Territoriality of Tax Systems in Europe

News, Wealth

Under a territorial tax system, multinational businesses primarily pay taxes to the countries in which they are physically located and earn their income. This means that territorial tax regimes do not generally tax the income companies earn in foreign countries. A worldwide tax system, on the other hand—such as the system previously employed by the United States—requires companies to pay taxes on worldwide income, regardless of where it is earned.

Countries enact territorial tax systems through what are called “participation exemptions,” which can 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 earned in a foreign subsidiary back to the parent company, and capital gains emerge, for example, when foreign subsidiaries are sold at a profit. Participation exemptions eliminate domestic tax on such foreign income by allowing companies to ignore some or all of it when calculating their taxable income.

One can distinguish among three cases:

  • A fully territorial tax system exempts all foreign-sourced dividend and capital gains income
  • A partially territorial tax system exempts only a certain share of foreign-sourced dividend and capital gains income or exempts foreign-sourced dividend income but includes foreign-sourced capital gains income (or vice versa)
  • A worldwide tax system does not exempt any foreign-sourced dividend and capital gains income

Of the 27 European OECD countries covered in today’s map, 19 employ a fully territorial tax system, exempting all foreign-sourced dividend and capital gains income from domestic taxation. In the remaining eight countries, such income is partially exempted from domestic taxation. No European OECD country operates a worldwide tax system.

Of the eight countries with a partially territorial tax system, only Ireland fully taxes foreign-sourced dividend income and at the same time fully exempts foreign-sourced capital gains income. The opposite is the case in Poland (fully taxing foreign-sourced capital gains income and fully exempting foreign-sourced dividends). The remaining six countries have partial exemptions for both foreign-sourced dividend and capital gains income, though Slovenia allows for a 95 percent exemption on dividend income, but only a 47.5 percent exemption on capital gains.

Many countries treat foreign-sourced income differently depending on the country in which it was earned. For example, many countries restrict their territorial systems based on a “blacklist” of countries that do not follow certain requirements. Among European Union (EU) countries, it is common to restrict the participation exemption to EU member states or the European Economic Area (EEA).

Territoriality of European OECD Countries’ Corporate Tax Systems, as of 2021
  Dividend Exemption Capital Gains Exemption Country Limitations
Austria (AT) 100.0% 100.0% None
Belgium (BE) 100.0% 100.0% None
Czech Republic (CZ) 100.0% 100.0% EU member states and EEA member states or double tax treaty
Denmark (DK) 100.0% 100.0% EU member states and EEA member states or double tax treaty
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 tax treaty
France (FR) 95.0% 88.0% Blacklist countries are excluded
Germany (DE) 95.0% 95.0% None
Greece (GR) 100.0% 100.0% EU member states
Hungary (HU) 100.0% 100.0% None
Iceland (IS) 100.0% 100.0% None
Ireland (IE) 0.0% 100.0% EU member states and tax treaty countries
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% None
Netherlands (NL) 100.0% 100.0% None
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% Black-list countries are excluded
Slovak Republic (SK) 100.0% 100.0% Tax treaty countries
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% None
Switzerland (CH) 100.0% 100.0% None
Turkey (TR) 100.0% 100.0% None
United Kingdom (GB) 100.0% 100.0% None

Source: Deloitte, “Tax Guides and Highlights 2021″; Bloomberg Tax, “Country Guides”; EY, “Worldwide Corporate Tax Guide 2020”; and PwC, “Worldwide Tax Summaries.”

Was this page helpful to you?

Thank You!

The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?

Contribute to the Tax Foundation


Products You May Like

Articles You May Like

A prolonged stock market pullback can pose a big risk early in retirement. Here’s what to know
Suspicious trades were made before Goldman’s $2.2 billion acquisition of GreenSky, options experts say
IRS sent thousands of premature tax collection notices during pandemic
Women are still behind men when it comes to retirement savings. What they can do to build security
In the blogs: Now the fun begins

Leave a Reply

Your email address will not be published. Required fields are marked *