We just keep talking and writing and shouting about taxation here at Nomad Capitalist, the same way Europeans and Americans deliberate over football.
Yes, I’m aware that they are not talking about the same thing, despite bearing the same name, but you could say the same thing about the word “taxation” in different countries: It may be the same name, but it can mean something entirely different depending on the country in question.
There are low or zero tax countries and then there are the high tax countries; depending on where you choose to plant your flags, half of your income could be taxable income.
You could be sending half your income to the government or none at all.
No, not all taxation is the same – far from it.
In today’s connected and globalized world, paying more taxes than you have to, if you pay them at all, is a costly error that is more than possible to avoid.
It just takes some basic understanding of the different types of taxation, a knowledge of the different tax rates around the globe and a bit of professional help to get your international tax affairs in order so that your tax bill comes in at a big fat $0.
The 4 Types of Taxable Income
Countries around the world usually implement one of four types of tax systems when it comes to taxable income: zero taxation, residential taxation, citizenship-based taxation, or territorial taxation.
The general rule of thumb with the residential system is 183 days; in other words, if you spend more than the allotted 183 days in Country XYZ, your worldwide income will be taxed.
In other cases, just being a resident in a certain country is enough to become subject to the country’s tax on your worldwide income.
Citizenship-based taxation is the most draconian form of all and is only used by the African country of Eritrea and the United States.
Citizens of these two countries will never escape the demands of their nation’s taxman, although those living outside the country have the opportunity to exclude some of their foreign income from the country’s strict taxation.
Fortunately, there are countries that administer a territorial tax system — one in which countries only tax the income that was earned within their geographical limits (i.e., income you have earned in Singapore is only subject to tax IN Singapore.)
It is incredibly important to be aware of the difference in these systems and keep tabs on which country uses which system.
Once you know how each country operates, you can keep the citizenship of your country of origin, live in another country, and earn money in another one without having to pay taxes in any of them.
Tax Haven or Tax Hazard?
The majority of people are not aware of the existence of low-tax countries and just accept the taxation system imposed on them by their own country, even if they make money online and have their main customers in some other part of the world.
Other folks are well aware of the “hidden gems” or tax havens out there but argue that high tax rates are a necessity if you want a certain quality of life.
From experience, I can guarantee that you will find a high quality of living in many of the countries where you would least expect it.
Taxes are not invariably tied to the quality of life a country can offer.
Figuring out which country to live in, which to earn money in, and which to be a citizen of is where Flag theory comes into play.
I advise the people I help each month to become tax residents of a tax-free country that will not try to get their hands on the money they earn anywhere else.
Remember, it’s all about going where you’re treated best.
There are a lot of low-tax countries with cities that rank high on the indices for the quality of life and the happiness of their citizens.
The high tax countries of the West do not have a monopoly on development, quality of living, or happiness. In fact, they can sometimes bring the opposite.
Low-tax countries are often called “tax havens”, which is why I have taken the liberty of calling countries with the highest tax rates, ”tax hazards.” You may live and work in such ”tax hazards” or plan to move there and I am here to point you in the other direction.
Let’s take a look at the 15 countries with the highest tax rates.
Yes, with all that cheese, vine, and “je ne sais quoi” street vibe, France is truly a formidable country.
Being Europe’s third most populous country, France is still a global power, a member of the G7, and the EU’s second-largest economy by purchasing power parity.
However, the country has some of the highest tax rates in the world, a whopping 45% top marginal rate.
To put this in context, Monaco, a low-tax country that is situated on the French Riviera, has no income tax and is one of the wealthiest countries in the world.
Monaco’s low tax rates are undoubtedly one reason the French comprise almost 30% of Monaco’s citizenry.
Who could resist enjoying the same quality of life (or better) with none of the tax obligations?
Spain has one of the most attractive Golden Visa programs in Europe. From golden beaches to a Spanish tapas counter everywhere you turn and all over high standards of living, Spain is a happening place.
But this comes with a price.
If you spend six months or more per year in Spain you will become a tax resident in the country, paying an outrageous 47% taxes.
And the bad news is that Spain taxes your worldwide income.
Sure, there are ways to plan around it, but it adds levels of complexity that you don’t need to deal with. There are better ways.
I am a big fan of Ireland when it comes to the quality of service and general friendliness of the nation (so much so that I decided to have our Nomad Mastermind Event in Dublin a while back.)
Ireland is ranked as one of the wealthiest countries in the European Union and among the twenty-five wealthiest countries in the world in terms of GDP per capita. It is one of the greatest examples that development and growth were possible even shortly after the world’s financial crisis of 2008.
One of the things that contributed to that, besides hard work and creative Irish spirit, was relatively low corporate income tax rates, which was used by the likes of Google and Apple, but Irish citizens are not quite as lucky and must pay a marginal income tax rate as high as 40%.
It’s not Europe’s highest tax rate, but its taxes are still high enough to make this list.
Taxable income is charged in respect of all properties, profits, or gains. A person resident and domiciled in Ireland is liable to Irish taxable income on his total income from all sources worldwide.
The taxation of earnings is progressive, with little or no income tax paid by low earners and a high rate applied to middle and top earners.
For such a tiny country, Luxembourg sure has some big taxes. The Grand Duchy of Luxembourg (yes that’s its official designation) is a small EU member state nestled between Belgium, Germany and France.
The country is not necessarily famous for much and is generally known for being a safe and sensible country with a stable economy, government and banking system. It also, incidentally, has one of the world’s best passports.
But unfortunately, it also has one of the world’s highest rates of income tax, with a progressive system targeting top earners with a personal income tax rate of 42%.
As the powerhouse of Europe, Germany is one of the world’s strongest economies, but it also has some of the world’s highest taxes. The price of success? Not exactly.
Germany is famously punctual but, as anyone who has ever dealt with its bureaucracy will tell you, Germany isn’t, contrary to popular opinion, all that efficient.
In fact, it’s the very definition of big government. And that government is costly to maintain.
As such, Germany is often lumped in with the so-called Northern European countries; which also includes Austria, France, the Benelux countries and Scandinavia.
You’ll note that these countries feature on this list – countries that are generally regarded as more thrifty and sensible than their southern Mediterranean counterparts, but who also maintain large social services programs, paid for by high taxes. (The wild card here is Italy which, thanks to its flat-100 tax regime, instead is on our low-tax European countries list.)
In Germany’s case that’s a progressive system with a personal income tax rate of 45% for its highest earners.
Portugal a high-income EU country with the 48th largest economy in the world and a top marginal tax rate of 48%.
Portugal uses tax to increase equality between high-income earners and low-income earners in the country. Employment income earned is subject to a progressive income tax that applies to all who are in the workforce.
A long list of tax allowances can count as tax deductions, including a general deduction, health expenses, life and health insurance, and education expenses.
11. The Netherlands
The Netherlands has a developed economy and has been playing a special role in the European economy for many centuries.
In more recent decades, it was one of the founding members of what would later become the European Union.
The Netherlands has the 17th-largest economy in the world.
The Dutch location gives it prime access to markets in the UK and Germany, with the port of Rotterdam being the largest port in Europe.
For a long time, Holland was among the most prosperous countries in the world.
This trading powerhouse, and one of the most densely populated places on Earth, has an income tax rate (income tax plus mandatory pension, social security, and state-funded medical care payments, all of which are a percentage of income up to a maximum) of 49% for people under the age of 65 on all income over €68,508.
Though one of the smallest countries in Europe, Slovenia still imposes a whopping 50% tax on its citizens. Slovenia lies at the tripoint of the Germanic, Latin, and Slavic cultures.
Slovenia has just 2.1 million citizens and it is among the smallest countries in the European Union.
It is one of many former Communist countries to join the European Union, but it also has the highest tax rates amongst its fellow ex-Communist states with a top marginal tax rate of 50%.
Still, Slovenia has a developed economy and is the richest of the Slavic countries by nominal GDP per capita in front of such regional powers like Poland and Russia.
The rate of innovation in this small Middle-eastern country is staggering. Israel is one of the rare non-European countries on this list and has a population of just 9 million citizens.
However, it also has the 13th largest number of startup companies in the world.
Israel was one of the world’s most resilient economies during the 2008 “Great Recession”.
Currently, Israel has a GDP per capita similar to Southern European countries.
Because of its history, geographical position, and high-quality university education system, Israel is home to a highly motivated and educated populace that is responsible for spurring the country’s high technology boom and rapid economic development.
But all that comes with a price: a top marginal tax rate of 50%.
Belgium’s strongly globalized economy and its transport infrastructure are integrated with the rest of Europe. Its location at the heart of a highly industrialized region helped make it the world’s 10th largest trading nation.
All of that sounds great until you realise that the country also has one of Europe’s highest rates of personal income tax.
You’ll hear people complaining about tax all he time, “I don’t know why I bother when the government takes half my money.” Most of the time they’re exaggerating, unless they’re from Belgium, because that’s literally what the Belgian government does.
Currently, if you earn more than €46,440, you will be taxed at a rate of 50%. And if you think that’s crazy, that’s actually an improvement, because until recently that rate was closer to 54%.)
Aruba is one of the most beautiful Caribbean islands and a popular island vacation destination.
The island is also one of the safest in the Caribbean if you exclude some petty crimes. But who cares about a little pick-pocketing when the government levies a staggering personal income tax rate of 52%.
It’s actually come down in recent years, previously it was 59%. But does it make the tax rate any better? Well, not to us. We can’t digest the notion of people paying more than half of their hard-earned money to the government in taxes.
Sweden is the 11th richest country in the world in terms of GDP per capita.
Its standard of living and life expectancy rankings are among the highest in the world and the country has very low-income inequality.
Sweden has a developed post-industrial society with an advanced welfare state but the cost of that is one of the highest rates of personal income tax, with as much as 52.9% deducted from annual income.
Sweden has a taxation system for income from work that combines an income tax (paid by the employee) with social security contributions (employers contributions) that are paid by the employer. Though Swedes may be taxed heavily, sales of residential properties are exempted from taxation there.
One of the few German-speaking countries in the world is also one of the most developed, just like every other German-speaking country.
Austria also demands that its people pay for that privilege, as the top marginal tax rates stand at 55%.
Aside from the high-income tax rate, it also has a social security rate of 18%, bonus payments are charged at a rate of 6%, and capital gains tax is 27.5%.
Austria is the 15th richest country in the world in terms of GDP per capita, has a well-developed social market economy, and a high standard of living.
But, you have to ask yourself, “At what cost?”
Much of what you can find in Austria in terms of quality of life you can find in other countries with much lower tax rates.
So, while it might be nice to visit Austria, don’t plan on making it your tax home.
Denmark has a developed economy that ranks 9th in the world in terms of GDP per capita and 6th in nominal GDP per capita.
The Danish welfare state is, among other things, based on the concept that citizens should have equal access to the different services paid for by taxes.
As it has a very small population, the Danish’ government imposed a total tax rate equivalent to 56% of per capita income in order to meet the needs of its people.
Many see this as a justification for its high tax rates, which also allow for increased social program accessibility for the Danish people.
Maybe this is part of the reason why the Danish are viewed as some of the happiest people in the world.
Or perhaps it is because they nurture the Hygge concept, used when acknowledging a feeling or moment, whether alone or with friends, at home or out, ordinary or extraordinary as cozy, charming, or special.
I will always lean towards mindset and not taxation as the explanation for a country’s happiness level.
Japan is the third-largest national economy in the world, after the United States and China in terms of nominal GDP. In terms of purchasing power parity, it is the fourth-largest national economy in the world, after the United States, China, and India.
This is all quite astonishing for a country that only has the 11th largest population in the world.
Many contribute Japan’s success to their legendary work ethic. With its capital being home to more millionaires than any other city on the globe, Japan is the only Asian country amongst high tax countries with a top marginal tax rate of 55.97% on income.
The supremacy of Japanese corporations in Asia in producing a variety of sophisticated technology and automobiles means there is plenty of income for the government to tax.
It is also one of only a few countries with a culture that can be compared with Western ones in terms of popularity around the world.
Finland has the highest taxes in Europe and the second highest taxes in the world. The rates are so high that this small home of just 5.5 million people earns a place in this list of highest tax countries, courtesy of its top marginal tax rate of 56.95%.
Finland also has one of the highest capital gains taxes.
An interesting fact is that anyone who has arrived in Finland and stayed longer than six months will become, from the Tax Administrator’s view, a resident. And any residents’ worldwide income is subject to Finnish tax with no distinction between the source country.
1. Ivory Coast
People living in Ivory Coast are giving away a whopping 60% of their income to the government, and that doesn’t have to be the case.
The long-troubled west African country Ivory Coast has the highest income tax rate in the world.
It sure is a frontier market with a unique profile, but for such a low quality of life, we can’t find a reason why someone would settle for paying their government most of their income.
Why Pay More?
As much I would like to hop on a plane and spend a weekend in Vienna, Paris, or Tokyo, I would advise you to think twice when it comes to becoming a resident of one of these countries, thereby subjecting your income to their high tax rates.
The rates listed here are the top marginal tax rates, which means that you will only be giving away half of the income that you earn above the marginal tax bracket. So, even in a country with a top marginal tax rate of 50%, your effective tax rate could be as low as 35%.
But even writing that is laughable.
Why pay 35% when you could be paying zero? And in some places, your effective tax rate could be well over 50%.
Depending on which tax bracket do you fall in from the federal income tax brackets of course.
Clearly, there is more to take into account than the top marginal income tax rate when going overseas. That is why we offer holistic offshore planning to take into account not just your taxes but where you live, where you invest, where you do business, and more and ensure that all those factors work together in your favor.
So, open your mind, get out of your comfort zone, and pick a place that treats you best, which certainly does not have to be one of the countries on this list.