Study on Tax Burdens: Corporate Taxes Continue to Decrease in Eastern Europe


The effective tax burden in the new EU Member States is considerably lower than that in Germany, where corporate taxes are almost three times as high as in Lithuania. Investment in the new EU Member States has contributed to an overall reduction of the tax burden for German businesses.

The tax competition between the old and new EU Member States is becoming increasingly aggressive. In Germany, corporate taxes are almost three times as high as in Lithuania, and twice as high as in Poland or Hungary. These are the findings of a study conducted by the Centre for European Economic Research (ZEW), Mannheim, in collaboration with the tax consultancy firm Ernst & Young. The study has recently been updated to include the findings recorded in 2004. In the study, the effective tax burden of German corporations is compared with the tax burden of comparable companies in the new Member States. The comparison is made on the basis of all tax types, tax bases and rates.

In 2004, the tax burden on German companies experienced a slight decrease compared to the previous year, falling from 37 to 36 per cent. The tax burden is, however, considerably lower in the new EU Member States, with the tax rate amounting to 18 per cent in Hungary and Poland, 14 per cent in Latvia and a mere 13 per cent in Lithuania. The results of the study suggest that the effective corporate tax burden has decreased significantly compared to the previous year in five of the ten new Member States (Lithuania, Latvia, Hungary, Slovakia and Poland).

"The substantial differences in the tax levels among EU countries are becoming more and more pronounced,” said Matthias Roche, partner at Ernst & Young. "The competition between business locations in Europe is intensifying and Germany is falling further and further behind its European neighbours," he explained.

Several of the new Member States have announced further tax reductions for the upcoming years. Once these measures are implemented, the tax burden for companies operating in these countries is likely to decrease once again. As a result, the effective corporate tax burden in the Czech Republic, Estonia and Cyprus will total 21.2 per cent, 17.3 per cent and 9.8 per cent respectively. Cyprus will thus become the first EU country with an effective corporate tax burden below ten per cent.

"The differences in corporate taxation between EU countries are growing continuously, and they are becoming more and more of a problem for the Member States. German policy-makers should therefore continue to work towards reducing corporate taxes. The EU would, however, also do well to increase its efforts to align national tax systems,” said Christoph Spengel, ZEW researcher and professor at the University of Giessen.

German companies benefit from expanding their operations to the new EU Member States

According to the study, German companies could also benefit from the low tax burden in the Eastern European Member States if they have subsidiaries in those countries. The study has shown that a Germany company with a subsidiary operating in Lithuania has a overall tax burden of around 15 per cent. In Slovakia, the tax burden for German businesses amounts to almost 19 per cent, in Poland and Hungary to around 20 per cent.

"Shifting the manufacturing sites to, say, Poland, gives German companies a competitive edge. Alongside lower expenditure on wages, these companies also benefit from a considerably lower tax burden," explained Roche.

Download the study

About the study:

The study conducted by ZEW and Ernst & Young is based on a scientifically recognised model, which is also used by the OECD and the European Commission to measure the effective tax burden of companies. The study goes beyond standard comparisons between national tax rates and considers a number of other important factors such as important legal provisions on how the tax base is determined as well as the numerous relevant tax types. The calculations are based on key assumptions for a “sample corporation”, which has the legal status of a limited company and invests in the company building, technologies, intangible assets, inventories and financial assets. The company uses equity capital, retained profits or loans as a source of finance.