The EU – Taxing Non Resident Citizens?
Most casual observers like to say that the US is the only
country that taxes its non-resident citizens.
For tax practitioners we know that this is not true. International entrepreneurs and expats who travel widely known Eritrea. But what about other OECD nations. We know that under some circumstances, the non-resident citizens of the following countries still pay taxes –
Now what about continental Europe?
Tax residency is more than the 183 day rule and specific steps and
conditions are required for tax non-residency. Failure to adhere to these rules has meant that they owe money in back taxes and face penalties and interest. I have seen it referred to as the “nomad tax trap”
One nomad told me that the EU has no authority to make tax
rules. Definitely part of the nomad tax trap. Why do I say that? Because part of the European experiment has been the harmonization of tax rules. Many people are unaware of this. It is correct to say that the EU allows each country to make its own tax rules yes. But one of the conditions of entering the EU is agreeing to operate a member country’s rules in line with the EU framework. So eg, in order to join the EU, the UK had to implement a value added tax or VAT. To understand more of this, one must understand the tax provisions chapter (Articles 110-113) of the Treaty on the Functioning of the European Union (TFEU), which relates to the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation; the chapter on the approximation of laws (Articles 114-118 TFEU), which covers taxes that have an indirect effect on the establishment of the internal market, with fiscal provisions not subject to the ordinary legislative procedure; other provisions relevant to tax policy, referring to the free movement of persons, services and capital (Articles 45-66 TFEU), the environment (Articles 191-192 TFEU) and competition (Articles 107-109 TFEU).
Personal income tax (PIT) is not covered as such by EU provisions. EU activity in this field is based on European Court of Justice case-law and here are some examples – https://ec.europa.eu/taxation_customs/individuals/personal-taxation/eu-individuals-rights-under-eu-law_en
So that’s the background which explains why there is some degree of consistency with both personal and corporate tax regimes within the EU. So it is nearly impossible to live in the EU and not pay taxes on earned income (as distinct from passive income). In fact, according to European law, a minimum 10% tax is required (with a few exceptions).
It is normally accepted that those who live on earned income (as opposed to passive income) cannot live tax free within the EU. Maybe you can get taxes down to single digits? But claims of being tax free on earned income within the EU? This should be met with suspicion.
Why? Because EU countries tax almost all types of income sourced domestically. The result is that those who don’t want to pay taxes or keep accounts have to live outside the European Union.
So now we get to a point which is the subject of much intense debate. Can EU citizens just simply leave and become tax non-resident after 183 days in a calendar year? Well it depends.
As an English speaker, I mainly work with clients from English speaking countries as opposed to those from continental Europe. But I am told that European countries are following the example of the Anglo-Saxon countries and taxing its non-resident citizens as well.
- Italy will continue to tax any citizen indefinitely if they move to a tax haven.
- I have spoken with German advisors who explained the “deemed” German source income rules which are triggered, when eg, a citizen is giving up German residency with business income that will not be allocated to a foreign permanent establishment or agent (which basically requires it be registration in some foreign state). So such stateless business income is given a “deemed” permanent establishment (or PE) in Germany. Thus deemed German sourced income.
- Romania applies a flat personal income taxrate of 16% to all Romanian tax residents on their worldwide income, except for salaried income for work performed and received abroad. This is for individuals who move to a country that does not have a tax treaty in place with Romania. Individuals remain taxable on their worldwide income for the next three years. Once those three years are up, they will only have to pay on income sourced in Romania.
- Portugal and Spain tax their citizens for 5 years after leaving the country unless they can prove they have not moved to a tax haven and that they are paying a similar amount in taxes as if they still lived in their home country.
- Finland (3 years), Norway (4 years), Sweden (5 years for both citizens and foreigners who lived there for at least 10 years) require that those who leave to prove that they no longer have any ties to the country before they can become exempt from worldwide taxation. This can often be done by showing proof of another nationality or by residing in a country that has a tax treaty with their home country.
There are ways to lose the tax residency faster but qualifying is complicated and entirely up to the discretion of the tax authorities.
For most other EU countries, things are simpler. If you spend more than 183 days abroad and do not maintain strong ties to your home country (in some cases, this includes having an apartment/ room/ house etc. available for your own use, or habitual abode in the form of regular visits eg), you lose your tax residency and only owe taxes on the income you generate there. If you generate no income there, no taxes are owed.
Do note that like the US, some countries e.g. Germany, do have an “exit clause” (Section 2 of German CFC legislation) which applies to German nationals leaving Germany for a period of 10 years and meeting certain criteria (having been fully liable to tax for at least 5 years of the last 10 years in Germany, moving to low tax jurisdiction (or moving to “no” jurisdiction), having had close economic ties to Germany, having German sourced income etc etc etc). A very complex and difficult rule which triggers an exit tax. A similar exit rule applies if you have shares in German corporations while giving up German tax residency.
Ok. So let’s say that the years do go by. You’re in Thailand or Bali. Are you completely free of the tax authority of your European home? Yes you may be, but immigration concerns aside, you would then fall under the taxing authority of Thailand or Indonesia. So that’s not exactly tax free!
If you’re doing online work and money goes into an account in Thailand or Indonesia, the bank will ask the usual KYC / AML (know your customer / anti money laundering) questions which they are obligated to do, by law. They will ask where it is being taxed.
Even if you find a zero-tax jurisdiction to incorporate an entity? Unless you plan to live there, you may still be living somewhere that taxes based on effective place of management – https://htj.tax/your-place-of-effective-management
So your options are to stay living in the so-called tax haven or to just keep moving. When you dig beneath the surface, the tax havens typically allow residency based on some sort of investment. So staying there on a tourist visa is not sustainable and often requires a substantial outlay.
So what about if you just keep moving and don’t stop?
That can work but if you are using one of the so-called tax havens like the BVI and Caymans? The new economic substance rules introduced in 2019, mean that the running costs of these structures are now relatively high and mid to low 5 figure annual fees are the new norm
These new rules apply to all the usual suspects like the UAE, Labuan etc. Actually, it was the price that the UAE had to pay, to get off the OECD blacklist. So while they may be “tax free”? The running costs operate like a tax in all but name. So there goes that tax free idea.
But let’s say you go for one of the few remaining tax free IBC jurisdictions? It’s ok. I think you may finally have found that holy grail of the tax free life. But you still need to bank somewhere?
- Reputable jurisdictions (ie any OECD nation) are now very nervous about running bank accounts for entities from jurisdictions with poor reputations
- Reputable banks in OECD countries do not want clients without fixed addresses.
So you’re restricted to banking in less regulated jurisdictions in banks that international rankings may rate as less stable (or down right shaky). If you try to transfer the funds to an OECD based bank? And you cannot demonstrate that it was taxed? It may not be allowed. But if you’re willing to limit yourself to this type of scenario? Then yes you can live tax free but you’re effectively locked out of the mainstream OECD financial system.
If a licensed tax advisor tells you otherwise? Make sure they are licensed in whichever jurisdiction your situation requires (always double check) as there are many “made-by-Google” tax experts who can get you in trouble. Do not trust anything you read online. Not even me. Check with your advisor at all times. Once you are sure that they are credentialed, if they still talk about “tax free”? Get them to put their opinion in writing. Bet they get nervous. And here’s why –
As a postscript – For perpetual travellers? Do not forget that from an immigration perspective, you’re not supposed to work while on tourist visas. Not only could you possibly owe local taxes, but you could face penalties, deportation or jail time. Most countries may not discover this as long as you fly under the radar but that still does not make it right.