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Low Corporate Tax Countries in Europe: How to Legally Pay 1%

Contributed by Zugimpex
September 3, 2020

The average corporate tax rate in the EU is set to reach 21.30% in 2020. There are some ways to get away with paying less. For instance, Malta has a 6/7 refund scheme for non-residents (an effective tax rate of 5%), while Ireland and the Netherlands offer a "sandwich" solution to decrease the CIT to less than 5%.

Also, there are member states with a low flat corporate tax rate: 9% in Hungary and 10% in Bulgaria.

However, a real discovery for low tax seekers is Romania! Its micro-company scheme offers a straightforward and fully compliant way to pay a corporate tax of 1%.

Set Up a Micro-Company in Romania

According to the Romanian Fiscal Code, micro-companies in Romania can benefit from a tax rate of 1% if they:

  • show a total turnover of less than 1,000,000 EUR in the previous year
  • hire at least one Romanian citizen (otherwise, the tax rate will be 3% instead of 1%)

It is important to highlight: the 1% rate applies to the net sales. Therefore, sometimes it makes sense to pay a higher net profit-based rate than a lower revenue-based rate. To opt for the former, a company needs to have a share capital of at least 45,000 RON (~9,000 EUR) and employ two persons or more. Whenever the microenterprise criteria are not met (e.g. earnings exceeded the 1,000,000 EUR threshold), the company automatically switches to the 16% tax rate in the same quarter. The article "Micro-Enterprise in Romania: 1% Corporate Tax" by Zugimpex provides a good example in this regard:

"If a company earns 150,000 EUR and spends 145,000 EUR on salaries and other expenses, it is cheaper to pay 16% from the net profits (800 EUR) than 1% from the total turnover (1,500 EUR)."

What to Do Next

There are different ways to take money out of a tax-effective Romanian micro-company.

For instance, if another EU or Swiss company holds at least 10% of its shares, dividends can be distributed at the corporate level tax-free, under the EU Parent-Subsidiary Directive.

In the case of individuals resident in low-tax countries such as the UAE or Monaco, there is a possibility to withdraw dividends at favourable rates (normally, 0-5%), based on double tax treaties in force.

Finally, it is important to note that a Romanian company cannot be used as a shell company for avoiding taxes. It must have real substance, including employees and/or physical office. Its input to a company's turnover should justify the part of revenue attributed to the Romanian company in case of a holding.

Final Takeaways

The Romanian micro-company scheme is a true discovery for aspiring entrepreneurs or those who are looking to redomicile their offshore companies to safer jurisdictions. Not only is it tax-attractive, but also it guarantees continuity (being fully compliant with EU regulations) and opens access to smart low-cost labour. In short, setting up a Romanian microenterprise is cost-efficient and safe. Worth trying!


Tags: European Union (EU) | Romania | tax | tax planning



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