Move to Europe and Pay Less Tax…. Yes, Really

The US is one of only two countries that taxes its overseas citizens. But with the right country and the right strategy, expats can still save big on taxes.

Many Americans avoid relocating to Europe, since many countries are known to have high income tax rates—some as much as 45% to 70%.

But that’s not always the case—if you choose the right European country. Places like Portugal (see pg. 3), Greece, and Italy offer huge tax incentives to immigrants. Consider two scenarios:

1. You’re a married couple filing jointly. You move to a European country and serve US clients remotely as a consultant. Because you do your work outside the US, you can benefit from the Foreign Earned Income Exclusion (FEIE), which exempts up to $240,000 of active income from federal income taxes. But if you live in a high-tax European country, you still might pay higher taxes than if you stayed in the US.
2. You’re a retired couple living in Europe. You pay taxes to the IRS on your retirement income. But the country you live in has a higher tax bracket for your income level than the US, so you can’t fully offset your foreign taxes.

Both cases end up costing you. But they don’t have to. Here are three ways to save on taxes while living in Europe:

Choose a Low-Tax Country

Not all European countries have high tax rates. Here it’s important to distinguish between tax on domestic income and foreign source income.

There aren’t any European countries with a completely territorial tax system—i.e., one in which only income generated within the borders is taxed—but quite a few exempt foreign passive income from tax.

The table below shows 12 countries with the lowest domestic tax rates in Europe.

The lowest federal US tax bracket pays a 15% tax rate, which is below tax rates in Estonia, Latvia, and Cyprus. But I’ve included those countries for two reasons.

First, the table lists the highest tax brackets, so if you’re a high earner, you’ll still pay a lot less than you would in the US.

Second, Malta, Estonia, Latvia and Cyprus don’t tax foreign passive income. You could get your Social Security or pension income from the US and pay no local income taxes.

The table also shows whether the country has a tax treaty with the US. If it does, then income taxes paid to that country can be deducted from your US tax obligations.

Research Special Tax Incentives

Some European countries grant special tax incentives to expats. Greece and Italy offer the two most popular tax incentives.

Italy

Anyone who hasn’t been a tax resident of Italy for the previous five years and is a citizen of a country with a tax treaty with Italy—which includes the US and Canada—pays a 7% tax on foreign source income for ten years.

The catch: To qualify, you must move to a town with a population of less than 20,000 people in southern Italy, in regions like Abruzzo, Basilicata, Calabria, Campania, Puglia, or the islands of Sicily and Sardinia.

The incentive lasts for 10 years, after which your income would be taxed at standard Italian rates which range between 23% and 43%.

Greece

Greece also offers a program available to anyone who hasn’t been a Greek tax resident for the last five years.

A 7% flat rate applies to all foreign income, as long as your country has a tax treaty with Greece, like the US and Canada.

Once approved for the concession, you get that rate for 15 years.

Take Advantage of Non-Dom Tax Regimes

For people with significant international investment income, some European countries offer a non-domiciled (nondom) tax regime.

These include the United Kingdom, Malta, Cyprus, Ireland, and the Channel Islands. Portugal also has the Non-Habitual Residence (NHR) scheme, which is a form of non-dom status.

Non-dom systems are used in residence-based tax systems to allow some residents to avoid taxation on foreign income.

You pay tax on income earned within the country, but foreign income is only taxed if it is brought into the country.

Non-dom tax systems are based on the concept of “domicile.” In tax law, your domicile is the country you consider your long-term and ultimate home. It’s possible to be a resident of one country for extended periods but be domiciled in another country for tax purposes.

For example, let’s say you become a resident of Ireland. Depending on your circumstances, you may be considered a non-dom for tax purposes. So even though Ireland taxes the worldwide income of its residents, it will exempt any foreign income you don’t bring into Ireland.

Non-dom status means that even if the country taxes residents’ worldwide income, you can achieve an exceptionally low tax rate by limiting your local income and only bringing in enough foreign income to meet your immediate needs.

Historically, non-dom status was reserved for people who spent a lot of time outside their country of residence, say by traveling constantly. For example, you can qualify for non-dom status in Cyprus with as little as 60 days’ presence a year— a status that lasts for 17 years.

Bear in mind that if you’re a US citizen, nondom status won’t exempt you from US tax on the income the foreign country doesn’t tax you on.

Looking Ahead

One thing we’ve learned from 2023: International residency and taxation rules are in the midst of a sea change. Ireland, Portugal, and Greece have all changed their Golden Visa systems this year.

Those changes were economically and politically motivated.

On the economic front, these countries decided their special regimes for immigrants had outlived their usefulness. They had helped to bring in a lot of foreign money after the global financial crisis, but housing prices are becoming out of reach for locals.

Their governments face pressure from domestic citizens upset about that and lower taxes for foreigners.

But there has also been pressure from the European Union for its nations to level the playing field.

The European Commission in Brussels has long pushed for a harmonized tax system for the continent. When one country lowers its tax rates, taxpayers from other EU countries have an incentive to move there to pay less taxes. The EU doesn’t like that.

The bottom line is, if paying less taxes (using one of the methods I’ve described above appeals to you), set the wheels in motion as soon as possible—before the window closes for EU tax savings.