Taxes In Europe

People often take Europe off the list of possibilities for where to move or invest overseas because they assume the tax implications are too onerous… so let’s take today to spend some time taking a realistic look at what it will mean to your tax return if you head to Europe.

In general, a retired American or Canadian shouldn’t owe any more in taxes on his pension and/or Social Security income than he would were he living back home.

Canada has signed a tax treaty with every EU country, as has the United States with the exception of Croatia. These determine which country gets to tax pension and Social Security income. Typically, your home country gets to tax the Social Security income of an expat overseas and the country of residence gets to tax that person’s other pension income. This is not always the case, though, so check with a tax professional to confirm the treaty specifics for the country where you want to live.

Only a few European countries—as opposed to EU countries—have not signed tax treaties with Canada or the States, and for the most part they aren’t countries North Americans would typically move to.

For Canada, there’s no treaty in place with Belarus, Bosnia and Herzegovina, Macedonia, Montenegro, Kosovo, Georgia, Liechtenstein, or Monaco.

For the States, there’s no treaty with Serbia, Croatia, Bosnia and Herzegovina, Albania, Macedonia, Montenegro, Kosovo, Andorra, Liechtenstein, or Monaco.

Croatia and Montenegro are both fantastic coastal countries that might be worth your attention, but if you’re interested in them, you’ll definitely want to seek professional tax advice.

While Liechtenstein, Monaco, and Andorra all might be interesting, they’re not cheap places to live, and adding an additional tax burden on top of the cost of living won’t make a lot of sense for most folks…

All that said, bottom line, if your only income is retirement income, you shouldn’t pay more in taxes as a foreigner retired overseas than you would back home.

As a resident of Portugal, for example, what would your tax obligations look like?

Portugal currently offers what it calls a Non-Habitual Resident Tax Regime. The poorly named tax law, which went through changes in 2020, allows new tax residents to apply for NHR status and enjoy benefits including a 10% tax rate on pension income and reduced on other income.

If you have a portfolio that kicks off rental income, dividends, or interest income, you’ll want to dig a little deeper into the details of the relevant tax code. However, again, in most cases, you’ll likely find that you’ll not be taxed more by living in a European country. You may be taxed less depending on the country and its tax rates and bands.

The biggest tax hit in Europe can come from social charges. Social charges associated with earned income are paid mostly by the employer. However, in some places, social charges are also imposed on passive income… another reason to take professional tax advice before making a move.

You’ve probably also heard about wealth taxes.

France’s wealth tax is notorious. Historically, if you were a resident of France, the country’s wealth tax applied to your worldwide assets, including jewelry (difficult to track and to value). If you hit the threshold (1.3 million euros, US$1.5 million), the tax started at a fraction of a percent.

In 2018, France changed its wealth tax law. Now only real estate is included when calculating the value of your assets to determine whether or when the wealth tax applies. The threshold of 1.3 million euros remains. If you’re a real estate tycoon wanting to live in France, you should speak with a French tax advisor before establishing residency to understand what you could do to mitigate any potential wealth tax hit.

France gets a bad tax rap, but, in fact, Italy and Spain are probably more painful tax regimes… because of how each country calculates the amount of tax owed. The tax bands are similar among all three, but France divides household income by the number of units living in the household before applying the tax bands.

Spain imposes a wealth tax that varies by region. Italy charges a wealth tax on financial assets held outside the country… so you should consider moving your stock portfolio to an Italian broker if you’re planning to become an Italian resident.

That said, Italy has a relatively new tax program similar to Portugal’s NHR regime that effectively taxes you just 7% on your income as a resident of Italy… if you move to one of the southern provinces or Abruzzo. Definitely seek tax advice if Italy is on the top of your list.

Also, when comparing what you’d owe as an American living in the States versus what you’d owe as an American living overseas, don’t forget state taxes.

When it comes to taxes, everyone’s situation is different. The overriding point is that you should not give up on your dream of a new life in Europe because you fear you’ll owe more in taxes as a resident in that part of the world than you would if you just stayed home.

We’d be surprised if that’s the reality.