Taxes in Europe vs the US

Meri Sargsyan

Last updated on December 18, 2024 | 17 min read

BusinessEurope

Key insights of the article:

• Deciding where to establish a business—US or Europe—requires evaluating tax systems, as differences significantly impact profitability, compliance, and operations.
• Eastern Europe offers lower tax rates and talent cost advantages.
• Western Europe provides robust market access and infrastructure despite higher tax rates.
• The US is ideal for startups seeking competitive taxes and state flexibility.

Deciding where to establish a business is a critical decision that involves examining various factors, with the tax landscape being one of the most significant. Tax rates and systems can differ drastically between the US and Europe, influencing profitability, compliance costs, and operational efficiency. Entrepreneurs and corporations must evaluate these differences to choose the location that aligns best with their strategic goals.

This article delves into the nuances of tax rates and structures across the two regions, highlighting key contrasts in corporate income tax, social security contributions, and other business-related levies. By comparing these systems, we aim to provide insights into how tax policies can impact business operations and financial planning, helping decision-makers navigate this complex aspect of international business setup.

US tax rates: federal, state, and local layers

Corporate tax rates

In the US, businesses are subject to a federal corporate tax rate of 21%, with state taxes ranging from 1% to 12%, depending on the state. Some states, like Texas and Florida, impose little to no corporate income tax, making them attractive for businesses. However, businesses in these states may face higher property or sale taxes, which can offset the benefits of lower corporate income tax rates. Additionally, some corporations may also face a minimum tax rate of 15% based on their annual financial statement income, aiming to standardize tax contributions. These trade-offs should be carefully considered when evaluating the overall cost of doing business in each state.

Personal income and employment taxes

US income taxes are applied at federal, state, and local levels, with federal rates ranging from 10% to 37%. This tiered structure can mean that employees in high-tax states like California face higher tax burdens. Additionally, the Federal Insurance Contributions Act (FICA) mandates contributions toward Social Security and Medicare, totaling a combined rate of 15.3% (7.65% each from the employer and employee).

Recent trends in US tax law

Changes like the 2023 Inflation Reduction Act have raised corporate tax rates slightly, though states have countered this with various business-friendly cuts. For instance, Pennsylvania lowered its corporate tax rate from 9.99% to 8.99% in 2023, with North Carolina expected to follow suit by phasing out corporate income tax entirely. These state-level cuts provide substantial savings for businesses, particularly in industries with high operational costs or those that heavily invest in capital expenditures, like manufacturing or tech startups.

States such as Tennessee and Florida have been particularly aggressive in reducing rates, with Florida’s corporate tax rate dropping from 5.5% to 4.5% in recent years. These reductions attract businesses by offering lower tax burdens, which can enhance profitability and incentivize expansion, especially for companies in capital-intensive industries that benefit from tax relief. However, it’s important to note that while these cuts may provide immediate financial relief, businesses should also consider other state-specific taxes, such as property or sales taxes, which may counterbalance the benefits in certain regions.

European tax rates: a country-by-country analysis

Corporate tax rates

In Europe, corporate tax rates vary widely. Western European countries such as France and Germany typically impose higher corporate tax rates, with France at 25% and Germany averaging around 15.825% (plus local municipal taxes). These higher rates persist in Western Europe despite global competition due to several key factors.

First, these countries often offer strong public services, including high-quality healthcare, education, and infrastructure, which businesses and their employees can benefit from. The tax revenues collected help fund these essential services, contributing to overall societal stability and economic resilience. In addition, Western European nations tend to invest heavily in research and development, innovation, and sustainability initiatives, which can indirectly benefit businesses in various sectors.

Second, these regions offer robust market access, especially within the European Union. Businesses operating in countries like France and Germany can tap into a vast consumer market and take advantage of free trade agreements and regulatory frameworks that ease cross-border trade within the EU. This access to one of the world’s largest economic blocs can be a significant trade-off for higher tax rates, as it provides substantial opportunities for growth and expansion.

Furthermore, while tax rates are relatively higher, Western European countries often have more predictable and stable tax environments compared to some low-tax jurisdictions. This stability can be appealing to businesses seeking long-term investment security, particularly in industries where regulatory compliance and consistent policies are crucial.

However, Eastern European nations like Hungary and Bulgaria offer significantly lower rates, with Hungary leading at 9% and Bulgaria at 10%. These countries thus present a competitive edge for companies seeking lower corporate taxes.

Personal income tax and social security

European personal income tax rates are often higher than in the US, particularly in Western Europe. Denmark’s top personal income tax rate can reach up to 55.9%, while Germany’s can hit 45% plus a solidarity surcharge. Eastern Europe, however, offers more favorable rates; Poland’s personal income tax caps at 32%, while Bulgaria and Romania maintain a flat rate of 10%.

These lower rates are particularly beneficial for talent recruitment and business operational costs, especially in the tech and manufacturing sectors. For talent, lower taxes mean higher take-home pay, making positions more attractive to skilled workers, particularly in tech, where there’s global talent competition. This can help businesses recruit top professionals at a lower cost compared to higher-tax regions.

For businesses, lower taxes reduce operational expenses, allowing companies in sectors like manufacturing to reinvest savings in production, R&D, or workforce expansion. This is especially advantageous for labor-intensive industries, helping businesses scale more quickly and boost productivity. Overall, these tax benefits make Eastern Europe an appealing location for investment and growth.

Social security contributions in Europe are generally higher than in the US, with the combined US rate at 15.3% while countries like France can have employer contributions 40%-45%.

For businesses in labor-intensive sectors like manufacturing or hospitality, these higher contributions significantly increase payroll costs. However, the benefits they fund—such as universal healthcare, pensions, and unemployment insurance—can make the rates more acceptable. These benefits reduce the need for private insurance or retirement savings, making the higher payroll costs more palatable for businesses and employees, especially in countries with strong social safety nets.

Key differences between US and European tax systems

1. Complexity and layers

The US system involves multiple layers of taxation (federal, state, and local), which can complicate administration. For example, a business operating in multiple states might face challenges due to differing corporate tax rates, sales tax rules, and taxable income definitions, requiring complex compliance.

In contrast, Europe simplifies taxation to national and municipal levels, reducing administrative burdens. However, while this system is more streamlined, tax rates tend to be higher, reflecting the trade-off between simplicity and the cost of robust public services.

2. Social security contributions

In the US, Social Security taxes are primarily allocated to retirement and disability benefits, with healthcare funded separately through Medicare taxes. In contrast, many European countries integrate contributions for healthcare, pensions, and unemployment into a unified social security tax, resulting in higher overall rates. This comprehensive approach reflects Europe’s broader social welfare systems, which provide extensive public services and benefits.

3. Corporate tax policies

Many European countries are aligning toward a standardized corporate tax rate of 15%, as recommended by the OECD. However, countries with lower rates, like Hungary and Bulgaria, have resisted to maintain their appeal to multinational corporations.

This alignment could impact multinational companies’ decisions to establish operations in traditionally low-tax countries like Hungary or Ireland. If these countries raise their rates to meet the 15% standard, they might lose their competitive edge, prompting companies to explore other jurisdictions with more favorable tax rates. Countries resisting the standard could still attract foreign investment by maintaining lower taxes.

Where to set up: US or Europe?

Choosing between the US and Europe depends on your business’s needs. The US offers competitive corporate tax rates and flexible state options, which can be favorable for startups. However, personal income tax rates vary significantly by state, making countries like Poland or Bulgaria appealing for lower income and social security rates. On the other hand, Western European countries are ideal for businesses prioritizing market access and infrastructure over tax savings.

When evaluating regions, businesses should consider key factors like taxation, including corporate and personal income tax rates, social security contributions, and available incentives. Talent availability is also important, with businesses needing to assess the local labor market, wage levels, and talent retention. Operational costs, such as labor, real estate, and utilities, should be considered, along with any regional cost advantages.

Market access, proximity to key markets, trade agreements, and infrastructure quality are also crucial factors. Additionally, businesses must consider the regulatory environment, including ease of doing business, permits, and industry-specific regulations.

By weighing these factors, businesses can make informed decisions about where to establish operations, balancing tax benefits, operational needs, and market potential.

Taxes in Europe vs. the US: Key considerations for business expansion

Deciding where to establish a business involves understanding the tax landscape, as tax rates and systems vary significantly between the US and Europe. This comparison is critical, as even small differences in tax rates can impact a company’s bottom line, particularly for startups and multinational corporations.

For example, a tech startup in Silicon Valley might choose to incorporate in Delaware due to its favorable corporate tax structure and lack of state sales tax, while a similar company expanding into Europe might opt for Ireland, where low corporate tax rates and access to the European market make it an attractive choice. Understanding these differences in tax systems is crucial for businesses aiming to optimize their operations, manage costs effectively, and scale efficiently in a global environment.

Corporate taxes: US vs. European perspectives

US corporate taxes: A layered approach

The US corporate tax rate is a federal 21%, with additional state taxes that vary widely—ranging from 1% to 12% depending on the state, while some states impose no tax at all. Furthermore, in specific cases, corporations may also face a minimum tax rate of 15% based on annual income, a regulation introduced to ensure more uniform tax contributions.

European corporate taxes: Competitive rates in Eastern Europe

Europe’s corporate tax rates vary by country, with Western European nations typically imposing higher rates. For example, France’s corporate tax is set at 25%, and Germany’s averages around 15.825% (with an additional municipal tax between 7-17%). However, Eastern Europe offers notably lower rates: Hungary and Bulgaria have rates of 9% and 10%, respectively, making them attractive for cost-conscious companies.

Startups, particularly in IT and fintech, are increasingly drawn to these countries because of the low tax rates and the access to skilled developers at a lower cost compared to Western Europe. Eastern European countries offer a highly educated tech workforce, with many developers trained in fields like software engineering, mathematics, and computer science. This talent pool and lower operational costs make these regions particularly appealing for startups looking to scale quickly while managing expenses. Additionally, many Eastern European countries have strong digital infrastructure and a growing startup ecosystem, which further boosts their appeal for tech-focused companies.

Personal income tax: High rates in Europe vs. state variability in the US

US personal income tax: State differences matter

Personal income tax in the US is applied at federal, state, and sometimes local levels. Federal rates range from 10% to 37%, and each state has its own rates, with some like California imposing high taxes, while others like Florida and Texas impose none. This variation creates both high and low-tax options, depending on business location.

Europe’s progressive income tax rates

European personal income tax rates are generally higher, particularly in Western Europe. Denmark’s top rate can reach 55.9%, and Germany’s tops out at 45%, with an additional solidarity surcharge. Conversely, Eastern Europe is more tax-friendly, with countries like Poland capping at 32% and Romania offering a flat rate of 10%. These rates can be advantageous for businesses aiming to attract top talent without high tax burdens.

Social security contributions: A starker contrast

US social security tax: Straightforward yet significant

In the US, social security taxes are relatively straightforward, with a combined rate of 15.3% (split between employer and employee at 7.65% each). Although straightforward, the combined rate can add up significantly, particularly in high-salary sectors.

European social security: Significant employer burden in Western Europe

European social security rates vary widely, with some countries requiring substantial employer contributions. For instance, France’s employer share can reach 45-68%, while countries like Denmark and Switzerland keep their rates below 20%. Social security contributions in Eastern Europe are lower than in Western countries, with Hungary and Romania hovering around 31-37%, making them appealing for businesses mindful of payroll taxes.

Simplified vs. layered tax structures

The complexity of US tax layers

The US tax system, with its federal, state, and local layers, can be complex, especially for businesses operating in multiple states. Each state has its own rules, leading to substantial compliance costs. For example, a business in California, Texas, and New York must navigate distinct tax rates and laws in each state.

In contrast, European countries like Ireland offer a simpler approach with a single national tax rate, such as the 12.5% corporate tax, without additional state or local taxes. This streamlined system makes tax compliance more straightforward compared to the complexity businesses face in the US.

Europe’s national tax focus

In Europe, taxation is typically at the national and, occasionally, municipal levels. While rates can be high, the relative simplicity compared to the US multi-layered system reduces administrative burdens. However, compliance still requires close attention, especially for multinationals operating across different European countries with varying tax obligations.

Choosing a location: US or Europe?

When choosing between the US and Europe, companies should consider the balance between tax rates, complexity, and business needs. The US offers competitive corporate tax rates and state-by-state flexibility, making it ideal for startups and corporations seeking tax-friendly states. Europe, especially Eastern Europe, provides lower personal and social security taxes and a simplified structure, benefiting companies focusing on employee compensation and manageable payroll taxes.

Beyond taxes, geopolitical stability and regulatory factors also play a role. The US offers a stable legal environment, while Europe provides strong protections, such as GDPR and labor laws, which may appeal to businesses prioritizing compliance and employee welfare. Eastern Europe’s growing stability and EU proximity add to its appeal for expansion.

Navigating future tax trends

Corporate tax harmonization in the EU

The EU has pushed for a standard 15% corporate tax rate across member states to reduce tax competition and promote fairness. This could impact multinational corporations benefiting from low-tax regimes, like Ireland’s 12.5%, by increasing their tax burdens.

While some countries may offer other incentives to remain competitive, the harmonization could reduce the incentive for businesses to relocate solely based on tax rates, creating a more level playing field across Europe.

Recent shifts in US tax policy

In the US, changes such as the Inflation Reduction Act and state-level adjustments reflect ongoing shifts in corporate taxation. While federal rates have slightly increased, states are implementing cuts to boost local business growth, a trend expected to continue in the coming years.

Many large US corporations, such as Nucor and AECOM, have benefited from low corporate tax rates, sometimes paying little to no federal taxes. These companies, while advocating for infrastructure improvements, oppose tax hikes to fund such projects, arguing that higher taxes would reduce their competitiveness. Despite a lower effective tax rate, businesses like Nucor continue to profit while participating in industry groups lobbying against corporate tax increases. These dynamics reflect the tension between corporate interests and public policy goals.

Final thoughts on tax benefits for business expansion

The US offers lower corporate tax rates in certain states, but companies must be prepared for potentially high personal and social security taxes and a complex filing system. Conversely, Europe provides favorable tax options in certain Eastern countries with simpler structures and attractive social security rates. For companies seeking a large talent pool, especially in the tech sector, Eastern Europe’s low-tax environment and skilled workforce are significant advantages.

To evaluate tax advantages, businesses should consider consulting with tax advisors or conducting a location-specific cost analysis. For instance, Poland’s IT services market is projected to reach US$9.75bn at the end of 2024, with IT outsourcing dominating the sector at US$3.49bn. The market is expected to grow at a CAGR of 6.15% through 2029, reaching US$13.14bn. This robust growth highlights Poland’s growing appeal as a hub for tech talent, particularly in IT outsourcing.

Any questions or comments? Let me know on Twitter/X.

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Meri Sargsyan Copywriter and Marketer

With three years of experience in the industry, Meri has authored articles on a wide range of topics including crypto, NFTs, machine learning, and artificial intelligence. As an avid learner, Meri continuously seeks out new knowledge, enrolling in various courses regardless of her busy schedule.

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