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It is a truth universally acknowledged that the structure of a country’s tax code says a lot about its economic performance.
While a well-structured tax code can promote economic growth, poorly structured, costly tax systems can harm economies, as noted in the International Tax Competitiveness Index report by the Tax Foundation. The report measures a country’s tax system adherence to two aspects of tax policy: competitiveness and neutrality.
For the 12th year running, Estonia has come out on top. According to the report, the country’s top score in the Index is mainly driven by four positive features:
- A 22 percent tax rate on corporate income that only applies to distributed profits, not retained and reinvested profits.
- A flat 22 percent tax on individual income that does not apply to personal dividend income.
- Property tax that applies only to the value of land, rather than to the value of real property or capital.
- A territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
It’s important to note, of course, that there is room for improvement even at the top. The report points out a few areas of potential improvement in the Estonian tax code, namely:
- The country has tax treaties with 63 countries, below the OECD average of 76.
- The territorial tax system is limited to European countries.
- Thin capitalisation rules that are among the strictest in the OECD.
While Estonia’s tax system is the most competitive as a whole in the OECD, competition is certainly heating up. The other top countries’ tax systems receive impressively high scores in one or more of the major tax categories. The report points out that Latvia, second in the overall rankings, recently adopted the Estonian system of corporate taxation and also has an efficient system for taxing labour income.
Want to know how Estonia’s business environment compares to the rest of Europe across other metrics? Check out our award-winning country comparison tool.
