GR)||100.0%||100.0%||EU member states|
|Ireland (IE)||0.0%||100.0%||EU member states and countries with a tax treaty|
|Italy (IT)||95.0%||95.0%||Blacklist countries are excluded|
|Latvia (LV)||100.0%||100.0%||Blacklist countries are excluded|
|Lithuania (LT)||100.0%||100.0%||Blacklist countries are excluded|
|Norway (NO)||97.0%||100.0%||Blacklist countries are excluded|
|Poland (PL)||100.0%||0.0%||EU Member States and EEA Member States and Switzerland|
|Portugal (PT)||100.0%||100.0%||Blacklist countries are excluded|
|Slovak Republic (SK)||100.0%||100.0%||Country of the tax treaty|
|Slovenia (SI)||95.0%||47.5%||Blacklist countries are excluded|
|Spain (ES)||95.0%||95.0%||Blacklist countries are excluded|
|United Kingdom (GB)||100.0%||100.0%||Nothing|
Source: Deloitte, “Tax Guides and Highlights 2021 ″; Bloomberg Tax, “Country Guides”; EY, “Global Corporate Tax Guide 2020”; and PwC, “Worldwide Tax Summaries”.
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