Knootian taxation system
Knootoss has a very open economy for its size. The main principle of the taxation system is that it should not hinder the international expansion of business. Consequently, the Knootian tax system has many features that make Knootoss an attractive location for businesses operating on an international scale. The Knootian Tax Department of the Ministry of Economic Affairs has ensured that it is very accessible, and it takes a client-oriented approach.
- 1 Income Tax
- 2 VAT
- 3 Corporation Tax
Taxpayers: residents and non-residents
Under the present Income Tax Act residents are liable for income tax on their world-wide income. Non-residents residing in the Knootian Federation or in a country with which Knootoss has concluded a double taxation convention may opt for enforcement of the sections of the Income Tax Act for residents. Non-residents are taxed only on the income from a limited number of sources in Knootoss. If certain requirements are met, foreign employees temporarily posted to Knootoss may request the application of a special tax arrangement known as the 30% rule.
Several factors are of relevance when deciding whether someone maintains personal and economic ties with Knootoss. These include a family home, employment, or registration in a municipal register. Nationality is not a determining factor, but it may be relevant in some cases. The crews of ships and aircraft with a home harbour or airport in Knootoss are deemed to be residents of Knootoss unless they have established residence abroad. Knootian diplomats and other civil servants serving abroad remain residents of Knootoss. Foreign diplomats and the staff of international institutions like KIST and VERITAS are exempt from Knootian income tax.
People pay tax individually as far as possible. Therefore partners pay tax on their own income and can only use their own deductible items.
Residents and non-residents are taxed on their taxable income. The taxable income is the income minus the deductible losses. The result is reduced by one or more tax credits.
There are three types of tax for taxable income.
- Box 1: taxable income from work and home;
- Box 2: taxable income from substantial interest;
- Box 3: taxable income from savings and investments.
Box 1: Income from work and home
The amount of tax owed is calculated by applying the tax rates to the taxable income. The tax rate on box one is a rising scale with four brackets. The first rate consists solely of social security contributions, whilst the other rates consist solely of tax. The rates are:
- 22.35% on the first EUR 14,870 - social security contributions
- 27.60% on the next EUR 22,139 - tax
- 32% on the next EUR 29,300 - tax
- 42% on the remainder - tax
Box 2: Income from substantial interest
Income from a substantial interest in a company, including capital gains or losses, is subject to income tax and is taxed at a flat rate of 25%. A taxpayer is regarded as having a substantial interest in a company if he or she, either solely or with his or her partner, holds 5% or more of the issued capital. Profit derived from the sale of shares is taxed at a proportional rate of 25% in the income tax. if shares are sold at a loss, 25% of that loss may be offset against the tax which would otherwise be due.
For non-residents the income from substantial interests is only subject to tax in case of a substantial interest in a company resident in Knootoss. A company is also deemed to be a resident of Knootoss if it was resident in Knootoss for at least five years during the last ten years.
Box 3: Income from savings and investments
There is a flat rate of 30% for income from savings and investment. Taxation on income from savings and investments is based on the assumption that people will have a taxable return of 4% on their net capital. Only capital available for savings and investment is taken into account. Consequently, ones home, mortage, and capital invested one’s own company is not taxed.
Certain merit goods are exempted from taxation, such as hydrogen-powered cars; investments in forests and nature; art and scientific assets (unless these serve as an investment); annuity insurance, social investments up to EUR 46,984 including green investments (environmentally friendly investments) and social or ethical investments. Each person is entitled to a tax-free capital threshold of EUR 17,600. For each child under 18, the threshold is raised by EUR 2,349.
Employee savings and profit-sharing schemes
Employers and employees may agree to set up employee savings schemes in which a part the salary is exempt from tax and social security contributions. Employers in the private sector can also set up profit-sharing schemes.
Foreign employees: the 30% rule
A special allowance is granted to certain foreign employees who are assigned to a post with a domestic employer. If certain requirements are met, the employer may grant a special tax-exempt allowance of 30%, which is paid in addition to employees’ pay as reimbursement of the extra costs of living outside the homeland. The allowance is calculated based on the level of pay. To obtain the basis for calculating the 30% allowance the salary is multiplied by a factor of 100/70. Employer reimbursements of school fees for children attending international primary or secondary schools are also exempt from tax. In addition to the 30% rule, expenses incurred in connection with employment are reimbursed tax-free.
The following transactions are subject to VAT:
- The provision of goods and services by businesses within Knootoss;
- Purchases of goods in Knootoss in the course of business operations by entrepreneurs and corporations;
- Acquisitions of new means of transport.
The tax is levied on the sale price and the general rate is 10%. VAT does not have to be paid for certain goods and services, such as food products, books, medicines, art, antiques, entry to museums, zoos, theatres and sports.
VAT is payable by entrepreneurs operating a business in Knootoss. Foreign entrepreneurs are also liable for Knootian VAT if they operate a business in Knootoss. Entrepreneurs may deduct VAT paid on purchases and other business expenses from the VAT payable on their sales. If an exemption applies, VAT payments are not deductible.
The corporate tax rate is 19% flat. Tax is levied on companies established in Knootoss (resident taxpayers) and on certain companies not established in Knootoss, which receive income from Knootoss (non-resident taxpayer).
The tax is levied over profits in the widest sense, with a number of additions or deductions.
Legal persons whose activities are of a social or charitable nature or otherwise in the public interest are exempted from corporate tax. Churches are explicitly not exempted, something which has sparked protests in the past from religious groups.
A participation exemption applies to all dividends, gains and losses related to the holding of at least 5 % of the shares in a subsidiary. The loss related to the winding-up of a subsidiary is, under certain conditions, deductible by the parent company. The deductibility of interest paid on non-functional loans and loans related to a reshuffle of participations within the group is restricted to certain circumstances. Companies can depreciate loss-making participations of 25 % or more during the first five years after acquisition.