Setting tax rates is a delicate task for policymakers, who must promote fairness without pushing firms and wealthy individuals toward lower-levy jurisdictions. According to the Tax Foundation, which countries are getting it right?
Tax revenues play a vital role in funding public services. In 2023, the overall tax-to-gross domestic product (GDP) ratio within the EU was 40.0%, according to Eurostat.
However, tax policies and rates vary widely among European countries due to their differing economic priorities and social models.
The Tax Foundation’s International Tax Competitiveness Index (ITCI) compares how different countries design their tax systems, and the two main factors it looks at are competitiveness and neutrality.
A competitive tax system keeps marginal tax rates low to encourage investment and economic growth, while a neutral system aims to raise the most revenue with the fewest economic distortions.
Better ranking does not always go hand in hand with lower tax rates.
“Countries can improve their tax structure without losing much revenue by reducing complexity and inefficiencies in their tax systems,” Alex Mengden, policy analyst at the Tax Foundation, told Euronews Business.
So, which countries have the highest scores for tax competitiveness across Europe?
Baltic states lead, France and Italy rank lowest
Among 27 European countries covered in the index, overall scores range from 45.8 in France to 100 in Estonia. That means Estonia has the most competitive and neutral tax system whereas France has the worst score.
“France manoeuvred itself to the bottom of the Index by implementing several surtaxes on large corporations that temporarily hike its top marginal corporate tax rate to 36.1%, the highest rate in the OECD, nearly 12 percentage points above the OECD average,” Mengden said.
Because of a temporary surtax, France’s top marginal corporate tax rate is 36.1%, the highest in the OECD and about 11.9 percentage points above the OECD average of 24.2%.
A surtax is an extra tax charged on top of an existing tax — essentially a temporary or supplementary levy added to a standard rate.
It is often used during periods of high deficits, crises or exceptional profits, and can make a country’s overall corporate tax burden look higher than its base rate suggests.
Without the surtax, France’s standard corporate income tax rate is around 25%.
Meanwhile the three Baltic states, Estonia, Latvia and Lithuania, dominate the top of the ranking. Latvia (92.8) follows Estonia, while Lithuania (81.8) ranks fourth and just behind Switzerland (86).
The Nordic countries — Sweden (76.1), Norway (68.8), Finland (66.8), Denmark (64.3), and Iceland (63.7) — are positioned in the middle of the ranking.
While Central and Eastern European countries generally show better scores, Western Europeans score poorly.
At the bottom of the ranking, Italy (50.3), Poland (54.7), and Spain (57.9) follow France. Portugal (58.2), the United Kingdom (59.1), Ireland (61.3), and Belgium (63.2) come next. Together they made up the eight lowest scores.
Hungary (78.7), Czechia (77.4), and Turkey (75.9) are also among the top 10, with scores significantly higher than those of the lowest-ranked countries
The Netherlands (71.4), Austria (69.6), Germany (68.9) and Greece (67.0) sit in the middle.
Drivers of the score gaps
“This year, the property tax category and the corporate tax incentives subcategory show the strongest correlation with final scores,” said Mengden from the Tax Foundation. This means that the countries' rankings are most significantly influenced by two key factors.
He explained that the first refers to the extent to which they impose distortive taxes on the productive capital stock (such as net-wealth taxes and business asset taxes) or on transactions like real property sales, share transfers, and equity capital raises.
The second one concerns the complexity of their corporate tax incentive structures, including patent boxes, R&D tax subsidies, and the use of multiple corporate tax rates or brackets.
For example, France scores only 29 points in the corporate tax category. The closest country is Italy, with 58 points. The gap shows how far France stands out at the very bottom of this category.
In the property tax category, France (41) has the fifth-lowest score, while Italy (32) ranks at the very bottom.
Besides overall scores, the report compares corporate tax, income tax, consumption tax, property tax and cross-border tax.
Why does Germany outperform other major economies?
In the overall score, Germany performs better than Europe’s top five economies.
“Two factors set Germany apart from the other large European economies: its consumption taxes and property taxes,” said Mengden.
Germany’s VAT base as measured by the OECD’s VAT Revenue Ratio was about 57% of potential consumption in 2022.
Its small-business VAT exemption applies below €25,000 on previous-year turnover from 2025, Italy’s registration threshold and flat-rate regime limit is €85,000, while the UK’s VAT registration threshold is £90,000 starting from April 2024.
Apart from its inheritance and property transfer taxes, Germany avoids distortive levies on individual wealth, financial transactions, bank assets and taxes on firms raising share capital.
“This more neutral approach to taxing capital gives Germany a significant advantage over Europe’s other large economies,” Mengden added.
The report emphasised that capital is highly mobile in a globalised world. Businesses can choose to invest in any number of countries to find the highest rate of return. The structure of a country’s tax code is a determining factor of its economic performance.