Dateline: Kyiv, Ukraine
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, 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 Income Taxation
Countries around the world usually implement one of four types of tax systems: 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 in 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?
A 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” out there but argue that higher tax rates are a necessity if you want a certain quality of life.
If you read my articles or follow my YouTube channel, you know that I have traveled the world extensively; you’ll also know how much I appreciate using top-notch services wherever I travel. 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 a tax resident of a tax-free country that will not try to get its 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. There are more than 160 countries outside of the western world and many are highly developed countries like Georgia, Costa Rica, Panama, and Singapore.
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.
Deutschland, as Germans call it, starts this list of countries with the highest taxes in the world with a top marginal tax rate of 47.5%. It is the most populous country in Europe (if you do not count Russia) and, in many ways, it is the powerhouse that drives Europe.
Germany is one of the main economies in the world and has a strong export orientation. The country is recognized for its large portion of specialized small and medium enterprises, known as the Mittelstand model. Around 1,000 of these companies are global market leaders in their segment.
Berlin developed a thriving cosmopolitan hub for startup companies and became a leading location for venture capital-funded firms in the European Union.
Simply put, when it comes to the economy, business and work spirit, Germany is a celebrity amongst countries. But it is also a tax hazard. Individuals who are resident in Germany or who have their normal place of abode there have full income tax liability.
All the income earned by someone living in Germany – whether they earn it at home or abroad – is subject to German tax. The German income tax is a progressive tax, which means that the average tax rate (i.e., the ratio of tax and taxable income) increases monotonically with increasing taxable income.
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 this year).
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 48%.
It’s not Europe’s highest tax rate, but its taxes are still high enough to make this list.
Income tax is charged in respect of all properties, profits, or gains. A person resident and domiciled in Ireland is liable to Irish income tax 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.
Greece is located at the crossroads of Europe, Asia, and Africa. The country has an astonishing history and culture but has made some not so astonishing economic decisions as of late.
This ancient country gave us many great myths and legends, but it has also shattered the myth that high taxes automatically create a social haven. Instead, Greece is a tax hazard. Greece ranks as the 15th largest economy in the European Union, but it also takes the 13th spot among the world’s highest tax countries with a high marginal tax rate of 48%.
To put this into perspective, Greece has a tax rate that is almost three times higher than the tax rate in the country of Georgia. Georgia has managed to create an economy that is on par with the Greek economy, all while remaining a low-tax country.
Income taxation in Greece is progressive. An individual in Greece is liable for tax on their income as an employee and on income as a self-employed person. Tax owed is calculated on the income earned in Greece and overseas.
Italy has it all at first glance. It’s one of the most populous countries in Europe with around 60 million people and it is the world’s 8th largest economy and the third-largest in the Eurozone.
Italy is paved with beautiful landscapes from the Alps mountain range to the Mediterranean coast and islands and has one of the richest-known histories in the world.
The country is a founding member of the G7 and one of the world’s most industrialized countries. It has a large number of dynamic small and medium-sized enterprises that are the backbone of the Italian industry. These companies form part of a manufacturing sector that is often focused on the export of niche market and luxury products.
While they may not be able to compete in terms of quantity, Italian products are certainly capable of facing the competition from China and other emerging Asian economies with their quality. But the high marginal income tax of 48.8% imposed by the government does not help Italians or their companies.
Italy’s high tax rate is the single most problematic factor for doing business in the country. It is even more problematic than Italy’s crippling government bureaucracy, which is a problem throughout the whole of Southern Europe.
Slovenia lies at the tripoint of the Germanic, Latin, and Slavic cultures. This small ex-Yugoslavian state was the most advanced part of the communist world. Currently, it is under the spotlight as the homeland of the first lady of the United States: Melania Trump.
Slovenia has just 2.5 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 8.5 million citizens. However, it also has the second-largest number of startup companies in the world after the United States.
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%.
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. With 31 of the 500 biggest companies in the world in 2015, France ranks fourth in the Fortune Global 500, ahead of both Germany and the UK.
However, the country has some of the highest tax rates in the world, a whopping 50.2% top marginal rate. Recently, there have even been proposals to increase the marginal tax rate for those earning more than 1 million EUR to 75%.
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?
Finland, or the “country at the end of the world,” as it was once deemed, is one of the high-tax Nordic countries. Days last an eternity there during the summer, but “winter is always coming and a long night with it.”
Do take into account that Finland’s citizens are among the most depressed people, even though the country’s welfare is among the top in the world – something that could be a consequence of the high tax rates. The rates are so high that this small home of just 5.5 million people ranks 8th in this list of highest tax countries, courtesy of its top marginal tax rate of 51.6%.
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.
7. 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 52% for people under the age of 65 on all income over €66,000. The government also charges a capital gains tax of 25%, a land transfer tax of 2%, and an inheritance tax of up to 40%.
This country is shared between two main linguistic groups: Dutch-speaking Flemish and French-speaking Walloons. It is the country that the European Union and NATO both call home. Belgium also has the highest tax rate in Western Europe with a rate of 53.7%.
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 15th largest trading nation.
Belgium was the first Continental European country to undergo the Industrial Revolution and since then it is always ranked as one of the most developed countries in the world. But recently, the unemployment rate of Wallonia is over double the one of Flanders, and the country has become more politically divided than in the last century or two.
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 25%. Austria is the 12th 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 18th 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 55.8% 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 10th 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 55.95% 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.
During the 15th and 16th centuries, Portugal was the place where a major chapter in world history began with the New World discoveries by Portugal’s fantastic fleet. Portugal played a crucial role in world history as they were the first global empire. It is also the only European country that had its capital, for some time, outside of Europe in Rio de Janeiro.
Today, Portugal is a developed and high-income country with the 45th largest economy in the world and a top marginal tax rate of 56.5%.
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 be deducted, including a general deduction, health expenses, life and health insurance, and education expenses.
For folks who set up residence in Portugal via the Golden Visa program or other residence options, it is possible to sidestep these high taxes altogether with Portugal’s non-habitual residence tax scheme. But it only lasts ten years.
Sweden is the 7th 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 and the highest income tax rate in the world, with as much as 57.1% 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.
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.
As noted, most of these countries administer a progressive tax system with various tax brackets. 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 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%. In California for instance, once you add in federal taxes, state taxes, payroll taxes, and more, your effective tax rate could be as high as 54%!
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.