Exploring European countries for favorable personal tax residency. Reviewing jurisdictions with lower income tax rates, while addressing living conditions since tax residency often involves relocation or extended stays.
Even though some people claim that this is unfair, pop and rock stars earn crazy money. And when you earn a lot, you consequently have to pay a lot in taxes. Or do you?
The popularity of the Irish rock group U-2 is not as high now as it was at its peak but there were times when all major radio stations and music TV channels broadcast their songs. You can imagine how much money the musicians earned! Rumors have it that Bono holds 1% of Microsoft shares and his total worth exceeds a billion euros.
At some point in time, the U-2 members realized that they were paying millions in taxes (taxes are high in Ireland) and this fact made them upset, to put it mildly. So what did they do? They decided to change their tax residence. For quite a few years now, U-2 has been a tax resident of the Netherlands, not of Ireland. Why? Because taxes are much lower for corporations in the Netherlands (and U-2 is a legal entity) than they are in Ireland. How much have the musicians been able to save on taxes over the years? We do not have this information but we guess a lot. Was it patriotic of them to change their tax residence? This is a philosophical question and we will leave it to the Irish to answer it.
The Netherlands enjoys high ranks in various international ratings. It has been one of the most reputable countries in the world since colonial times. (By the way, the Netherlands still has a couple of colonies in the Caribbean.) Besides, it is a beautiful country with extremely friendly people. If you ask the way in the Netherlands, you can have only two responses: a) ‘Sorry, I’m a tourist here myself’ and b) ‘Let me take you by the hand and see you to the place that you want’. Why are they so friendly? Because they are wealthy. The low corporate tax attracts many companies to the Netherlands, including U-2. We must note that Switzerland is one more European country attractive for corporations because the corporate tax rates are also low there. At the same time, you do not want to acquire personal tax residence in the Netherlands or Switzerland. The personal tax rate is almost 50% in the former country (if you make more than 73,000 euros per year) and it can be even higher in the latter country.
What countries can you consider if you would like to establish personal tax residency in Europe? Below we consider several European jurisdictions that have (comparatively) low personal income tax rates. Because acquiring tax residence in a foreign country usually means relocating there (or at least spending more than 183 days per year there), we also discuss the living conditions in the countries that we mention.
Gibraltar
Gibraltar is not actually an independent state but an overseas territory of Great Britain. It sits at the tip of the Iberian Peninsula and the Spanish are naturally annoyed not to have it their territory. Once they nearly went to war with the British over Gibraltar and denied British ships access to the place. To avoid being cut off in the future, Gibraltarians (with the help of the British, of course) thought they had to build an airport. Now the runway crosses the main road perpendicularly and the cars have to stop when airplanes land or take off. Why so? Because Gibraltar is a tiny place! The main street is very much the only street in the jurisdiction and all other streets are just small lanes.
Living in Gibraltar is comfortable enough because Gibraltarians can freely cross the Spanish border back and forth. As far as the personal income tax is concerned, you can choose one of the two ways in which you are going to be taxed. Depending on how high your personal income is, you can choose the gross income taxation system or the allowance taxation system. The tax scale is progressive in Gibraltar and the lowest personal income tax that you can pay there is 8%. This rate applies to the first 10,000 pounds of your income on the condition that you opt for the gross income taxation system. The income that exceeds this amount is taxed at higher rates.
Andorra
Andorra (officially, the Principality of Andorra) is also a tiny state sitting in the mountains between France and Spain. Unlike Gibraltar, Andorra is an independent state and it is not a member of the EU even though both of its neighbors are. The country’s population is only around 80,000 and the smallness of this number will become especially glaring if we tell you that more than 10 million tourists visit the principality every year. There you can find some breathtaking mountain views and fantastic historic buildings.
If you don’t mind the high elevation (more than 1,000 meters above sea level) and lack of access to the sea, living in Andorra is wonderful. The pace of life would be relaxed if it was not for the tourists and the prices are lower than they are in France and even much of Spain. What is more, the personal income tax rates in Andorra are among the lowest ones in the whole world. If you make up to 2,000 euros per month, the tax rate is 0%. And you can easily survive in Andorra on 2,000 per month! You won’t be able to live in luxury but you can get by. If you make up to 40,000 euros per year, the tax is only 5% and everything that exceeds this amount is taxed at 10%. That’s the highest tax rate in Andorra.
Monaco
Fiscal residents of Monaco do not pay any taxes. Well, you have to pay a 1% tax if you have residential property in the Principality and you let it on a lease. There is no other country in the world where the tax burden is as light as it is in Monaco. The only thing is that acquiring a tax residence in Monaco is extremely difficult. If you have a few hundred million dollars, you are welcome. If not, you are not.