So you want to expand your business internationally. Whether it’s Europe or the US you’re considering, there’s a lot of potential in both these markets. Indeed, the Indian market itself is increasingly becoming favorable to international businesses. But starting a business abroad has just as many prospects. From solid legislation systems and favorable economies to access to highly skilled workforces and the latest technologies, the opportunities in doing business abroad are very promising. However, one grey area in most people’s minds is often related to taxation in these countries. 

If you’re a large enterprise or own a large-sized business, tax matters can be relatively more straightforward since you will find various experts in the field to guide you. On the other hand, if you own or operate a Small and Medium Enterprise (SME) or a Micro, Small, and Medium Enterprise (MSME), you’re likely to find the whole process tiresome and confusing. 

If a guide on different types of taxes small businesses should pay abroad is what you’re looking for, you’re at the right place.

Taxation in the EU

The different types of taxes you need to pay for small businesses in the EU are Corporate Tax, Maximum Income Tax, and Value Added Tax. All throughout Europe, tax compliance costs differ with respect to the company and sector. 

A study conducted by the EU Directorate-General for Internal Market, Industry, Entrepreneurship, and SMEs in 2018 revealed that tax compliance costs in the EU are higher for SMEs than large enterprises. Paying out all three categories of taxes significantly adds to the burden of SME owners. Findings from the study even showed that about 2.5% of the turnover SMEs made had to be paid in taxes. 

However, this should not deter you from starting a new business in the EU since several tax incentives are available for small businesses. Some countries have lower tax rates than other countries. 

Hungary, Bulgaria, Ireland, Lithuania, and Cyprus have the lowest tax rates in all of the EU. While the regular Corporate Tax rate stands at 25% in Bulgaria, SMEs need to pay only 20%. Similarly, in Croatia, the Corporate Tax for small businesses is 12%, while the standard rate is 18%. Similarly, there is a wide range of tax incentives available for SMEs throughout Europe. Out of the 27 Member States in the EU, at least 18 countries provide tax incentives specially targeted to small businesses

As an SME owner, you will also have access to preferential tax rates along with investment allowances, tax credits, etc. In some cases, you may also get tax benefits in relation to the creation of additional jobs in the market. Some of the most popular forms of tax incentives in EU countries include reduced corporate tax rates, investment allowances, accelerated depreciation, tax credits for newly acquired assets/newly hired employees, and exemptions from fairness tax, capital gains tax, local business tax, etc., 

All in all, regardless of reports on how taxes are high for SMEs in the EU, thanks to many incentives and tax benefits, starting your business here would be a great opportunity. 

Taxation in the US

Moving to business taxation in the US, we have to say it is a bit more complicated, especially since small businesses have to pay more categories of taxes than in the EU. But hold on, as we will explain it to you. 

Instead of a single small business tax, there are six categories of business taxes you’ll have to pay if your business is in the US.

These are Income tax, Payroll/ Employment Tax, Self-Employment Tax, Excise Tax, Sales Tax, and Property Tax. Wondering how income tax –  the tax that individuals pay on their income – fits into this category? Well, it’s different in the US. Even if you are a business or a corporation, you need to pay both federal and state tax on your business’s net income each year. 

Considering that you are the owner of your small business, you will also have to pay a self-employment tax if your net income in a year is more than $400. The self-employment tax is set at 15.3% and covers social security and Medicare. 

Moving on, you will also have to pay about 7.25% employment tax on the gross payroll of your employees. Failure to pay employment may attract harsh penalties. Excise tax is usually indirect; property tax is not. All buildings and land owned by your small business will be taxed at 0.15% – 1.90%, depending on which state you’re doing your business in. 

In addition to this, you may also be charged Capital Gains Tax and Dividend Tax on your small business, but these are usually adjusted in the owner’s tax bracket.

We know it seems overwhelming to start a small business with all the endless categories of taxes you’ll have to pay. However, you are also eligible for various tax credits. For instance, if you have taken health insurance coverage for your employees, you are eligible for up to 50% tax credits in the Employment/Payroll category. Providing paid family and medical leaves to your employees will also qualify you for tax credits in the same category. 

Similarly, you can avail of tax credits in several other areas like motor vehicle credit, fuel credit, employer-paid childcare facilities credit, etc. However, these credits come with strict regulations on availing them; hence you need to make sure that you’re following the tax credit requirements 100%. 

Get assistance with Salt 

Regardless of where you plan to start your business, you need to research well when you’re planning to start a new business, especially in a foreign country. You need to know the A-Z details from market volatility to demand for goods and services and economic and political conditions. Thanks to Neobanks like Salt that offer cross-border financial services, you can now get tailored support for your business at affordable rates.