It’s common knowledge that taxes can be a massive burden on many expats from all income brackets. Fortunately for them, some countries in Europe impose zero foreign income tax on their citizens and residents.
You can live, work and enjoy life abroad in all its glory without the concern of how much additional tax you’ll owe on any income earned from work or business activities outside your home country.
Many European countries concede that their citizens have the right to earn income outside their tax home jurisdiction without being subject to additional taxation. Besides, foreign-earned income remitted to a country also positively affects the economy.
If you’re considering relocating to Europe or incorporating a business there, this guide is for you. We will cover each European country that charges zero foreign income tax and what other benefits you can cash in on by living in these places.
Can you lower taxes on income earned at home and abroad?
Lowering taxes on income earned at home and in a foreign country can be tricky as you’ll need to consider any contrasting tax laws that may exist and how best to communicate with two different tax home jurisdictions. The rules for each country can vary, in addition to the regulations for how two separate tax authorities combine taxation.
Countries like the US provide a tax exemption for a specific amount of foreign-earned income. If the foreign-earned income is from a country that charges zero foreign income tax, then the income will essentially be tax-free up to a certain threshold.
Further tax-saving measures to take advantage of can be used too. Most developed countries provide tax-credits when you pay foreign income tax. These credits can offset some or all of the self-employment taxes you would otherwise owe on your foreign-earned income. Additionally, you may be able to deduct certain expenses related to your foreign earnings, such as housing costs or travel expenses.
The “Expat Tax Trap” and What to Do About It
Entering into a new life of global citizenship comes with many benefits. You get to experience and embrace new cultures in a profound way that holidaymakers only get a taste of. If you’ve ever had the desire to learn a new language, you have the opportunity to immerse yourself in one on a daily basis, which for many of us, is a much more efficient way of learning.
However, there can also be downsides to Americans living abroad, one of which is navigating the complex tax laws of a foreign country and disclosing your foreign-earned income to your home country. Unfortunately, many expats find themselves caught in what is known as the “expat tax trap,” whereby they end up owing taxes in both their home country and their host country.
An even more problematic predicament to find yourself in is basing out of two countries that levy tax on foreign-earned income. You could then be facing an unimaginable tax liability which you’ll want to avoid at all costs.
There are a few ways to avoid or minimize the expat tax trap:
- First, you must check the tax laws listed by your home country’s tax authority to see if you are still deemed a tax resident. If you are considered a non-resident, you may be able to claim certain deductions or exemptions or not have to file taxes at all.
- Second, take advantage of any tax agreements between your home and host countries. These agreements were made to encourage globalization and international relations. As a result, they can often help reduce a certain amount of your tax obligations or eliminate double tax on foreign-earned income for those who live abroad.
- Finally, consider using a professional tax advisor who can help you plan for and navigate the complexities of taxes for expats. At Global Citizen Solutions, our international migration consultants specialize in strategic planning to reduce taxes for expats and international investors.
Click here to get in touch with one of our specialists today.
How to Avoid Paying Taxes on Offshore Income
There are several ways to avoid paying taxes on offshore income, and the best approach depends on your circumstances. If you’re a resident of a country with no tax on foreign-earned income, you can simply remit your offshore earnings to your home country. If you are a resident of a country that imposes tax on worldwide income, this is where it becomes a little more complicated.
Foreign-earned income exclusion
Foreign tax exemption
For US expats or resident aliens, the approach to tax avoidance on offshore income is relatively straightforward and well-documented. Whether it’s income from a job with a foreign company or self-employment income, expats who live abroad with a foreign permanent residence or are conducting business in a foreign country have a taxable income exemption they can claim on their tax returns of the first $112,000 of their income earned overseas.
Foreign tax credit
Further to the tax exemption, by completing IRS Form 1116 with your federal tax return, you can claim a tax credit credit in your federal income tax return for taxes you paid to a foreign government on foreign-earned income. This will mean only some income is taxable after you pay foreign income tax.
Zero global income tax countries
Fortunately, Europe has several low-tax countries for expats and other individuals dealing with international finances. Countries in Europe that offer a Golden Visa provide tax incentives for those who possess the visa and do business in the country.
Special residency permits like the Portugal NHR Tax Regime (non-habitual resident) offer several tax-saving benefits, in addition to non-residence status, which has considerable tax benefits in and of itself–we’ll come back to this later.
Other ways of avoiding tax exist. Specific offshore financial accounts like a trust fund, foundation, pension plan, or other retirement accounts in a foreign country can be eligible for special tax exemptions.
Portugal’s crypto law declares some profits from crypto and other digital assets tax-exempt, provided you meet specific requirements. On the more extreme side of things, an effective – but likely irrevocable – way to reduce your tax is to renounce your citizenship and become a citizen of a low-tax or tax-free country.
While there may be ways to avoid paying taxes on offshore income, it’s important to weigh the risks and rewards before taking any action.
European Countries with Zero Foreign Income Tax
Here is a list of countries that do not impose a tax on the foreign-earned income of their residents and citizens:
Malta has become a mainstay in conversations about the best countries in Europe for taxes. Whether you’re a non-resident or full-time permanent resident living in Malta year-round, you’ll benefit from tax deductions on foreign-earned income. A flat tax rate of 15 percent [with a minimum of €15,000 ($15,900)] is charged on income remitted to the country.
The process of acquiring permanent residence in Malta is also much less bureaucratic than in other European countries. The Malta Permanent Residence Program (MPRP) facilitates obtaining a permanent residence permit in Malta. The option of applying for Malta Citizenship by Naturalization for Exceptional Services by Direct Investment (CES) is also available, which provides access to the many tax benefits of living in Malta as a citizen.
You can obtain a Maltese residence permit through the MPRP with a total investment of €380,000 ($403,000) [you can save €50,000 ($53,000) if you invest in South Malta/Gozo] through the purchase of real estate and two non-refundable donations amounting €30,000 ($31,800).
Alternatively, a Maltese residence permit can be obtained with a total investment of €120,000 ($127,000) [you can save €10,000 ($16,600) if you invest in South Malta/Gozo] through a property rental held for at least five years and non-refundable donation of €58,000 ($61,500).
To learn more about the Malta Permanent Residence Program, click here for a full breakdown.
Nestled between Spain and France in the Pyrenees mountains, the micro tax haven of Andorra has been a lifeline for exapts looking to preserve their wealth. Foreign-earned income is tax-exempt up to €24,000 ($25,500). Additionally, foreign-earned income from €24,000 to €40,000 ($42,400) is taxed at five percent, and anything over €40,000 is taxed at ten percent.
Many of us would position Portugal at the cusp of progressive globalized tax policies and options for residency. The Portugal NHR Tax Regime (non-habitual resident) offers an escape from the tax trap that thousands of expats and international investors fall into.
The unique aspect of the Portugal NHR Tax Regime is that as a non-habitual resident, you’re permitted to spend more than 183 days in Portugal but are only liable to pay income taxes of a non-resident. Furthermore, the taxes you would be responsible for paying are less than what is charged to habitual Portuguese residents.
Under the Portugal NHR Tax Regime, there is no tax on personal income earned abroad. You can earn tax-free global income as well as capitalize on significantly reduced tax levied on a certain amount of income generated from business activities in Portugal. Some of the benefits include:
- Special tax treatment for ten years
- No wealth tax
- No minimum stay requirement
- Tax exemption on all foreign-earned income
- 20 percent tax rate on some Portuguese income
Check out our complete guide to the Portugal NHR Tax Regime.
Monaco has long been considered a top country for wealthy individuals to live in. The microstate has favorable tax policies for everyone, from non-residents and residents to corporations. Not only is zero tax levied on income earned outside Monaco, but income earned in the country is also tax-free. Only a corporate tax exists in certain circumstances.
Life in Monaco provides many tax benefits, but living there requires a considerable capital investment. In any case, it is one of the most distinguished tax havens in Europe and around the world for the wealthy and elite.
The British Overseas Territory of Gibraltar is another one of the few European countries with no tax levied on the worldwide personal income of its residents and non-residents who do business there. Gibraltar is also generally considered a low-tax country with favorable tax policies far beyond income taxes, such as no form of capital gains, inheritance, and wealth tax, in addition to no VAT (Value Added Tax).
Greece isn’t technically a “tax-free” country, but the Greek taxation system means that, depending on your level of foreign-earned income, a significant portion of it can be tax-exempt. Greece imposes a relatively high tax rate of 45 percent on local and worldwide income over €40,000 ($42,400), but they offer a significant foreign-earned income exclusion for tax with the option to pay a one-off charge.
A lump-sum payment of €100,000 ($106,000) per year will cover the tax liability on any amount of personal income earned abroad for the full tax year. In simple terms, whether you earned €200,000 ($212,000) or €2 million ($2.12 million), you can cover your tax liability with a one-off payment of €100,000.
This makes the prospect of joining the Greek tax system highly advantageous, and a straightforward way to do so is through the Greece Golden Visa Program. With investment options such as a real estate purchase in Greece worth at least €500,000 ($106,000) or a minimum capital deposit of €400,000 ($106,000) in a Greek bank, you can become a permanent resident of Greece.
A significant benefit of the Greece Golden visa is that obtaining citizenship is possible once residency has been maintained for seven years.
For more info on the Greece Golden Visa, check out our article: Ultimate Guide to the Greece Golden Visa 2023.
Although a tax is charged on foreign-earned income, Bulgaria is one of Europe’s most tax-friendly and lowest-income tax countries. A ten percent flat-rate tax is imposed on all personal income for Bulgarian tax residents.
Worldwide income tax-free countries
European countries are not the only ones where residents can enjoy a tax-free lifestyle on foreign-earned income. Several countries across multiple continents charge no tax on the gross income earned in a foreign country of their residents.
Antigua and Barbuda
The Antigua and Barbuda citizenship by investment program allows individuals to obtain citizenship and permanent residency in the country. No tax on inheritance, income, or capital gains from overseas sources exists.
Singapore uses a territorial tax system that exempts worldwide income from being taxed. There is also a tax credit for income remitted to Singapore.
United Arab Emirates
The oil-rich country of the United Arab Emirates is the best Middle Eastern nation for expats who want to settle in a tax-free country and enjoy western comforts. The government levies no income taxes on worldwide or local income for residents of the United Arab Emirates.
Countries with foreign-earned income exclusion or tax credit
Although not tax-free, some countries will reduce your tax bill by providing tax relief or credits on foreign taxes paid and other taxes like capital gains. If you’re living abroad, you can also reduce tax liability by claiming credits or a tax break on a foreign rental property, foreign housing amounts paid for rent, and being a member of the armed forces working overseas.
EU Tax on Foreign Income for Residents and Non-residents
For people with dual or triple citizenship, the status of citizenship may be held in multiple countries, but the classification of residency isn’t based on citizenship alone. Most European countries have a rule that anyone who spends less than 183 days a year in the country will be considered a non-resident and hence, a non-tax resident.
If you’re an expat from the US, the implications of non-resident status can have significant economic advantages. Non-residence in most circumstances means that even if the country imposes a tax on global income, you’re not liable to pay taxes on foreign-earned income.
Although the list of foreign income tax-free countries in Europe 2023 for residents is small, practically all EU countries don’t impose a tax on non-resident’s foreign-earned income, even if they do business in the country:
- The UK has a black-and-white policy concerning taxes for residents and non-residents. If you are a non-resident in the UK, you are not liable to pay taxes on foreign income earned, no matter the amount.
- The Netherlands employs a similar system where you’re not required to file a self-employment tax return if you’re a non-resident with overseas income.
- For Luxembourg, like the Netherlands, a tax return is only required for income sourced in Luxembourg.
The tax incentives make Europe an attractive destination for expats and digital nomads looking to save on taxes. As previously covered, tax-saving schemes like the Portugal NHR Tax Regime (non-habitual resident) allow expats to live tax-free lives abroad.
Despite these countries offering significant tax advantages for those looking to minimize their tax burden, remember that they all have different rules and regulations regarding global income taxes, so it’s essential to do your research before making a decision on where to live or work abroad.
Reducing your taxes and diversifying your wealth
There are several ways to go about reducing tax on foreign-earned income, in addition to diversifying your wealth. If you plan to move overseas to reduce taxes and diversify your wealth, several European countries will alleviate tax pressure with zero tax global income policies.
And while these countries may have different tax laws and regulations, they all share one common goal: To attract foreign investment and business.
Each country has unique benefits and drawbacks, but many European countries are worth considering whether you’re looking for a low-tax or tax-free environment to invest in.
What are territorial taxes?
Territorial taxes are taxes levied by a state on income that is earned within its territory. This type of tax is common in Europe, where many countries have zero or low rates of taxation on foreign self-employment earnings, foreign investment income or any other income earned overseas.
There are several advantages to this system, including the encouragement of investment and economic activity within the country’s borders. Over the last 30 years, most OECD (Organization for Economic Co-operation and Development) nations have transitioned from an arbitrary global taxation system towards a territorial tax system that benefits the government by raising revenue without burdening residents with high tax rates.
Most countries have aimed to reduce barriers to international capital flows and boost the competition among domestically headquartered multinational firms.
A territorial taxation system can have many positive indirect effects by allowing more earnings to circulate in the economy. It prevents companies from borrowing in the US to fund foreign business activities, essentially taking money out of the economy to stimulate another economy.
With the increase in the repatriation of income due to a forward-thinking tax law like territorial taxation, the country can benefit from economic growth across the board, such as more jobs, new business and investment at the local level, and a bigger spending purse for public services.
There are also some disadvantages to a territorial taxation system, such as the potential for abuse by multinational corporations, but the positives far outweigh the negatives with the overall boost it can provide the economy.
Tax Mistakes to Watch Out For
The complexity of taxes often leads people into unfortunate tax predicaments unknowingly. Although you may have been liable to pay taxes on certain income, the prospect of a surprise tax bill is never appealing.
How mistakes can be made will vary from country to country due to differing tax laws and processes of filing taxes, be here are some common mistakes made:
Claiming for ineligible expenses: People often commit the error of claiming for expenses on things related to personal use and not business or work.
Not including all income earned: This process is somewhat simplified for an individual with a salary or one source of income. People with multiple sources of income can forget to include things like interest-based income from credit unions, loans, or dividends.
Incorrect pension contributions: Whether you have a 401k in the US or an ISA in the UK, there is a threshold for tax exemption on pension contributions. Exceeding it can warrant an unexpected tax debt.
Missed deadlines: Self-assessment tax returns in all countries have a deadline for when they need to be submitted. A missed deadline can incur a significant fine or charge related to the taxes owed.
For anyone interested in becoming a global citizen, the tax trap – technically referred to as double taxation – can be a grave position to find oneself in. The term “double tax” simply refers to the practice of taxing the same income or asset twice. Double tax can occur when living in two countries that charge tax on foreign-earned income or when investing in foreign companies.
Double tax treaties
Fortunately, with the growth of globalization, many countries now have double tax treaties with one another. A double tax treaty is a bilateral agreement between two countries in which each agrees to provide specific tax concessions to the other.
The primary purpose of a double tax treaty is to avoid double taxation on income earned in one country by residents of the other country. They may also provide additional tax advantages, such as reduced withholding tax rates on interest or dividends.
Things to Note
Tax exemption: Even if you reside in a foreign country that charges foreign taxes, you can claim a tax exemption on your tax return for foreign taxes paid to reduce your tax liability. The maximum excludable amount may exempt most or all of your self-employment income from taxation when you report foreign income.
Tax credits: Similar to tax exclusion, how much foreign income you earn may entitle you to claim tax credits through IRS Form 1116 on your foreign income tax return to reduce foreign income taxes. Depending on how much you earned, this may reduce self-employment taxes on some income but could be all income earned overseas.
You can also claim a child tax credit for most foreign income while living abroad to reduce your tax obligations. The potential saving from a child tax credit could be enough to pay for foreign housing.
Foreign housing exclusion: Another way to reduce your tax liability when you pay tax on foreign income is foreign housing exclusion for your housing expenses in a foreign country. The amount you can save depends on your housing expenses and how many days you spend outside the country in the calendar year or tax year.
Under a typical double tax treaty, residents of one country (the “source” country) will be exempt from paying tax on certain types of income earned in the other country (the “host” country). This means they will only be taxed on their worldwide income by the source country. Similarly, host country residents will be exempt from paying taxes on certain types of income earned in the source country.
Frequently Asked Questions about Foreign Income Tax
Which country in Europe has the lowest income tax?
The European country with the lowest tax on income is Bulgaria. It’s the ideal place if you’re looking for tax-friendly countries. You’ll liable to pay self-employment taxes on foreign-earned income but at a low flat rate of ten percent tax.
Which European country has the best tax system?
The country with the best tax system in Europe will depend on your personal circumstances and needs. Bulgaria has the best low-tax system for income taxes with a flat ten percent tax rate. If you need the best tax system for business, Hungary imposes the lowest corporate tax in the EU, with a corporate tax rate of nine percent.
The Malta Retirement Programme provides the best tax system for retirees by offering several tax benefits in addition to a low tax rate of 15 percent on overseas retirement income received in the country.