New CEE tax guide outlines fundamental changes and long-term trends

Providing information on taxation in 22 Central and Eastern European (CEE) states, the latest Mazars CEE tax guide¹ analyses long-term taxation trends and fundamental tax regime changes in each country, both now and in previous years. The publication is designed to help investors understand the complexities of the various CEE tax regimes that are vital for long-term investment decisions.

Significant social tax differences

Mazars’ analysis found that social taxes are decreasing in almost all observed countries, but the extent of the decrease shows significant differences across jurisdictions. The basic approach to income taxation also varies, with some countries such as Bulgaria, Hungary and Romania continuing to enforce flat-rate income tax rates. While Austria, Germany and Slovakia maintain significantly progressive tax rates.

In the countries analysed, average social taxes borne by employers amount to 15% of gross wages. Still, there are significant differences between the lowest, less than 5% in Romania, and the highest, 30% in countries such as Slovakia, making tax system comparisons difficult. A more practical way of comparing systems is the so-called ‘tax wedge’, which shows what percentage of total income the state takes away in taxes and contributions. The tax wedge indicator varies between 15% and 51%, mainly depending on income levels and family status.

All 22 countries analysed show the most significant variation is in wage levels. Minimum wages in the Czech Republic, Hungary Slovakia and Poland, known as the Visegrad Four countries, range between €500-€650. Minimum wage levels are significantly lower in the Balkans and Moldova, where they are below €400 compared with over €1,700 in Germany and Austria. In terms of the private sector, the euro-based average wage grew by more than 12%. However, in Serbia and Hungary, private sector wages increased by 14% and 19%, respectively.

Potential reversal of VAT as prime source of tax revenue

Value-added taxes (VAT) have undoubtedly become the prime source of revenue for central budgets in recent years. However, this trend might reverse due to the pandemic, economic recession, the war in Ukraine, and difficulties experienced by global supply chains. VAT rates in the region have remained stable over the past year, with standard rates averaging around 21%. The standard VAT rates of 25% and 27%, effective in Croatia and Hungary, respectively, remain exceptionally high.

All EU member states follow EU VAT rules, though each can choose how to implement the rules. Many non-EU countries are also trying to align with the EU system.

The CEE countries are putting visible efforts into improving the efficiency of tax collection, primarily by implementing new digital technology to combat abuse, as this is where the risk of tax evasion is most significant. Their objective is to monitor all affected transactions end-to-end, detect fraudulent activity and curb tax evasion.

Lower corporate income tax on the horizon?

The countries analysed take different approaches to tax corporate profits, with typical rates ranging between 15%-20%. However, there is a 22 percentage point difference between the lowest corporate tax rate of 9% in Hungary and Germany, with the highest corporate tax rate of 31%. Only one country, Greece, has reduced tax on profits from 24% to 22%. It should be noted that Austria also plans to gradually lower corporate taxes from next year.

The EU is also making a conscious effort to put the tax brakes on by drafting a common corporate taxation framework for member states that prevents the use of the most harmful tax avoidance techniques. An essential tool in this effort is the Anti-Tax Avoidance Directive (ATAD) which has been mandatory for member states since 1 January 2019.

CEE countries that apply corporate taxation based on pre-tax profits invariably allow losses incurred in earlier years to be carried forward and offset against profits in a later year. However, only five countries allow unrestricted loss carry-forward. Most countries also readily apply withholding tax on interest, dividend, and royalty revenues at rates of between 15%-20%, excluding Latvia and Hungary, which still do not impose withholding tax on capital gains. Consolidated tax reporting for groups is now available in Germany and Hungary. Previously, it was only available in Bosnia and Herzegovina, Poland and Austria.

Focus on corporate group cross-border transactions

The OECD’s Base Erosion and Profit Shifting (BEPS) initiative drew attention to the fact that tax authorities need to concentrate more on possible cross-border transactions within corporate groups. In 2022, following the introduction of documentation obligations for large taxpayers in Montenegro, transfer pricing regulations will have been in effect in all CEE countries except Moldova. In addition, taxpayers operating in the CEE region also have to participate actively on a country-by-country basis. The OECD’s country-by-country reporting (CbCR) system aims to improve transparency by making the information needed to assess tax risks available to local tax authorities.

According to Mazars’ research, the most significant transfer pricing challenge in the past year was reacting to the impact of the pandemic, which upset expected profit levels forcing multinational corporations to intervene in their pricing structures. It is still uncertain how tax authorities will take account of variations in business activity and profit levels when looking across pre-covid, covid and post-covid periods.

In terms of corporate taxation, the decision by the OECD and the G20 to introduce a global minimum tax will generate significant changes in compliance obligations. The proposal aims to impose a 15% minimum tax rate on large multinational companies from 2023. Though there may be twists and turns, it is clear that there will be significant challenges for those charged with managing multinational tax obligations.

^{1 Mazars’ CEE Tax Guide 2022 offers comprehensive insights into the latest changes and trends in the CEE tax regimes. It covers 22 countries: Albania, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Germany, Greece, Hungary, Kosovo, Latvia, Lithuania, Moldova, Montenegro, North Macedonia, Poland, Romania, Serbia, Slovakia, Slovenia, Ukraine.}