Comparing Europe’s Tax Systems: Cross-Border Tax Rules
3 min readBy:Today’s map looks at how European OECD countries rank on cross-border tax rules and is the last in our series examining each of the five components of our International Tax Competitiveness Index (ITCI). Cross-border taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rules define how income earned abroad and by foreign entities are taxed domestically, making them an important element of each country’s tax code.
The ITCI’s cross-border tax rules component compares various aspects of OECD countries’ cross-border tax systems, namely territoriality, withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. taxes, tax treaties, and cross-border tax regulations such as controlled foreign corporations (CFC) rules and thin-capitalization rules.
Territoriality defines the extent to which foreign-earned dividends and capital gains are included in the domestic tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Tax treaties align many tax laws between two countries and attempt to reduce double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. , partly by reducing or eliminating withholding taxes on dividends, interest, and royalties earned by foreign individuals and businesses. CFC and thin-capitalization rules seek to prevent multinational businesses from minimizing their tax liability through base erosion and profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. .
The United Kingdom’s cross-border tax system ranks highest in the OECD. Like most OECD countries, the UK operates a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , fully exempting foreign-earned dividends and capital gains from domestic taxation. The UK has the broadest tax treaty network in the OECD, at around 130 countries. As a result, depending on the tax treaty, foreign entities from these countries are either not subject to the 20 percent withholding tax on interest and royalties earned in the UK or pay a reduced rate. There is no withholding tax on dividends. The UK has relatively strict CFC rules and thin-capitalization rules.
Among European OECD countries, Slovakia has the least competitive cross-border tax system (Chile ranks the lowest in the OECD). While Slovakia excludes foreign-earned dividends and capital gains from its domestic tax base, it levies a relatively high withholding tax of 35 percent on dividends (interest and royalties are subject to a 19 percent withholding tax). Slovakia’s tax treaty network consists of approximately 70 countries, and its CFC and thin-capitalization rules are relatively strict.
Click here to see an interactive version of OECD countries’ cross-border tax rules rankings, then click on your country for more information about what the strengths and weaknesses of its tax system are and how it compares to the top and bottom five countries in the OECD.
To see whether your country’s cross-border tax rules rank has improved in recent years, check out the table below. To learn more about how we determined these rankings, read our full methodology here.
| OECD Country | 2019 Rank | 2020 Rank | 2021 Rank | Change from 2020 to 2021 |
|---|---|---|---|---|
| Australia (AU) | 25 | 24 | 24 | 0 |
| Austria (AT) | 5 | 5 | 7 | -2 |
| Belgium (BE) | 9 | 18 | 18 | 0 |
| Canada (CA) | 16 | 16 | 16 | 0 |
| Chile (CL) | 37 | 37 | 37 | 0 |
| Colombia (CO) | 36 | 35 | 35 | 0 |
| Czech Republic (CZ) | 12 | 12 | 12 | 0 |
| Denmark (DK) | 28 | 30 | 30 | 0 |
| Estonia (EE) | 15 | 15 | 15 | 0 |
| Finland (FI) | 21 | 21 | 21 | 0 |
| France (FR) | 17 | 13 | 13 | 0 |
| Germany (DE) | 7 | 7 | 6 | 1 |
| Greece (GR) | 29 | 25 | 25 | 0 |
| Hungary (HU) | 4 | 4 | 4 | 0 |
| Iceland (IS) | 30 | 31 | 31 | 0 |
| Ireland (IE) | 19 | 19 | 19 | 0 |
| Israel (IL) | 13 | 10 | 10 | 0 |
| Italy (IT) | 26 | 27 | 26 | 1 |
| Japan (JP) | 20 | 26 | 27 | -1 |
| Korea (KR) | 33 | 33 | 33 | 0 |
| Latvia (LV) | 10 | 9 | 9 | 0 |
| Lithuania (LT) | 24 | 23 | 23 | 0 |
| Luxembourg (LU) | 6 | 6 | 5 | 1 |
| Mexico (MX) | 35 | 36 | 36 | 0 |
| Netherlands (NL) | 2 | 3 | 3 | 0 |
| New Zealand (NZ) | 23 | 22 | 22 | 0 |
| Norway (NO) | 11 | 11 | 11 | 0 |
| Poland (PL) | 27 | 29 | 29 | 0 |
| Portugal (PT) | 31 | 28 | 28 | 0 |
| Slovak Republic (SK) | 34 | 34 | 34 | 0 |
| Slovenia (SI) | 22 | 20 | 20 | 0 |
| Spain (ES) | 18 | 17 | 17 | 0 |
| Sweden (SE) | 14 | 14 | 14 | 0 |
| Switzerland (CH) | 3 | 2 | 2 | 0 |
| Turkey (TR) | 8 | 8 | 8 | 0 |
| United Kingdom (GB) | 1 | 1 | 1 | 0 |
Note: This is part of a map series in which we examine each of the five components of our 2021 International Tax Competitiveness Index.
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