In recent years, European countries have undertaken a series of tax reforms designed to raise additional revenue, though they have also maintained some temporary relief measures to respond to economic realities.
These policies include reducing value-added taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (VAT) rates for certain goods and services while increasing corporate, personal income, and excise taxes. However, with inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin still a concern, several countries have adjusted their income taxes to protect household purchasing power.
Nevertheless, according to an Organisation for Economic Co-operation and Development (OECD) report,16 countries—Luxemburg, Colombia, Turkey, Latvia, Lithuania, Estonia, Mexico, Canada, New Zealand, Iceland, Poland, Czech Republic, Slovakia, the Netherlands, Belgium, and Switzerland—experienced an increase in tax revenues between 2022 and 2023, while growth outpaced the rate of GDP expansion. In Denmark and Ireland, tax revenues rose in nominal terms while GDP contracted.
If this trend continues through 2024 and 2025, it would suggest that governments used this period of high inflation to raise more revenue rather than protect households and small businesses from inflation. In Europe, the largest increases in the tax-to-GDP ratio were observed in Luxembourg (due to an increase in revenues as a share of GDP from personal income taxes and social security contributions) and Turkey, due to an increase in taxes from consumption and social security contributions. Outside Europe, the largest increase in the tax-to-GDP ratio was observed in Colombia due to an increase in revenues from corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.. On the other hand, 17 OECD (12 European) countries registered a decline in their tax-to-GDP ratio, with Norway experiencing the largest decline among European countries at 2 percentage points.
Business Tax Reforms
Some countries increased their corporate tax incentives and encouraged investment through capital allowances, more support for research and development (R&D), or emission-reducing technologies.
Denmark raised its enhanced rate on tax allowances on R&D expenditures and raised the ceiling on its R&D tax credit. Ireland increased the first-year payment threshold under its R&D tax credit from €50,000 (in 2024) to €87,500 (beginning January 2026). By allowing companies to receive up to €87,500 immediately—rather than waiting over two or three years—this policy benefits smaller companies by injecting quicker funding into innovation projects.
Spain selectively improved the depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco rules for investments in electric and hydrogen vehicles and their charging infrastructure. Ireland extended its accelerated capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company’s long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances. for gas vehicles and refueling equipment until the end of 2025. Belgium expanded its tax-exempt bicycle allowance and added a refundable credit for employers subsidizing train passes. Additionally, Finland and Germany extended their capital allowances for machinery and equipment. In 2025, Lithuania also introduced draft legislation that would allow for full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for machinery and equipment, as well as for software and acquired rights, starting on January 1, 2026. While, technically, capital allowances narrow the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates., permanent full expensing supports capital formation and economic growth over the long term. Temporary expansions, like the ones approved during the past years, have a much more limited impact because businesses may simply accelerate some already-planned investment decisions without increasing the overall level of investment.
Regarding the corporate tax rate, in 2024, the Czech Republic increased its standard tax rate by 2 percentage points from 19 percent to 21 percent. Slovenia temporarily increased the corporate income tax rate by 3 percentage points (from 19 to 22 percent). This five-year tax is set to finance the reconstruction efforts after the major floods of August 2023. Slovakia also increased its corporate tax rate by 3 percentage points from 21 percent to 24 percent for companies with taxable income over €5 million. Iceland temporarily increased its corporate tax rate from 20 percent to 21 percent for 2024, but reduced it back to 20 percent for 2025. Lithuania increased its standard corporate income tax rate from 15 percent to 16 percent. Beginning in January 2025, Estonia also increased its corporate income tax rate from 20 to 22 percent.
Austria reduced its corporate tax rate for 2024 to 23 percent, and, in 2025, Portugal decreased its corporate rate from 31.5 to 30.5 percent.
On the one hand, in 2026, Portugal will continue to decrease its corporate tax rate by one percentage point per year until 2028. On the other hand, Estonia and Lithuania will increase their corporate income taxes from 22 percent to 24 percent, and from 16 percent to 17 percent, respectively. Estonia’s 2 percent security tax on corporate income, effective from 2026 to 2028, was introduced to support defense spending and will apply to annual, not only distributed, income.
After the EU Council approved the EU-wide windfall tax, 23 EU countries and the United Kingdom implemented a windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Historically, such taxes have targeted oil and energy companies when costs have risen, especially from war or other crises. (mostly on energy companies). Some countries didn’t limit the scope of the windfall tax to energy producers or oil and gas companies. The Czech Republic, Hungary, Lithuania, Slovakia, and Spain extended the scope of the windfall profits taxes to cover the banking sector.
Although the EU regulation clearly states that windfall profits taxes should be a temporary mechanism and “the duration of the measure should be limited and tied to a specific crisis situation,” Spain extended it until 2026; Hungary, Lithuania, and the Czech Republic extended it until 2025; and Slovakia has extended it until 2027. The United Kingdom, which also implemented a windfall profits tax on fossil fuel companies in 2022, extended its application to 2030.
Additionally, in Latvia, only distributed profits are subject to the 20 percent corporate income tax, but, in 2024, the government introduced a 20 percent corporate tax rate surcharge for credit institutions, regardless of the profit distribution. In addition to this, Latvia also introduced a temporary solidarity levy on credit institutions, effective from 2025 to 2027. The solidarity contribution is a 60 percent rate on net interest income that exceeds the institution’s five-year average net interest income by over 50 percent.
European countries have also adopted domestic minimum taxes in accordance with the global anti-base-erosion (GLOBE) rules under Pillar Two. Additionally, under the EU Directive on Pillar Two, EU Member States with more than 12 in-scope multinational groups are required to implement the income inclusion rule (IIR) starting 31 December 2023, and the undertaxed profits rule (UTPR) starting 31 December 2024. Member States with no more than 12 in-scope multinational groups can elect to defer implementing both rules for six years under Article 50 of the Directive. Twenty-two of the 27 Member States of the European Union implemented the qualified domestic minimum top-up tax (QDMTT), the IIR, and the UTPR in 2025, while five have not. Five EU Member States can opt for a six-year deferral of Pillar Two implementation, and all of them have exercised this option, with Estonia, Latvia, Lithuania, and Malta deferring all rules until 2029, while Slovakia has selectively implemented only a domestic top-up tax as of 2024. Additionally, these countries are looking to extend their current six-year exemption. Among the major European countries outside the EU, only Norway, Turkey, and the United Kingdom are expected to implement a QDMTT, an IIR, and a UTPR by 2025. Switzerland implemented the QDMTT and IIR, while Iceland is looking to implement QDMTT and IIR in 2026.
Consumption TaxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or income taxes where all savings are tax-deductible. Reforms
Value-Added Tax
While temporary VAT zero-rates and exemptions on products used first to mitigate the COVID-19 pandemic and later to ease the high inflation period have been almost universally withdrawn, an increasing number of countries continue to introduce reduced rates on a wide variety of goods and services to increase equity or to stimulate certain sectors of the economy. However, the effectiveness of using reduced VAT rates to address equity, environmental, and other policy goals is questionable.
Austria reduced the VAT rate applied to food donations to charitable organizations to zero. Also, from January 2024 to December 2025, Austria applied a 0 percent VAT rate to the supply and installation of photovoltaic systems. The Czech Republic revised its VAT structure by consolidating two reduced rates of 10 percent and 15 percent into a single reduced rate of 12 percent.
In 2025, Germany reduced its VAT rate on works of art and collectible items from 19 percent to 7 percent. Starting in 2026, the same reduction will be applied to food served in restaurants and catering services. Hungary extended its reduced VAT rate of 18 percent to dessert-type cheese. Iceland extended its VAT exemption on the sale of used electric, hydrogen, and plug-in hybrid vehicles to 2025, subject to a cap. In January 2024, Ireland extended the 0 percent VAT rate on the supply and installation of solar panels for private dwellings to schools. It also reduced its VAT rate on books and audiobooks from 9 percent to 0 percent and the VAT rate on the supply and installation of heat pumps from 23 percent to 9 percent. In Latvia, since January 1, 2024, fruits and vegetables have been subject to a reduced rate of 12 percent. Moldova introduced a temporary reduced rate of 6 percent for restaurant and cafe services from December 2024 to June 2025. Norway reduced the VAT rate on water supply and wastewater services from 25 percent to 15 percent. Poland extended the application of an 8 percent reduced VAT rate to a series of agricultural products. It also reduced the VAT rate from 23 percent to 8 percent on certain beauty care and treatment services, effective April 2024. In 2025, Portugal made permanent a 6 percent reduced VAT rate on electricity consumption. The 6 percent rate also applies to the supply, installation, and repair of equipment used primarily for collecting and using solar, wind, geothermal, and other renewable energy, and to admission to bullfighting shows. Portugal also reduced the VAT rate on food for small children from 13 percent to 6 percent. Portugal extended to December 31, 2025, the temporary application of a 0 percent VAT rate on the supply of fertilizers, soil improvements, and animal feed.
Between 2024 and 2025, eight countries–Croatia, Finland, Ireland, Latvia, Portugal, Slovenia, Sweden, and the United Kingdom–increased their VAT registration thresholds to support small enterprises. While these measures are intended to support small businesses, raising the threshold deepens a costly distortion that holds back small business growth, reduces the efficiency of the VAT system, and leads to a revenue shortfall that governments may compensate for by raising the standard VAT rate.
Conversely, several countries increased their standard VAT rate and rates on specific sectors or goods and services to raise additional revenue and simplify their VAT systems.
Austria abolished the VAT exemption for services provided between banks, insurance companies, and pension funds. Bulgaria phased out temporary rate reductions for some items introduced during the pandemic. Estonia broadened its VAT base by moving some items to higher rates, and it increased its standard rate from 22 percent to 24 percent in July 2025. Finland raised its standard rate from 24 to 25.5 percent and broadened its VAT base by moving most items from the 10 to the 14 percent bracket in September 2024. Lithuania raised its reduced rate from 9 to 12 percent, effective from 2026. The Netherlands moved some items from the reduced to the standard rate. Slovakia increased its standard rate from 20 to 23 percent and its reduced rate from 10 to 19 percent, while shifting many items to different rates. The United Kingdom abolished its VAT exemption for private education fees. As part of its harmonization process with that of the European Union, Montenegro abolished its VAT exemption threshold for imported products under €75.
Health Taxes
Countries also raised excise duties on alcohol, tobacco, and sugary drinks to raise revenues and discourage behaviors that affect public health.
Iceland, Ireland, Poland, and Spain introduced or expanded excise taxes on e-cigarettes and their associated liquids. The UK will introduce a vaping products duty in October 2026, along with a one-time tobacco tax hike to incentivize switching to vaping.
Bulgaria, Estonia, Finland, Lithuania, and Slovenia raised their existing excise taxes on all tobacco-related products.
Estonia, Finland, and Lithuania also announced alcohol excise hikes. Estonia plans to increase rates gradually from 2026 to 2028; Finland will adjust rates from 2025 to 2027 for inflation, and Lithuania has already raised the duties on alcoholic beverages. The UK raised excise taxes on bottled alcohol in line with inflation, while slightly lowering rates for eligible draught products.
Additionally, Estonia introduced a general tax on sugar-sweetened beverages, while the UK indexed its soft drink excise to inflation.
However, all these excise duties are regressive because smoking and drinking are more prevalent among people with lower incomes. Since alternative tobacco products like vaping can help smokers transition to less harmful options, tax policy should incorporate harm reduction principles by applying lower tax rates to these products compared to traditional tobacco.
Individual Tax Reforms
A series of countries implemented measures to raise their tax bracket thresholds, allowances, and credits for lower-income taxpayers within the personal income tax.
Croatia and Germany raised the basic allowance. Malta and Germany adjusted the income tax brackets (except for the top income bracket) upward. Luxembourg adjusted its tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. to general price increases via its automatic indexation mechanism, while Finland partially adjusted its tax brackets to the rise in the general earnings level.
Hungary, Croatia, Ireland, Germany, and Luxembourg increased the generosity of personal income tax measures to support families with children. Effective from 2026, Germany also increased the tax-free allowance for employment income of pension-age individuals by an additional €24,000, leading to a total of €36,000 of tax-free allowance.
Three European countries have increased their top personal income tax rates from last year. Estonia increased its flat income tax rate from 20 to 22 percent, while Latvia increased its top rate from 31 to 36 percent. Additionally, Latvia consolidated the two lower tax rates of 20 and 23 percent into a single bracket, with income up to €105,300 being taxed at a rate of 25.5 percent. It also introduced an additional rate of 3 percent on total taxable income over €200,000. Norway lowered the social security contributions for all taxpayers while simultaneously increasing the personal income tax rates by 0.1 percentage points for those in income tax brackets three to five. As a result, marginal tax rates fell for taxpayers in the first two income tax brackets and remained unchanged for those in brackets three to five.
In Croatia, local governments must choose two progressive income tax rates between specified ranges. This year, Croatia lowered the upper tax rate limit of the higher range.
Other European countries are due for potential changes to their top personal income tax rates in the coming years. Austria is planning to eliminate its highest tax bracket in 2029, reducing the top income tax rate from 55 percent to 50 percent.
Property TaxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. Reforms
Over the past year, property tax reforms have focused on targeted base broadening and rate adjustments of inheritance, estate, and gift taxes, property transaction taxes, and recurrent taxes on immovable property.
Andorra, Ireland, and the Netherlands are tightening rules on property investment and vacancy to address housing shortages and affordability, while the Netherlands is easing transaction costs.
Andorra introduced a new tax on foreign real estate investment, with rates ranging from 3 percent to 10 percent, depending on the type of real estate.
Germany’s property tax reform became effective in 2025, following a revaluation of around 36 million properties in 2022 to replace their old 1964 (West) and 1936 (East) assessment values. The property tax bases have been devolved to the federal states, with most states following the federal model or close variants. Baden-Württemberg chose a land-value tax that excludes buildings from the tax base, while Bavaria implemented a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. based solely on floor area, independent of the property’s assessed value.
Ireland increased the vacant homes tax significantly (from five times to seven times the local property tax), targeting underutilized housing. It also raised the stamp duty on bulk acquisitions (to 15 percent) and introduced a higher rate (6 percent) for luxury residential properties (above €1.5 million).
The Netherlands reduced the base rate of its real estate transaction tax from 10.4 percent to 8 percent, which will come into effect in 2026.
Additionally, the UK removed charitable rate relief for private schools—closing a loophole and increasing the property tax burden on private education institutions. From 2028, owners of UK homes valued over £2 million will face a new annual surcharge on top of their regular council tax.
The UK is also broadening the inheritance taxAn inheritance tax is levied upon the value of inherited assets received by a beneficiary after a decedent’s death. Not to be confused with estate taxes, which are paid by the decedent’s estate based on the size of the total estate before assets are distributed, inheritance taxes are paid by the recipient or heir based on the value of the bequest received. base for high-value estates, while Denmark is offering additional relief for family businesses.
Starting in 2026, the UK will limit the 100 percent relief on businesses and agricultural assets to £1 million and introduce a 50 percent relief above that threshold. Denmark reduced inheritance and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. on family-owned businesses by 5 percentage points, to 10 percent, supporting business succession and continuity.
Environmental Tax Reforms
European countries implemented reforms to strengthen carbon pricing and adjust fuel excise taxes. Austria and Germany raised the rates of their carbon taxes from €45 to €55 per ton of CO2 in 2025, which will transition into national emissions trading systems (ETSs) in 2026, until they are eventually replaced by the EU-ETS-2. Iceland raised its carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. rate by 59 percent, while Ireland increased its carbon tax to €63.5 per tonne of CO₂, and Slovenia raised its CO₂ tax by 80 percent. Norway expanded its carbon tax base to include emissions from distant offshore fishing and introduced a reduced CO₂ tax for international shipping. Denmark announced a carbon tax on agriculture, targeting emissions from livestock and agricultural lime starting in 2030, alongside harmonized duties on F-gases. Lithuania added a CO₂ component to its fuel excise taxes, and Latvia raised excise duties on fuel, natural gas, and petroleum gases used for heating. In contrast, Sweden reduced fuel excise taxes on gasoline and diesel, while maintaining reduced rates for agriculture, forestry, and aquaculture.
Environmental goals also drove transport-related tax reforms in several European countries. Latvia increased vehicle operation tax rates by 10 percent for all vehicles and raised company car taxes by 10 percent starting in 2027. Hungary also increased motor vehicle taxes and company car taxes by 20 percent starting in 2025. Denmark increased diesel excise taxes but lowered recurrent vehicle taxes on diesel cars and road use taxes for trucks. Slovakia reduced car taxes for freight transport vehicles while increasing highway tolls. Adjustments to electric vehicle (EV) taxation were made in Finland, Hungary, and the Netherlands, with Finland raising taxes on EVs and plug-in hybrids, Hungary abolishing tax exemptions for hybrid cars, and the Netherlands phasing out motor vehicle tax exemptions for emission-free passenger cars starting in 2026. Aviation taxes were increased in Germany, the Netherlands, and the United Kingdom, with the Netherlands introducing a distance-based differentiation to tax long-haul flights at higher rates. Sweden, however, abolished its air travel tax.
Additionally, tourism-related taxes expanded in Greece and Iceland. Greece increased rates for its climate crisis resiliency charge, while Iceland introduced a new infrastructure fee for tourists arriving on international cruise ships and raised the overnight tax rate.
Tax Reforms for Economic Growth and Budgetary Stability
As governments are moving toward budgetary stability, policymakers should focus on consumption taxes by making them more neutral and efficient. This should be done by broadening the tax base, lowering the tax rate, and eliminating unnecessary tax exemptions. Countries could also put compensation measures in place for poorer households. Additionally, countries should move away from temporary measures and consider full expensing to increase private investment and move toward a permanent and neutral corporate tax. Finally, for capital investments, governments should provide adjustments for inflation and the time value of money.
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