CMS Guide to Tax regimes in Central and Eastern Europe. Tax Connect

Transcription

1 CMS Guide to Tax regimes in Central and Eastern Europe Tax Connect October 2013

2 Content Introduction 3 Tax at a glance 4 Albania 8 Austria 10 Bosnia and Herzegovina 12 Bulgaria 15 Croatia 18 Czech Republic 20 Hungary 22 Montenegro 24 Poland 26 Romania 29 Russia 32 Serbia 34 Slovakia 36 Slovenia 39 Ukraine 41 Tax contacts in Central and Eastern Europe 44 Geographical coverage 46 2 Tax regimes in Central and Eastern Europe 2013

3 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-beforeseen 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. Tamás Fehér CMS Cameron McKenna E tamas.feher@cms-cmck.com 3

4 Tax at a glance 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 Austria Currency: EUR EU Member: Yes OECD Member: Yes Corporate income tax rate: 25% VAT rates: 20% and 10% Participation-exemption regime: Yes 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. 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% Participation-exemption regime: Yes Group regime: 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 Participation-exemption regime and 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 4 Tax regimes in Central and Eastern Europe 2013

5 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% 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: 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 5

6 Slovakia Currency: The Euro (EUR) EU Member: Yes, since 2004 OECD Member: Yes, since 2000 Corporate income tax rate: 23% VAT rates: 20% and 10% Participation-exemption regime: Yes Group regime: No Exemption on dividends: Yes Thin capitalisation regime: No 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 Tax regimes in Central and Eastern Europe 2013

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8 Albania General introduction There are four main categories of taxes in Albania: Indirect state taxes (VAT, excise, gambling) Direct state taxes (income taxes, taxes on capital, personal income taxes, customs taxes and other national taxes) Local taxes (taxes on small business, taxes on immovable property, board taxes, etc.) Social and health security contributions Corporate Income Tax Resident and non-resident companies which are registered for Albanian VAT at the National Registration Centre are also subject to corporation tax at a rate of 10%. However, foreign companies which do not create a permanent establishment (PE) in Albania and do not wish to pay Albanian corporation tax, but which have been registered for Albanian VAT, must specifically refuse to be registered for corporation tax. Still, any Albanian sourced income will be subject to Albanian withholding tax of 10%, subject to any applicable treaty. Participation exemption Net capital gains are regarded as taxable income. Capital gains on the sale of immovable properties are treated as business income and are consequently taxed at a rate of 10%. Dividend income is subject to the same treatment as other taxable income (10% rate), subject to participation exemption or any applicable tax treaty. Participation exemption is available on dividend distributions made by resident companies to other resident companies or partnerships. The exemption is granted to recipients holding 50% or more of the voting rights or capital value of the company making the distribution, where both companies are resident in Albania and registered for corporation tax. There is no participation exemption on dividends received from non-resident companies. Thin-capitalization regime The Albanian thin capitalization rules apply where a company s liabilities are more than four times its equity (excluding short-term loans). In such a case, the interest paid on the excess is not tax deductible. The thin capitalization restrictions do not apply to banks, insurance companies or lease finance companies. In addition, interest paid in excess of the average annual interest rate of loans, as published by the Bank of Albania, is not tax deductible. Corporate Property Tax In general, corporate property tax is due on agricultural land and buildings. The tax rate varies according to the size, location and age of the assets. Foreign Tax Credit Double taxation relief may be granted under a tax treaty. Albania allows a unilateral tax credit if all supporting documents, as required by the Ministry of Finance, are provided. Incentives Relief from corporate income tax may be granted for certain projects on a case-by-case basis, such as investments related to public services and infrastructure projects, as well as tourism and the oil industry. Value Added Tax (VAT) The standard VAT rate in Albania is 20%. However, a 10% rate applies to supplies of medicine and medical care services. VAT applies to supplies of goods and services within Albanian territory and to importation of goods. Supplies of services by non-residents are subject to the reversecharge mechanism. Exports of goods and services are exempt from VAT. A non-resident entity which supplies services for which the place of supply is considered to be Albania must appoint a VAT representative to fulfil its tax obligations in the event that VAT is due. The VAT representative must be resident in Albania. 8 Tax regimes in Central and Eastern Europe 2013

9 The VAT representative is entitled to act on behalf of the taxable entity for all purposes relating to VAT, and is jointly responsible with the debtor for the performance of all VAT obligations. Registration A person that carries out taxable supplies as part of his/her business activities is required to register for VAT purposes. The threshold for mandatory registration is annual turnover of ALL 5 million. For licensed professionals (ex. notaries, accountants, lawyers etc.) there is no threshold, they must be registered for VAT in any case. The person registered for VAT purposes is also subject to corporate income tax. Filing and payment VAT must be paid by the 14th day of each month. Recent changes The government has recently adopted a resolution which envisages that individuals with a monthly income of ALL 30,000 or less will be fully exempt from personal income tax. Under a recent amendment to the VAT law, the importation of machinery and equipment for the purpose of performing investment contracts with a value of 50,000,000 ALL, or investment contracts relating to small businesses, agricultural businesses or active processing industries, is exempt from VAT. In addition, the importation or purchase of cement and iron for use as raw materials in the construction of hydropower facilities will be exempt from VAT. Personal Income Tax Since 1 January 2011, resident individuals have been required to submit a general personal income tax declaration. The personal income tax rate in Albania is 10%. The basis for the determination of taxable income is gross taxable income less deductible expenses. Lulzim Alushaj CMS Adonnino Ascoli & Cavasola Scamoni Sh.p.k. E lulzim.alushaj@cms-aacs.com Gross taxable income includes the following: Gross salary income and remuneration of employees, or profits for the self-employed Gross dividend income arising out of partnerships or business activities Gross interest income Deductible expenses include: Social and health contributions and voluntary pension contributions Interest on loans taken out for the purpose of self-education, or education of others under the taxpayer s care Medical expenses paid for medical services provided to individuals and not covered by social security Individuals with an annual income of ALL 800,000 or more are not entitled to deduct the expenses listed above, nor are non-residents. Social Security & Health Contributions The social security and health insurance contributions total 27.9% of gross salary, with the employer paying 16.7% and the employee paying 11.2% on salary between ALL 19,026 and ALL 95,130. The employer must calculate the contribution and remit it no later than the 20th day of the month following the month of calculation. 9

10 Austria General introduction Austria is a member state of the European Union and all EU directives have been transposed into domestic law. The finance department has introduced a modern electronic system which is user oriented and flexible, and which has shortened and simplified the procedures. Since 1 January 2011, it has been possible to obtain binding tax rulings in relation to transfer prices, group taxation and restructurings. The new procedure is already widely used in practice. Major taxes Corporate Income Tax General rate: 25% Qualifying venture capital companies, investment funds and pension funds: 0% VAT Standard rate: 20% Reduced rate: 10% Personal Income Tax Progressive tax rate: up to 50% Capital Income: 25% Capital Gains from real estate (as of 1 April 2012): 25% Social Security Contributions Employer s contributions: 21.83% Employee s contributions: 18.07% Derivative Instruments Gains Tax Applicable to all kinds of capital income: 25% Real Estate Transfer Tax: 3.5% Corporate tax Tax basis Taxable income is based on annual profits, which are determined under local accounting standards and adjusted for tax purposes. For specific assets like buildings or vehicles, a maximum annual depreciation rate is fixed by law. A favourable and modern group taxation regime is available, under which domestic and foreign subsidiaries may be included in a tax group. Tax rate The corporate income tax rate is 25%. The corporate income tax rate for qualifying venture capital companies, investment funds and pension funds is 0%. Non-profit organisations are tax exempt. Capital gains Capital gains are generally subject to 25% corporate income tax unless the participation exemption applies (see below). Participation exemption Dividends received on Austrian and EU shareholdings are generally tax exempt. Dividends received from third countries are tax exempt if (i) Austria has concluded a treaty for administrative assistance with the relevant state or (ii) the shareholding represents at least 10% of share capital and the holding period is at least one year. Thin capitalisation There are no thin capitalisation rules in Austria. Interest is fully deductible. Tax loss carry-forward Tax losses can be carried forward for an unlimited period of time and may be offset against up to 75% of annual profit (i.e. 25% of annual profit remains taxable). Tax losses are extinguished if all three of the following criteria are met: 75% change in shareholders, 75% change in executive directors, and Change of business activity. Tax relief In relation to R&D expenditure, a government premium of 10% of the expenditure is paid by the state. Withholding tax Withholding tax applies to a number of payments, including dividends, interest and royalties. The statutory rate is 25%. The rate may be reduced under a double tax treaty or the relevant EU Directive. 10 Tax regimes in Central and Eastern Europe 2013

11 Transfer pricing The OECD Transfer Pricing Guidelines are applicable, as well as the Austrian Transfer Pricing Guidelines published by the Ministry of Finance in October Transfer prices are generally determined by reference to the market prices charged between unrelated parties, as determined by one of the methods envisaged by the OECD Transfer Pricing Guidelines. Taxpayers must maintain appropriate transfer pricing documentation, as described in the Austrian Transfer Pricing Guidelines. Other taxes Wealth Tax: There is no wealth tax in Austria. Inheritance and Gift Tax: Since 1 August 2008, no inheritance and gift tax is levied in Austria. Real Estate Transfer Tax: Real estate transfer tax is payable at 3.5% of the consideration paid by the purchaser. In addition, a 1.1% registration fee is levied for the registration of the new owner in the land register. Double tax treaties Value Added Tax The standard rate of 20% applies to all supplies of goods and services not specified as being subject to the reduced rate or exempted. The reduced rate of 10% applies to specific supplies of goods and services such as food, water, medicines, passenger transport, cultural and sports events, residential leases, hotel accommodation, etc. Austria has concluded double taxation treaties with more than 80 states. The double tax treaties generally follow the OECD Model Tax Convention. Sibylle Novak CMS Reich-Rohrwig Hainz E sibylle.novak@cms-rrh.com Personal Income Tax Income tax applies to seven categories of income: income from agriculture and forestry, income from independent work, income from trade, income from employment, income from capital, income from rental and other income. Income from capital (dividends, interest, capital gains etc.) is taxed at a flat rate of 25%. Income tax on the other categories of income is calculated at a progressive rate of up to 50%. As of 1 April 2012, capital gains derived from the sale of real estate are generally subject to a flat rate of 25%. 11

12 Bosnia and Herzegovina General introduction In order to explain the tax system in Bosnia and Herzegovina ( BiH ), reference must be made to the Dayton Agreement 1995 (hereinafter the DA ). The DA established a constitution for BiH, as well as constitutions for the entities within BiH the Federation of BiH ( FBiH ) and Republika Srpska ( RS ). Brčko District ( BD ) was subsequently created as a third unit. Consequently, the tax systems vary between the three units in terms of tax rates and tax benefits. Different tax authorities (at entity, cantonal and municipal levels) are responsible for collecting taxes. A centrally administered VAT regime was enacted at BiH level on 1 January The BiH Indirect Taxation Authority is responsible for collecting value added tax and customs and excise duties throughout BiH, as well as coordinating fiscal policy issues generally. Main taxes Value added tax: 17% Corporate income tax: 10% Personal income tax 10% of gross salary in FBiH 10% in RS 10% in BD Property tax: annual charge at various rates per square metre or based on market value Real estate transfer tax: in RS, real estate transfer tax is 3% of the estimated property value. In the FBiH, cantonal laws set the tax rate by reference to the value of immovable property (5 to 8%) Excise duties on some commodities, such as oil products, tobacco products, soft drinks, alcoholic drinks, beer, wine and coffee Corporate Income Tax Corporate Income Tax is payable by companies and other legal entities that independently and permanently carry out economic activities for profit. Non-residents are subject to the unit (FBiH, RS or BD) tax on profits achieved in that unit. The tax base is the entity s accounting profit, adjusted in accordance with the provisions of the Corporate Profit Tax (CPT) Law. The tax rate in all three units is 10%. A wide range of incentives is available in FBiH and BD, while the CPT Law in the RS does not offer tax incentives. Tax loss carry forward In general, a tax loss can be carried forward and offset by reducing the taxable base in the following five years. Tax losses incurred outside the unit of residency cannot be deducted from the tax base. Thin capitalisation There are no thin capitalisation rules. Withholding tax In FBiH, a 10% withholding tax is charged on interest, royalties, fees for market research, tax advisory or audit services, and insurance or reinsurance premiums. A 5% withholding tax is charged on dividends. In RS and BD, a 10% withholding tax is payable on interest paid to non-residents, interest paid by permanent establishments or subsidiaries on loans from their foreign associates, royalties, and fees for management, consulting, financial, technical or administrative services. In RS dividends are subject to a 10% withholding tax, but this can be reduced to 0% if the foreign shareholder holds at least 10% of the company paying the dividend. These rates can also be reduced under double tax treaties. Transfer pricing Transfer pricing issues are regulated by the applicable CPT Legislation for each entity. In all jurisdictions, the taxpayer has an obligation to report related party transactions in its tax statement (an additional document submitted with the tax return). The taxpayer must also report the value of related-party transactions separately, based on market prices or substantially similar transactions (i.e. at arm s length prices). 12 Tax regimes in Central and Eastern Europe 2013

13 The CPT legislation does not explicitly regulate the form of transfer pricing documentation. However, the legislation does stipulate the transfer pricing methods that can be used to establish the market value of the goods/services. Based on current practice, in the absence of adequate transfer pricing documentation the taxpayer runs the risk of the tax authorities not recognising expenses in full, or making a deemed increase in the revenue generated by transactions with associated companies. Tax consolidation Tax consolidation at group level is possible upon request, provided that all the companies within the group are resident in the same unit (FBiH, RS and BD). Different detailed regulations apply in each unit. Value Added Tax Any person who independently carries out any economic activity at any place, whatever the purpose or result of such activity, is a taxable person for VAT purposes. VAT is payable on all supplies of goods and services made for consideration by a taxable person acting as such in BiH, and on the importation of goods. There is a single tax rate of 17%. Social Security/National Insurance Contributions In all entities, contributions are calculated on the basis of gross wage (net wage multiplied by a predetermined coefficient). Employee s contribution FBiH: 17% for pension insurance, 12.5% for health insurance, 1.5% for unemployment insurance (a total of 31% of gross wage) RS: 18.5% for pension insurance, 12% for health insurance, 1% for unemployment insurance, 1.5% for child protection (a total of 33% of gross wage) BD: 17% or 18,5% for pension insurance for employees from both entities, 12% for health insurance and 1.5% for unemployment insurance Employer s contribution FBiH: 6% for pension insurance, 4% for health insurance, 0.5% for unemployment insurance (a total of 10.5% of gross wage) RS: nil BD: 6% of gross wage for pension insurance for employers who apply FBiH law The BiH Indirect Taxation Authority is responsible for collecting value added tax across the whole territory of BiH. A system of tax representatives is also in place. The VAT Law follows the EU VAT Directive. Personal Income Taxation Personal income tax applies to an individual s income. Residents in each entity are liable to income tax on their worldwide income (i.e. income derived anywhere in BiH or abroad). Non-residents are liable to income tax on income derived within the particular entity. Personal income tax rates apply to the difference between total taxable income and expenses recognised for tax purposes. The tax base for non-residents is gross income with various exemptions/special rules. The applicable tax rates are as follows: 10% (FBiH) 10% (RS) 10% (BD) 13

14 Other Real Estate Transfer Tax In FBiH the taxpayer is the seller of the property. Cantonal laws determine the tax rate according to the value of the immovable property (5% - 8%). Inheritance Tax Inheritance and gift taxes are levied at cantonal level in FBiH, at rates between 2% and 10%. Property Tax In FBiH property tax is levied at the cantonal level. Allocation of the revenue from this tax between the cantons and municipalities is prescribed by cantonal laws. In RS property tax is administered and levied by the central government on behalf of the local communities. The taxable base is the estimated market value of the immovable property while the tax rate, depending on the local community varies between 0.05% and 0.5%. In BD the minimum and maximum tax rates vary between 0.05% and 1%. The actual tax rate is fixed annually by the Brčko parliament. Double Tax Treaties BiH has 29 treaties in place. Wolfgang Auf CMS Reich-Rohrwig Hainz E wolfgang.auf@cms-rrh.com 14 Tax regimes in Central and Eastern Europe 2013

15 Bulgaria Corporate tax Corporate taxation in general Bulgaria levies corporate tax at a flat rate of 10%. In addition to the standard tax on corporate profits, there is also a special tonnage tax (optional regime), a gambling tax and a tax on certain expenses. Some income derived by non-resident legal entities without permanent establishments in Bulgaria is subject to a final withholding tax, which is levied on gross income. The taxable entities are primarily companies incorporated under Bulgarian law and non-resident companies (in respect of their own Bulgarian income or income derived through a Bulgarian permanent establishment). Income from special investment schemes, trusts, pension funds and other collective investment vehicles, Bulgarian REITs, etc. are exempt from corporate income tax. However, dividends distributed by such companies are taxed at shareholder level. The tax year generally corresponds to the calendar year. Most taxpayers are required to file corporate tax returns by 31 March of the year following the respective financial year. Different reporting rules apply to companies which are subject to special taxes. Annual corporate tax is due on the same date, with advance payments made during the year being deducted from the final amount due. The amount of the advance payments is determined on the basis of the forecasted taxable profit for the current year as declared in the tax return for the previous fiscal year or as subsequently amended with a declaration. If the net sales are up to BGN 300,000 (approx. EUR 153,280) advance payments are not mandatory. Bulgaria has concluded 68 double tax treaties and around 63 investment protection treaties. Tax on expenses Bulgaria levies 10% annual tax on entertainment expenses, the cost of social benefits provided in-kind to employees and maintenance and running costs for vehicles. Withholding tax Dividends: Dividends distributed to Bulgarian or EU/ EEA corporate shareholder are exempt from withholding tax, whilst ordinarily withholding tax of 5% of gross income applies. Interest and royalties: Interest and royalties paid to qualifying EU companies are subject to 5% withholding tax provided that the payer and the recipient are related companies and certain conditions are met. The preferential rate of 5% does not apply to certain hybrid financial instruments, however. Otherwise, the tax rate is 10%, unless a more favourable double tax treaty rate applies. Capital gains: Gains realised by non-residents on the sale of financial assets or real property are subject to 10% withholding tax, levied on the difference between the acquisition and the sales price. Other income: Certain income derived by nonresidents and not generated by a permanent establishment in Bulgaria, such as remuneration for technical services, remuneration under franchise and factoring agreements etc., is subject to a withholding tax of 10%, subject to any double tax treaty. EU/EEA entities may opt for net taxation of certain income under certain conditions, subject to following a specific procedure. Transfer pricing Bulgarian transfer pricing rules apply to dealings between related parties and in certain cases between unrelated parties. Taxpayers are not obliged by law to create and maintain transfer pricing documentation either before or at the time of the controlled transaction. Domestic transfer pricing guidelines nonetheless recommend preparing and maintaining transfer pricing documentation on an ongoing basis. Advance Pricing Agreements are not available in Bulgaria yet. Anti-avoidance Bulgarian tax law adopts the substance-over-form approach to combating tax avoidance. 15

16 There is also a concept of countries with preferential tax regimes. These are countries which do not have a tax treaty with Bulgaria where the income tax applicable to Bulgarian income is over 60% lower than the corresponding Bulgarian tax. There is also a (black) list of countries with preferential tax regimes. It includes countries such as Monaco, Virgin Islands (US and UK), Aruba, San Marino, Guam, Dutch Antilles, Hong Kong, Gibraltar, etc. Certain income paid to residents of the above countries is subject to a 10% withholding tax. Thin capitalisation The deduction of interest paid on loans from third parties is limited to the total interest received by the company plus 75% of its profits (calculated without taking into account interest income and expenses) where the company s debt-to-equity ratio exceeds 3:1. Interest payable to banks is only caught by these rules if the bank and the company are related parties or the loan is guaranteed by a borrower s related entity. In general, non-deductible interest may be carried forward and deducted from the company s profits in the following five years, subject to specific conditions and requirements. Compensating losses Domestic: Companies may carry forward losses for five consecutive years. Carrying forward is not allowed in the context of restructuring transactions, except in the case of a change of legal form and for permanent establishments in Bulgaria resulting from an EU merger. Offsetting foreign losses: The ability to offset losses generated through a foreign PE depends on whether the applicable double tax treaty applies the exemption or credit method. The exemption method is more restrictive in that it will only allow the losses to be offset against the profits of that same source in that same country of establishment of the respective PE, but it allows for the remaining losses to be used by the Bulgarian entity upon termination of a PE in an EU/EEA state. 16 Tax regimes in Central and Eastern Europe 2013 Personal Income Tax Taxes Individuals resident in Bulgaria are taxed at a flat rate of 10% on their worldwide income on a self-assessment basis, unless in an employment or similar relationship. There is no minimum taxable threshold. Dividends and liquidation quotas are subject to 5% tax, calculated on the gross income. There are special rules for calculating the taxable base for capital gains upon disposal of real estate and financial assets, selfemployment income, revenues from leasing of movable and immovable property, etc. Non-residents receiving Bulgarian income are subject to 10% withholding tax on the income, except for dividends and liquidation quotas, which are taxed at 5% unless a more favourable tax treaty is applicable. Generally, all income paid by Bulgarian legal entities or persons is treated as Bulgarian income. EU/EEA individuals may opt for net taxation of certain income under certain conditions, subject to following a specific procedure. In addition, there is a range of tax exemptions, some of which are also available to EU/EEA citizens. Social security Social security contributions (including health insurance) in Bulgaria vary between 30.7% and 31.4%, depending on the age of the employee, the type of work, etc. The apportionment of these contributions as between employer and employee depends on the particular contribution. Local taxes Real estate tax: Real estate tax is levied on the tax value of the real estate for residential property and the higher of tax value and net book value for business property. The rate varies from 0.01% to 0.45% depending on the municipality. Transfer tax: Transfer tax is levied on transfers of ownership of real estate and vehicles, as well as on the creation of in rem rights over real estate. The tax base is the tax value of the property or right in question. The rate varies between 0.1% and 3%, depending on the municipality. The taxable person is normally the acquirer of the property/right. Gift and inheritance tax: The rate of gift and inheritance tax varies between 0.4% and 6.6% for collateral relatives and non-related persons, but there is no tax where the gift is made by, or the property inherited from, a direct relative or spouse. Proceeds from the sale of inherited property are not subject to tax.

17 Value Added Tax General The standard VAT rate is 20%. The reduced rate is 9% and applies to certain tourist services such as hotels and other places of accommodation. The VAT system is generally aligned with the EU VAT Directive. VAT registration Persons (both natural and legal) with taxable turnover exceeding BGN 50,000 (approximately EUR 25,000) in any 12-month period must register with the tax authorities for VAT purposes. Mandatory VAT registration also applies to intra- Community acquisitions above a certain value, and to foreign entities, not established in Bulgaria, which make taxable supplies in Bulgaria in respect of which they are required to pay VAT, or which have a fixed place of business there. Excise duties The following are subject to excise duties: alcohol and alcoholic beverages; tobacco products; energy products and electricity. Valentin Savov CMS Reich-Rohrwig Hainz E valentin.savov@cms-rrh.com Jivko Sedlarski CMS Reich-Rohrwig Hainz E jivko.sedlarski@cms-rrh.com Elisaveta Georgieva CMS Cameron McKenna E elisaveta.georgieva@cms-cmck.com Taxable persons (including foreign persons) also have the option to register for VAT voluntarily. Exempt supplies and incentives The list of exempt supplies replicates the list contained in EU directives. Taxable persons may treat a supply under certain leasing agreements as VAT-able. The same is true for transactions involving (parts of) old buildings and adjacent land, or non-regulated land, and leases of premises to an individual (not being a trader) for domestic purposes. The VAT Act enables investors to benefit from lighter importation requirements and shorter timescales for VAT refunds. In both cases the investor must meet certain requirements and must submit an application for permission to the Minister of Finance. 17

18 Croatia General introduction During the recent years, the tax system in Croatia was being aligned with EU, which resulted with its full harmonization with EU regulations as of 1 July 2013 when Croatia joined the EU. The tax collection process is divided between different official authorities according to the source of tax revenue. Main taxes VAT: 5%, 10% and 25% Corporate income tax: 20% Personal income tax: progressive rates: 12%, 25% and 40% Real estate transfer tax: 5% Excise duties: alcohol, alcoholic beverages, tobacco, energy and electricity Special taxes: non-alcoholic beverages, coffee, motor vehicles, vessels and aircraft, liability and comprehensive road vehicle insurance premiums County, municipal and town/city taxes as part of regional and local government revenue; city surtaxes on personal income tax Corporate Profit Tax The entities subject to corporate profit tax are resident companies and other legal entities carrying out activities with a view of profit, as well as permanent establishments of non-resident businesses. Individual entrepreneurs may, subject to certain conditions, elect to become corporate profit taxpayers. The corporate profit tax base is determined in accordance with the accounting regulations and adjusted for tax purposes in line with the Corporate Profit Tax Law. The general tax rate is 20%. Tax exemptions and other tax reliefs are available in accordance with special legislation regulating incentives. The Merger Directive, Interest/Royalty Directive and Parent/Subsidiary Directive have been implemented in the Corporate Profit Tax Act and are applicable from Croatia s accession to the EU (i.e. 1 July 2013). Special reduction of the tax base As of 2012, the tax base may also be reduced by the amount of profit used to increase the share capital of the company. The taxpayer has to prove that share capital was actually increased. The reduction will not apply where tax avoidance or evasion is the sole purpose of the increase. Tax loss carried forward Generally, a tax loss can be carried forward for five years. If the right to offset losses passes to a legal successor by virtue of a merger, acquisition or division, the right to carry forward transferred losses starts in the period during which the legal successor acquired that right. The legal successor may lose the right to carry forward tax losses if the original taxpayer had not been carrying out business activities during the two tax periods before the change, or if the business activity changes significantly in the two tax periods after the change (where the change is not intended to preserve jobs or bring about a recovery of the business). The above is also applicable when there is a change of control during the tax period (affecting more than 50% of ownership). Thin capitalisation If the amount borrowed from shareholders holding at least 25% of the shares, equity capital or voting rights in a taxable person exceeds four times the amount of that shareholder s share in the capital or voting rights, interest on the excess will not be tax-deductible. Participation exemption Dividends received are not included in the corporate tax base, regardless of whether they are received from a domestic or foreign entity. Withholding tax Withholding tax is generally payable at the rate of 15% on the gross amount of interest, royalties, payments in respect of other intellectual property rights and service fees paid by a resident to a non-resident, who is not a natural person. Dividends paid abroad, with the exception of dividends paid to natural persons, are subject to withholding tax at the rate of 12%. 18 Tax regimes in Central and Eastern Europe 2013

19 Withholding tax may be further eliminated/reduced by applying the Interest/Royalty Directive and Parent/ Subsidiary Directive or the double tax treaties (where the rate may be reduced to 5 or 0%). Additionally, there is a 20% withholding tax on payments for services of any kind made to persons with a business seat or place of management in a country blacklisted by the Ministry of Finance. Transfer pricing The transfer pricing legislation follows the OECD Transfer Pricing Guidelines. Transfer pricing rules apply to transactions between related resident and non-resident companies and between two resident companies where one or both companies: Have beneficial tax status (i.e. pay corporate profit tax at a rate lower than prescribed); or Have the right to carry forward tax losses from earlier tax periods. In accordance with a special rule for interest on loans between related parties, the arm s length interest rate is determined and published by the Finance Minister before the beginning of the tax period in which it is to apply. If the Finance Minister does not determine and publish such a rate, the base rate of the Croatian National Bank applies (currently 7%). Value Added Tax The VAT system in Croatia is harmonized with the EU VAT Directive. VAT rates are 25%, 10% (tourist accommodation, food preparation and serving nonalcoholic beverages, wine and beer in restaurants and bars, certain newspapers and periodicals, edible oils and fats, infant food, water (except bottled water) and sugar) and 5% (with right to deduct for bread, milk, medicine, implants, professional magazines etc.). Personal income tax and other taxes Personal income tax Personal income tax applies to an individual s income. Different methods of calculating the tax base apply to different sources of income. The tax base for residents is determined on a worldwide basis, while non-resident taxpayers are only liable to pay tax on income sourced in Croatia. Tax rates are progressive: 12%, 25%, and 40%. City surtax Municipalities and cities may levy an additional tax, called the city surtax, which is calculated and withheld on the amount of personal income tax payable. City surtax is payable by reference to the residence or habitual abode of the taxpayer, at rates varying from 0 to 18%. Social security contributions Pension contributions (payable by the employer): Inter-generation solidarity contribution at the rate of 20% (for employees insured according to the previous pension system); or Inter-generation solidarity contribution at the rate of 15% and individual capital saving at the rate of 5%. Health care contributions (payable by the employee): Obligatory health care insurance at the rate of 13%; Unemployment insurance at the rate of 1.7%; and Work Accident or professional illness insurance at the rate of 0.5%. Real Estate Transfer Tax Real estate transfer tax is payable by the transferee at the rate of 5%. The tax base is the market value of the real estate at the time of purchase. Wolfgang Auf CMS Reich-Rohrwig Hainz E wolfgang.auf@cms-rrh.com Foreign businesses receiving VAT taxable supplies in Croatia have the right to a VAT refund, where Croatia requires reciprocity with the business s country of residence. The reciprocity is not required for taxpayers from EU member states. 19

20 Czech Republic General introduction The tax system in the Czech Republic is very similar to other European tax systems, having undergone years of harmonisation. The Czech system includes the following taxes: personal income tax, corporate income tax, VAT, road tax, real estate tax, real estate transfer tax, inheritance and gift tax, excise taxes and energy taxes. Health and social insurance also form part of the Czech tax system. Main taxes and rates Personal income tax: 15% plus 7% on income exceeding 1,242,432 CZK (approx. EUR 48,500) Corporate income tax: 19% VAT 21% basic rate 15% reduced rate Social & Health Insurance Contributions Employer s contributions: 34% of gross salary Employee s contributions: 11% of gross salary Corporate Income Tax The corporate income tax rate is 19%. There is also a reduced rate of 5%, levied on investment, pension and share funds. There are currently (2013) no significant amendments planned for corporate income tax. Tax losses Tax losses can be carried forward for five years after the year in which they were generated. The deduction of carried-forward tax losses is limited if there is a change in the direct shareholding of the company of more than 25%. In this case, losses are only deductible if at least 80% of current revenue is generated from the same business activity as that carried out in the taxable period when the tax loss was generated. Under Czech law, tax losses cannot be offset against the profits of another company within the group. Participation exemption and dividend exemption The participation exemption applies to income generated from the transfer of shares in Czech and foreign (even non-eu) companies. However, certain conditions apply to the exemption: the parent company must hold at least 10% of the shares for more than 12 months; in the case of a company tax-resident in a non-eu country (i.e. where the parent company is a tax resident in the Czech Republic and the subsidiary is a non-eu resident), that country must also have signed a double taxation treaty with the Czech Republic, and its corporate income tax rate must not be lower than 12%. The exemption does not apply to shares acquired as part of the purchase of a business or part thereof. The conditions for tax exemption of dividends are analogous to the conditions for the participation exemption. Research and development expenses A taxpayer may deduct from the tax base 100% of the expenses incurred, during the relevant taxable period, in carrying out research and development projects. These may relate to experiments or theoretical work, proposed technologies etc. This means that such expenses will be deductible twice once as expenses incurred to generate income, and secondly as items deductible from the tax base. Investment incentives Manufacturing companies may be granted a partial or complete income tax allowance for a period of up to 10 years, together with support for the creation of new jobs and employee re-training. Investment projects in the Czech Republic may be financed from three main public sources local investment incentives, EU structural funds and EU central funds. Withholding tax Among others, income from dividends, interest and royalties is subject to domestic withholding tax. The withholding tax rate is 15%. A 5% rate applies to finance leasing fees. Where the income is paid to a non-resident, the rate of withholding tax is usually reduced by a double taxation treaty or under the relevant EU Directives. A 35% rate applies to income paid to non-residents from countries without a double taxation treaty with the Czech Republic. 20 Tax regimes in Central and Eastern Europe 2013

21 Transfer pricing In the Czech Republic, all transactions with associated enterprises must be carried out in accordance with the arm s length principle. Preparing transfer pricing documentation is not obligatory under Czech law; taxpayers may prepare such documentation in accordance with the OECD Transfer Pricing Guidelines or the EU Transfer Pricing Documentation approach, or they may present other evidence and documents. It is the taxpayers decision as to how they prove and justify the prices between associated enterprises. Taxpayers may also ask the tax authorities for a binding ruling regarding transfer prices. Thin capitalisation rules The thin capitalisation rules concern loans and credit granted by related persons, and apply not only to interest but to all finance costs relating to the loan or credit. The debt-to-equity ratio which is expected to be maintained is 4:1. Finance costs exceeding this ratio are generally non-deductible. Moreover, finance costs exceeding this ratio and paid to a tax resident in a non-eea country are recharacterised as dividends. Such dividends are subject to the standard 15% rate of withholding tax, unless the relevant double taxation treaty provides otherwise. Value Added Tax Czech VAT law is harmonised with the EU VAT Directive. For 2013, the standard rate is 21% and the reduced rate is 15%. The majority of goods and services are subject to the standard rate. The reduced rate applies to food, medicines, printed matter, public transportation, water and distribution, cultural activities, accommodation, and construction works. In 2012, a reverse charge system was introduced for construction and assembly services in an effort to prevent tax evasion. Personal income tax The tax base for an individual includes all income generated by any activity. The Income Taxes Act recognises five sources of income: employment, entrepreneurial activity, capital, leased property and other income. The personal income tax rate is 15%. Tax on employment income is calculated on the basis of super-gross income. This represents gross income increased by an amount corresponding to the social security and health insurance contributions paid by the employer (34% of gross income). Deductions are available against income from entrepreneurial activities and property leasing, either in the amount of actual expenses or as a fixed percentage of income (30% - 80%). From 2015, the super-gross basis of assessment is planned to be abolished and the personal income tax rate is to be increased to 19%. Rates of social security contributions Health Insurance Employee: 4.5% Employer: 9% Sole trader (contributions calculated on 50% of tax base): 13.5% Social Insurance Employee: 6.5% Employer: 25% Sole trader (contributions calculated on 50% of tax base): 31.5% The social insurance contributions cover sickness insurance, pension insurance and state employment policy contributions. There are caps applicable to the assessment base of employer s and employee s contributions for social security insurance (48 times the average monthly wage, or 1,242,432 CZK (approx. EUR 48,500)). Contributions are not payable on the excess. Health insurance has no caps. Other tax news As of the end of 2012, the Czech Republic has signed 80 double taxation treaties. During 2012, for instance, it renewed its treaties with Poland and Croatia. Radko Matyáš CCS Consulting, s.r.o. E matyas@ccsconsulting.cz 21