Mazars publishes its latest Central and Eastern European Tax Guide

The Mazars CEE Tax Guide analyses and summarises the fiscal changes in 21 countries and focuses on labor costs, indirect taxes, as well as the various aspects of corporate taxation and transfer pricing. The global pandemic induced several changes to the tax systems in the region, but the study focuses on long-term trends, as investment decisions are best supported by the analysis of trends and changes in regional tax regimes, both in historical and geographic comparison.

The list of countries in Mazars’ tax brochure has been steadily expanding in recent years, with the 2021 edition presenting data from 21 countries: besides the Visegrad Group[i] countries, the states of Southeast Europe, Germany, Austria, Russia, Ukraine, and the Baltic states are also featured. The annual research aims to provide a comprehensive insight into the tax regimes and policies of the listed countries, so the interim tax reliefs introduced in the context of the coronavirus pandemic were not the subject of this year’s survey.

„The Romanian tax landscape in FY 2021 is marked by measures to alleviate the COVID-19 economics low down as a means to ensure a solid route for economic recovery. Fiscal stimulus measures such as a tax amnesty aim to consolidate budgetary revenue collection coupled with an increase in taxpayers’ compliance. The Romanian Tax Authorities are accelerating steps for rolling out digitalisation projects which facilitate liaison and communication with taxpayers to also ease compliance. Going forward, economic recovery may translate into a rising number of tax audits.”, mentioned Edwin Warmerdam, Partner, Head of Tax, Mazars Romania.

In 2021, labor and wages related taxes and contributions continued to decrease, but their actual rates vary across the region. While Romania, Bulgaria, Ukraine, and Hungary still apply flat rate income tax, others countries, like the Czech Republic, Austria, Germany, Slovenia, Croatia, and Slovakia, operate with progressive income tax rates.

The regional average of employers’ total wage cost remains unchanged at 160% of net wages, but this value varies significantly across countries. Among taxes and contributions, the ratio of employer costs to gross wages averages 15%, but there is a difference of more than 30 percentage points between the lowest and highest employer contributions. The two extremes (the contribution burden is below 5% in Romania and above 30% in Slovakia) also highlight the limitations of the comparability of the respective tax systems.

The countries of the region show the largest variance in their wage levels. The minimum wage in the V4 countries ranges between €400-630, it is significantly lower in the Balkans and Ukraine, and no competition to around €1,700-1,900 in Germany and Austria. By 2021, however, the minimum wage in euros has risen significantly in several countries (Bosnia, Serbia and Latvia).

In Romania, starting from January 1, 2021, the minimum monthly gross wage guaranteed in payment, without including bonuses or other additions, is increased to RON 2,300. The minimum monthly gross wage for the period January 1, 2020 – December 31, 2028 in the construction sector is RON 3,000 per month.

The average wage level in euros increased the most in the private sector, by 14% in Germany, but also by 5-10% in Slovakia, Croatia, Latvia and Northern Macedonia. At the moment, the value of the average salary in Romania is around RON 5,429.

VAT and new rules for e-commerce

There was no change in VAT rates across the region over the past year, with standard VAT rates averaging at 21%, but showing major differences across the examined countries. The 27% and 25% standard VAT rates in Hungary and Croatia remain particularly high. By comparison, in Germany, where the average wage is already close to €4,000, the standard VAT rate is 19%.

The rules of international e-commerce were also transformed from July 1, 2021. At the EU level, a significant change in VAT taxation is the extension of the OSS (Single Window System, formerly MOSS system, which was only applicable to telecommunications, radio and television broadcasting and electronic services) to distance selling to private individuals in general, and to all services supplied to non-taxable entities, provided the place of delivery of the service coincides with the member state of effective use.  

„During 2021, trends in the taxation area seen before the debut of the COVID-19 pandemic have only accelerated. In most CEE countries, the year has started with more and more disclosure of information by taxpayers towards their national tax authorities with the start of the DAC6 mandatory reporting of qualifying cross-border arrangements. This has the potential to yield a more forceful focus on international tax planning which last year was only delayed by the exceptional circumstances generated by the world health crisis. Especially for Romania, the start of 2021 has seen a significant increase in the number of tax audits and the aggressiveness of the tax authorities in their assessments, albeit the process became in some cases less burdensome through the adoption of electronic means of communication.”, mentioned Lucian Dumitru, Tax Director, Mazars Romania.

Corporate income tax

It remains obvious that countries in the region place a very different emphasis on the taxation of corporate revenues: there is a difference of 22 percentage points between the lowest and highest corporate tax rates. Germany has the highest corporate income tax rate (31%), the lowest are Hungary and Montenegro (9%), while the mainstream corporate tax rate in the countries of the region is typically between 15-20%. In Romania, the general corporate income tax rate is 16%.

However, the limits of tax competition are becoming increasingly visible. On one hand, there is no country where the rate of corporate income tax was lowered, while the European Union also actively seeks to limit tax competition. The EU’s objective is to establish a common framework for corporate taxation, or at least to prevent the applications of the most harmful tax avoidance techniques in the member states. An important tool in this effort is the Anti-Tax Avoidance Directive (ATAD, Directive 2016/1164 EC), which is mandatory for Member States from January 1, 2019. The adoption of this set of EU rules, including those on the restrictions of interest deductions, was the biggest challenge of the past years. The standardization of offshore (controlled foreign company, CFC) is also rooted in ATAD.

The planned introduction of a global minimum tax will fundamentally change the future of corporate taxation and the stage of tax competition between countries

Without exception, CEE countries applying traditional corporate taxation allow the carry-over of losses acquired in previous years and the possibility of standing these against the positive tax base of later years. This option typically can only be used for a predetermined period of time, usually for 5 to 7 years, in some places only for 3 to 4 years. Currently, 7 countries allow unlimited loss carry-forward.

Regarding corporate income tax, it is worth noting that Hungary and Lithuania still do not apply withholding tax on capital income. Since 2019, group taxation has also been available in Hungary, which was previously only available in Austria, Poland and Bosnia and Herzegovina.

Transfer pricing

By 2021, transfer price regulations appeared in the tax regimes of almost all countries, except for Montenegro. The OECD's country-by-country reporting (CbCR), aimed at improving transparency, makes the information needed to assess tax risks available to local tax authorities.

Regarding transfer prices, the biggest challenge of the past year has arguably been responding to the consequences of the global pandemic. The crisis has transformed expected profit levels, multinationals had to change their pricing structures, and the question remains to what extent the tax authorities will accept or challenge tax bases that will be significantly lower than in previous years.

The G7’s[ii] decision to introduce minimum global taxation sets a clear path to what comes next in corporate taxation. We do not see the end of the road yet, but it is clear that there will be fewer and fewer opportunities for multinationals to use profit shifting.

„Multinational groups present in the region should consider shifting their focus from simply fulfilling local transfer pricing documentation requirements, to concluding Advance Pricing Agreements (APA) with local tax authorities, that enable a transparent approach and offer long term certainty in respect of pricing methods.”, mentioned Liviu Gheorghiu, Transfer Pricing Senior Manager, Mazars Romania.

Compare now the tax measures in each CEE country with the help of our interactive comparison tool

Access the tool