2020 was full of events as unprecedented as they were unpredictable, so much so that no one would have expected them a year earlier. 2020 changed people’s perspectives on many things, and gave many the opportunity to observe things they previously didn’t notice, both in their private and professional lives.
That is possibly why we are seeing an increase in people looking at international relocation. There can be many reasons for taking such a decision, but relocation or expansion plans are a fact and more and more entrepreneurs are looking outwards.
Let us therefore take a look at what taxes are like in our neighbouring countries (as well as those somewhat further) which are of interest to Polish entrepreneurs.
To start off, we will outline what we mean when we talk about foreign expansion. Expansion is as diverse a term as the various types of businesses that make use of it. For some, it will mean purchasing companies operating in their industry in another country. For others, it will be the equivalent of opening a branch abroad to sell their products or services there. It may also mean building a factory or setting up an office abroad to establish a base for further development. And others still will see more opportunities for expansion as they themselves move physically closer to the ‘action areas’ i.e. foreign markets. We are seeing more and more of the latter model, especially among clients who are looking to conquer the developed Western markets.
Let’s get to the point – here’s a short overview of the prospects for expansion to our closest neighbours.
THE CZECH REPUBLIC – an interesting option for Polish businesses to expand to
The Czech Republic has seemingly been getting closer to Polish entrepreneurs in recent times. This can be seen, for example, in the frequency of internet searches for keywords such as: company in the Czech Republic, business in the Czech Republic, etc.
In many ways, the Czech tax system is similar to one in Poland. However, there are a number of details that make the former look perhaps more attractive. The key details are: there is no separation of capital gains from other sources of income. There is also an interesting relief on education. Additionally, the PIT rate in the Czech Republic is significantly lower than in Poland and the VAT rate is also lower, all of this potentially makes this market more competitive. Furthermore, a user friendly legal and administrative environment, a well-developed internal market with international connections and the proximity to Poland, both geographically and culturally, all make the Czech Republic one of the most interesting options for Polish businesses to expand to.
The Czech Republic also offers an attractive R&D relief package, relief for research and development. Taxpayers who run R&D businesses benefit from a special tax deduction which allows R&D expenses to be accounted for twice: first, in the costs of obtaining a tax deduction and secondly, in a special tax deduction. There is no maximum limit.
On top of all that, there is also a tax break for education, including the deduction of various activities related to the education of secondary school pupils or students.
It is worth mentioning the absence of a separate inheritance and donations tax as another appealing characteristic of the Czech tax system. Income from those is included in the PIT, but there is also the possibility of applying other relevant breaks.
SLOVAKIA – no inheritance and donations tax
The second of our southern neighbours has a similar tax system to the one of the Czech Republic, but there are some specific differences. The CIT and PIT rates are slightly higher, however special reliefs, such as the Patent Box (similar to the Polish IP Box, but operating in a different way) and R&D relief are available. The VAT rate is slightly lower, butthe main characteristic of the Slovak tax system is the lack of inheritance and donations tax.
The Slovak market is smaller than the Czech Republic’s. It is also not as well connected to Western markets, in particular to Germany. Nevertheless, the Slovak government has introduced many initiatives to attract investors, specifically focusing on individual industries, automotive and manufacturing among others. It is worth noting one of the main incentives from an investor’s point of view, which is that Slovakia is a member of the eurozone.
From a tax perspective, Slovakiahas an interesting approach which allows the use of the 7% PIT rate on dividends paid to individuals.
On top of that, Slovakia provides tax breaks on technology. R&D tax payers benefit from a special tax deduction that allows R&D costs to be accounted for twice. Since 2020 it has been possible to account for 200% of additional costs in certain categories.
Furthermore Slovakia also uses a solution called Patent Box, which is somewhat similar to the Polish IP Box, but it operates on a different principle. It provides an exemption of up to 50% on the proceeds from the sale of intellectual property rights. Those who use this solution are recorded in a special register.
ROMANIA – a magnet for the IT industry
Although not a direct neighbour of Poland, the country is quite close and Polish investors are becoming increasingly aware of it. More and more companies looking for new investment opportunities cast their sights south-east, towards this large and dynamically developing market located in the Carpathian Mountains.
Admittedly, Romania is the least developed country in the region we are writing about and it is the furthest away from western markets. Nevertheless, the cost of labour is lower than in Poland and the availability of highly qualified specialists acts as a magnet for investors. Additionally, Romania is a member of the European Union and enjoys all the advantages associated with the internal market.
To further increase the attractiveness of this investment location, the Romanian government has developed a number of resources for investors. The pro-investment stances of the tax and administrative systems support investing in the country. In addition to the very low CIT, PIT and VAT rates, the Romanian tax system provides a number of incentives for investors, in particular from the IT industry.
One of those incentives is an income tax exemption for software development workers. A number of conditions must be met to benefit from this, but they should not pose any problems to software companies.
Moreover, income from remuneration derived from R&D activities, including those related to IT projects, is exempt from income tax in Romania.
Also, just as is the case in Slovakia, there is no inheritance and donations tax in Romania.
GERMANY – the region’s largest market
Of all the countries discussed here, Germany is undoubtedly the largest partner for Polish businesses and the most developed market, not only in our part of Europe, but throughout the Old Continent.
Increasingly, Polish entrepreneurs have been trying their hand at doing business on the western border, not only as suppliers and subcontractors, but also as competitors for local and international businesses. The tax environment on the other side of the Oder is by far the most complicated and layered of all the jurisdictions described here, including Poland.
It is worth highlighting that the German market is governed by slightly different laws from the markets of the Central and Eastern European countries discussed above. The German tax system does not provide incentives for investors. Tax rates are high and computations are very complicated. Therefore, in terms of tax and legal solutions, the aforementioned countries seem more inviting and affordable, but due to the scale of development opportunities many Polish entrepreneurs tend to naturally start their expansion plans with Germany, despite the regulatory challenges and costs.
Comparison of the main tax regulations in our neighbouring countries – what to expect when planning a business expansion strategy
The Czech Republic
15% on annual gross income of up to CZK 1.7 million, 23% on annual income above CZK 1.7 million.
21% 15% on items such as: food, social housing construction works 10% on: some medicines, books, newspapers, as well as heat supply, tap water, catering services, soft drinks and draught beer, shoe and clothing repairs, hairdressing.
In line with general PIT/CIT rates
19% on annual income of up to EUR 36,258.38 25% on amount above the aforementioned threshold.
20% 15% on items such as: food, social housing construction works 10% on: some medicines, books, newspapers, as well as heat supply, tap water, catering services, soft drinks and draught beer, shoe and clothing repairs, hairdressing.
19% 9% on items such as: the food and medical industries; 5% on: the supply of social housing under certain conditions and for accommodation, soft drinks, school textbooks, newspapers, magazines, water supply and sewage.
approximately 15.825% of income. On top of which a local trade and municipal tax, depending on the size of the municipality or locality.Currently rates range from 8.75% to 20.3%, with tax rates ranging between 30%-33% in some cities, such as Berlin, Frankfurt and Munich.
from 0%-45%, where 0% applies to income up to EUR 9,744.The rate increases exponentially to 14-42% for incomes between EUR 9,744-57,918, up to the maximum rate for income above EUR 274,612. In addition, local authorities may impose an additional tax of between 3.5% to c. 21% on business income. A solidarity tax of 5.5% has also been introduced to support less developed regions within Germany, it is calculated according to complex rules but generally applied to annual incomes above EUR 96,850. In addition, there is also a church tax of between 8% to 9%, which depends on the region and religious organisation membership.
19% 7% for certain consumer and convenience goods
according to general PIT/CIT rates
EACH COUNTRY HAS ITS OWN RULES – How to make sure you make the right decision when expanding?
As can be seen from the above brief summary on our neighbouring countries’ basic tax rules, it is paramount to carefully check the tax consequences of the planned moves before expanding abroad, no matter how near of far.
Tax rules can vary from country to country. It is worth getting acquainted with the former as early as at the planning stage of expansion, this will allow to avoid unnecessary problems at the least expected moment, but also to not miss out on important opportunities and ensure to take advantage of tax breaks and other preferential circumstances that are possibly available in the destination country. Another topic must also be tackled i.e. how to connect the dots between those matters and Polish law. To avoid this minefield we recommend speaking to an experienced advisor who could assist you in matters of scaling up businesses or maybe even relocating them. For more than 20 years, the team at Panasiuk & Partners has been specialising in legal and tax matters in international trade, it has supported businesses, business owners and investors in their bold development plans.
Adam has over eight years of experience in tax advisory for Polish and international clients. He worked in tax advisory departments of several of the so called Big Four companies as well as leading Polish tax advisory firms. He also supported one of key construction groups operating in Poland as an in-house tax advisor. Licensed […]
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