EU Candidates Cut Corporate Tax Rates

by Ulrika Lomas, Tax-News.com, Brussels

04 July 2003

Corporate tax rates in certain Eastern European countries have plummeted recently as governments battle with each other for foreign investment ahead of the expansion of the European Union in May 2004.

The most recent EU aspirant nation to propose a dramatic scaling back of business tax rates is the Czech Republic, where the government is planning to reduce corporate taxation from 31% to 24% by 2006. This follows hot on the heels of the Polish social democratic government's announcement last week that it intends to cut its corporate tax rate from 27% to 19%. Slovakia announced last month that it is cutting its rate from 25% to 19% as of 2004. However, the changes have yet to make the statute book in any of these countries.

Such rates will contrast markedly with the current EU average corporate tax rate which stands at 31.68%, according to KPMG's latest corporate tax survey. Still, although these lower rates will seem very attractive to foreign business people, some observers have pointed out that the candidate countries must reform other areas of their taxation codes, and suggested that corporate tax is only one aspect that a firm must consider before investing.

As Marcin Mroz, an economist at Societe General in Warsaw oberservedto the EU Business news service: "Poland has the reputation of making companies bear a hefty tax burden. In this sense, the decision to lower the tax can only be positive even if it is only one element in the general business environoment."

Once in the EU however, the Eastern European states will find that their ability to give firms one-off tax breaks will be somewhat curtailed. Governments will also not be permitted to offer firms total tax exemptions for longer than 10 years, as the Commission considers that such measures constitute 'harmful tax competition'.

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