In recent years, EU countries have undertaken tax reforms to maintain tax revenue while supporting investment and economic growth. Tax reforms generally focused on reducing individual and corporate income tax rates while increasing environmental or wealth taxes. However, as summarised here, not all tax reforms were created equal. Poorly designed fiscal policy and tax hikes might undermine the economic recovery.
The European Commission has recently released the fiscal policy guidance for 2023 as EU countries are recovering from the economic impact of the pandemic. The 2022 winter Commission forecast (done before Russia invaded Ukraine) projected 4 percent Gross Domestic Product (GDP) growth for the EU member states in 2022 and 2.8 percent GDP growth for 2023.
With these economic predictions, the European Commission recommends that low-debt countries focus more on investment for the green and digital transition. In contrast, high-debt countries should concentrate on reaching budgetary stability and debt reduction.
Austria’s 2022 budget reduced from 35 percent to 30 percent of the personal income tax rate for the second tax bracket as of July 2022. In 2021, the personal income tax rate on the first tax bracket was also lowered, from 25 percent to 20 percent. However, another reduction from 42 percent to 40 percent for the third income tax bracket was pushed back one year to mid-2023.
In 2021, the Czech Republic reintroduced progressive income taxation with two tax brackets and a top rate of 23 percent on income beyond CZK 1 million (the US $44,679), which was raised to CZK 1.8 million ($80,421) in 2022. Previously, a 15 percent flat tax was applied.
Greece suspended the solidarity surcharge in 2020. However, in 2022, the surcharge will be suspended only for workers in the private sector.
Latvia cut the top tax rate from 31.4 percent to 31 percent in 2021. The maximum rate applies to income above EUR 78,100 ($86,129).
In 2021, Norway reduced the income tax rate by 0.2 percentage points for the first and second tax brackets. In 2022, it increased the income tax rate by 0.2 percentage points for the third and fourth tax brackets, and a fifth tax bracket was added for incomes over NOK 2 million ($2.28 million) that are subject to a marginal tax rate of 17.4 percent on top of the 22 percent flat tax.
Therefore, in 2022, the top income tax rate has increased from 38.2 to 39.4 percent. Additionally, Norway continued to adjust the income tax brackets for inflation.
Norway also raised the adjustment factor applied to gains on shares and dividends from 1.44 percent to 1.6 percent in 2022, raising the effective capital gains tax rate from 31.7 percent to 35.2 percent.
Poland approved a tax reform plan, the so-called “Polish Deal,” in 2022. The reform increased the income tax threshold from PLN 8,000 ($1,885) to PLN 30,000 ($7,074), while the health insurance contribution is no longer tax-deductible from the personal income. Instead, tax relief is offered to taxpayers with annual earnings between PLN 68,410 ($16,132) and PLN 133,692 ($31,527).
In 2021, Spain raised income tax by two percentage points for those with an annual income greater than EUR 300,000 ($331,485). This pushed the top statutory tax rate to 54 percent in Valencia Community. The last time Spain’s central government adjusted the individual income tax brackets for inflation was in 2008.
Additionally, the tax on capital gains above EUR 200,000 ($220,566) was increased by three percentage points to 26 percent.
In 2024, Austria will cut the corporate income tax from 25 percent to 23 percent. The government is also considering raising the tax exemption threshold on profits to EUR 30,000 ($33,085) from 13 percent to 15 percent.
France lowered the standard statutory corporate income tax rate in 2022 to 25.83 percent (including the 3.3 percent social surcharge).
The Netherlands discarded the planned initial reduction of the corporate tax rate to 21.7 percent, and, in exchange, the statutory corporate income tax rate was increased to 25.8 percent in 2022. However, at the same time, the higher tax bracket was increased from EUR 245,000 ($270,193) in 2021 to EUR 345,000 ($380,476) in 2022.
Poland, trying to emulate Estonia, adopted a new tax rule in 2021 that allows businesses with revenues below PLN 100 million ($24 million) to be taxed on their income when it is distributed to shareholders. Limiting the reform only to businesses below the revenue threshold could drive some companies to misreport revenues to stay below the threshold. In 2022, the “Polish Deal,” a tax system overhaul, came into effect.
Many measures focus on tax relief for Research and Development (R&D), such as the simultaneous application of the R&D and patent box’s tax relief or a 200 percent deduction for certain R&D expenditures. Additionally, a minimum 10 percent corporate income tax has been approved, applied when a company’s net income represents less than 1 percent of the total revenue, excluding capital gains.
Spain approved a new minimum corporate tax rate of 15 percent for 2022, applied to large companies with annual revenue over €20 million (US $22 million), while banks and energy firms must pay a minimum of 18 percent. Large multinational businesses headquartered in Spain will also face higher taxes as in 2021, the government reduced tax exemptions from 100 percent to 95 percent for dividends and capital gains from overseas subsidiaries.
In 2021, Sweden cut the corporate income tax from 21.4 percent to 20.6 percent.
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