Territorial tax systems in Europe, 2021

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).

Territoriality of corporate tax systems in European OECD countries, from 2021
Dividend exemption Capital gains exemption Country limits
Austria (AT) 100.0% 100.0% Nothing
Belgium (BE) 100.0% 100.0% Nothing
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
Germany (DE) 95.0% 95.0% Nothing
Greece (GR) 100.0% 100.0% EU member states
Hungary (HU) 100.0% 100.0% Nothing
Iceland (IS) 100.0% 100.0% Nothing
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
Luxembourg (LU) 100.0% 100.0% Nothing
Netherlands (NL) 100.0% 100.0% Nothing
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
Sweden (SE) 100.0% 100.0% Nothing
Switzerland (CH) 100.0% 100.0% Nothing
Turkey (TR) 100.0% 100.0% Nothing
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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