The Greek corporate income tax (CIT) framework set forth in Law 4172/2013, as currently applicable, includes a unique mechanism for taxing distributed profits that presents significant complexities and diverges from common international practices.
While many countries use distribution-based taxation to capture untaxed reserves or deferred profits, Greece’s approach creates notable challenges, due to its interaction with temporary differences and permanent differences, and its unclear tax base definition. This article examines the Greek system, compares it with international practices, and highlights its abnormalities.
Overview of the Greek system
Greece taxes profits of legal entities as they become realised under tax law. However, a unique provision imposes CIT at the currently applicable rate of 22% on distributed accounting profits, even if these profits have not yet been realised for tax purposes.
This approach leads to several complex scenarios and this article will focus on three areas:
Temporary differences between the tax and accounting base;
Permanent differences; and
Tax deferrals and incentives.
1 Temporary timing differences
Temporary differences arise when accounting and tax rules recognise revenues or expenses at different times. The Greek guidelines attempt to address this by requiring adjustments to prevent double taxation. Specifically, if accounting profits are taxed upon distribution but later become taxable under standard CIT rules (when recognised for tax purposes), no additional tax is imposed, according to Circular Ε.2089/2022.
However, this presents a challenge in that accurately monitoring and reconciling these adjustments across multiple tax periods is administratively burdensome and prone to errors. Imposing a complex and costly system to monitor temporary differences solely to accelerate tax collection is disproportionate and counterproductive. The marginal benefit of collecting tax slightly earlier does not outweigh the significant administrative burden it places on companies, especially when these profits will eventually be taxed under normal CIT rules. Such an approach risks raising legal concerns about proportionality, as the objective – early tax collection – is neither critical enough nor efficient enough to justify the system’s complexity and questionable effectiveness.
2 Permanent differences and their nature
Permanent differences arise because certain amounts are either:
Excluded from taxation (e.g., tax-exempt income); or
Recognised for accounting purposes but intentionally excluded from the tax base due to specific provisions in tax law.
These differences exist because tax law does not intend to tax these amounts. Their distribution to shareholders, as permitted by corporate law and accounting rules, should therefore be irrelevant for tax purposes; the taxation at the level of the shareholder is achieved by applying a withholding tax on the distributed profits. The attempt to tax permanent differences upon distribution contradicts the legislative intent behind their exclusion from the tax base.
The Greek tax authorities attempted to address the taxation of permanent differences upon distribution by allowing companies to increase their tax loss carry-forwards by the amount of the taxed difference. However, this mechanism is fundamentally flawed for several reasons.
Lack of legal basis:
Tax loss carry-forwards are a tool designed to defer the taxation of profits across fiscal years, not to adjust for the premature or unintended taxation of amounts that were never meant to be taxed; and
The method of increasing tax losses lacks explicit legal grounding, creating uncertainty and a disconnect between practice and law.
Permanent differences cannot be corrected:
Unlike temporary differences, permanent differences do not represent a timing mismatch. They are amounts that tax law excludes from the tax base permanently; and
As such, no mechanism – whether an increase in tax losses or adjustments in future tax periods – can ‘correct’ the taxation of these differences upon distribution. This is because the taxation should never have occurred in the first place.
One of the underlying problems is the belief that it is possible to reconcile distributed profits with their original accounting and tax treatments. This assumption is fundamentally flawed, for the following reasons:
Distributions are aggregate amounts:
When a company distributes profits, it does not distribute specific ‘banknotes’ or amounts linked to particular accounting or tax treatments;
Distributions are made from a pool of retained earnings, which may consist of a mix of taxed and untaxed amounts, and permanent and temporary differences; and
The idea that one can trace a specific portion of a distributed amount back to its original tax treatment is impractical and unrealistic.
Inherent complexity:
Attempting to monitor and reconcile the tax and accounting origins of distributed profits creates unnecessary complexity without providing meaningful or accurate results; and
This complexity undermines the clarity and efficiency that tax systems aim to achieve.
3 Tax deferrals and incentives
Tax deferrals and incentives are essential tools in fiscal policy, designed to support specific strategic goals such as encouraging investment or fostering innovation. However, the Greek tax system creates inconsistencies when these mechanisms are applied, particularly in cases involving profit distribution. While taxing deferred amounts upon distribution aligns with the logic of deferrals, the same approach undermines the effectiveness of incentives such as super deductions for R&D costs or the ‘patent box’ regime. The distinctions between deferrals and incentives, their treatment in Greece, and how this compares with international best practices are explored below.
The logic of tax deferrals
Tax deferrals temporarily postpone the taxation of profits, effectively providing companies with an indirect financing mechanism by delaying the payment of tax. This allows businesses to reinvest the deferred amounts in operations, growth, or other initiatives.
In such cases, taxing these deferred profits upon distribution is reasonable, as it ensures the deferred tax is ultimately collected once the profits reach shareholders. This aligns with the objective of the deferral: to encourage reinvestment in the short term without permanently exempting the profits from taxation.
The problem with incentives
Incentives such as super deductions and patent boxes are fundamentally different from deferrals. They are not intended to merely postpone taxation, but to permanently reduce the tax burden on specific activities deemed strategically important for the economy. Greece’s approach to taxing distributed accounting profits undermines these incentives in two key ways:
Super deductions for R&D:
Under Greece’s R&D incentive, companies can deduct 200–250% of their R&D expenditures for tax purposes. For example, if a company invests €100 in R&D, it can deduct €200–250 from its taxable income (Article 22A of the Greek Income Tax Code).
While this reduces the company’s taxable profits, it creates a gap between tax profits and accounting profits. If the excess accounting profits are distributed, they are taxed at the corporate level, effectively clawing back the incentive.
Impact – this negates the purpose of the incentive, which is to encourage investment in R&D. Shareholders, who ultimately fund these investments, are disincentivised if they cannot fully benefit from the reduced tax burden.
Patent box regime:
Greece’s patent box exempts for three years profits derived from patents from taxation to promote innovation and support the development of intellectual property (Article 71A of the Greek Income Tax Code).
However, when these untaxed profits are distributed to shareholders, they become subject to corporate tax, negating the benefit of the exemption.
Impact – this undermines the strategic objective of fostering innovation. A patent box should reward the shareholders who took the financial risks to support innovation. Shareholders, who fund businesses with the expectation of a return on investment, may perceive the incentives as uncompetitive or unattractive compared with permanent tax reductions offered in other jurisdictions that give permanent super deductions and exemptions.
The above incentives may not have been intended as temporary benefits, but their reduction to mere tax deferrals stems from the overarching principle that prohibits shareholders from receiving even a single euro untaxed at the corporate level. This approach fails to account for special circumstances, such as incentives designed to promote strategic objectives.
International practices
In most countries, the tax base has a clear and robust origin. It is either (a) realisation of profits or (b) distribution. In the system under (a), when profits are earned, corporate tax is either imposed or waived. When profits are distributed, there is no corporate tax element any more. This is the role of the dividend withholding tax. In systems under (b), profits are taxed only upon distribution.
The following are examples of the approaches adopted in several European jurisdictions.
Estonia and Latvia – distribution-only tax base:
Estonia and Latvia tax profits only upon distribution. Retained profits remain untaxed until they are distributed as dividends.
This system is simple: there is no concept of realised or unrealised profits; the tax base is strictly the distribution.
Rationale – this model prioritises reinvestment and ensures a clear tax basis tied to shareholder payouts.
Switzerland and Austria – untaxed reserves:
In Switzerland, untaxed reserves (e.g., those benefiting from tax holidays or revaluation gains) suffer only dividend withholding tax upon distribution. The concept is simple: a tax holiday means no corporate tax. Upon distribution, only the shareholder is taxed, not the company; this is what the withholding dividend tax is for.
Austria applies a similar rule. There is no rule that recaptures corporate tax upon distribution; there is only dividend withholding tax.
Rationale – these rules are consistent and clear. There is a corporate and a dividend tax and their role is distinct and clear. When waiving corporate tax, there is no push back because of distribution.
Poland – hybrid system:
Poland has a system in which profits are taxed when realised.
It also has an optional ‘Estonian’ system, which can be applied by minority taxpayers under very special conditions and that allows taxation of profits only at the point of distribution. It defers taxation on retained earnings, encouraging reinvestment.
Rationale – both systems are straightforward. The tax base will either be the realisation of profits at the default system or the distribution at the Estonian election system; never a mixture that tries to combine realisation and distribution.
Recommendations
Rectifying the tax base abnormality needs bold actions. The suggestion is to change Article 47, paragraph 1 of the Greek Income Tax Code, by removing the section: “In the event of capitalisation or distribution of profits for which corporate income tax has not been paid, the amount distributed or capitalised is taxed in any case as profit from business activity, regardless of the existence of tax losses.”
This change will ensure that taxation does not occur simply due to distribution. The implications of this change are as follows:
Elimination of taxation on timing mismatches – by not taxing the distribution of profits that result from a timing mismatch between accounting and tax rules, Greece ensures that tax is collected at the appropriate time, when profits are realised under tax law. This eliminates unnecessary complexity and administrative burdens related to reconciling temporary differences. A transitional provision is needed to make sure that past distributions that have been taxed are not taxed again when these profits are realised.
No taxation on distribution of permanent differences – if an amount was initially exempt from taxation, there was a clear rationale for this exemption in the first place. Taxing these amounts upon distribution contradicts the policy intent behind the exemption. By removing taxation on permanent differences, Greece will reinforce consistency in its tax framework and eliminate redundant and legally questionable tax applications.
Enhancement of tax incentives – the current application of Article 47 of the Greek Income Tax Code effectively reduces tax incentives to mere deferrals rather than genuine benefits. This diminishes their attractiveness and effectiveness. By removing this provision, Greece can ensure that incentives such as R&D super deductions and patent box regimes serve their intended purpose – making the country more competitive in attracting investment and fostering innovation.
By implementing this change, Greece will create a more rational and internationally competitive corporate tax system. The removal of this provision will provide clarity, ensure that taxation aligns with economic reality, and enhance the effectiveness of fiscal incentives without unnecessary distortions.
