Which European countries have the highest tax rates?
In its latest study, published on October 30, Eurostat compared the tax rates of European countries in 2021. Unsurprisingly, one of the highest-taxing countries is France. 47% of its GDP comes from taxes. But with a taxation rate of 48.8%, Denmark does better, or worse, depending on one's point of view. At the foot of the podium, there is Belgium, where 46% of state wealth comes from taxes. These three European countries have scores well above both the European Union (EU) and the Eurozone averages, which stand at 41.7% and at 42%, respectively. Austria, Norway, Italy, Sweden, Finland and Germany are the countries with the highest tax rates after Belgium, with receipts ranging between 42.7% and 41% of GDP. The other half of the European countries, including Greece, the Netherlands, Luxembourg, Spain, and Slovenia, score below the EU and Eurozone averages, with rates under 40% (except Greece, which stands at 40%). On the other hand, Romania and Ireland are the countries with the lowest tax/GDP ratio, with rates of 27.3% and 21.9%, respectively.
Should we see this as a COVID consequence? The study reveals a general increase in the share of taxes in the national GDPs. Between 2020 and 2021, the total revenue generated by these taxes has increased by 520 billion euros in the EU, reaching 6058 billion euros in 2021. Actually, after a 41.9% to 39.3% downward trend between 1999 and 2010, the tax/GDP ratio has exploded as of 2010, both in the EU and in the Eurozone. The region is still experiencing the backlash of the subprime crisis, the euro crisis (public debt crisis), that occurred between 2010 and 2012. From 2012 onwards, the share of taxes in European wealth kept on increasing but at a slower pace. The health crisis marked a new surge in the tax/GDP ratio, which rose by one point in one year. For experts, the weight of inflation and the energy crisis should continue to affect national budgets.
How do high tax rates affect expat plans?
Expatriates and locals alike are directly affected by a country's fiscal arbitrations. The Euro crisis, which remains a major concern, has been reignited by the health crisis, the energy crisis and resulting inflation. Do countries still have to raise tax rates? In June, Finance Minister Bruno Le Maire announced a revision of the French tax scale for 2023. Economists believe this is essential, given the risk of rendering modest households taxable again. However, the French government has chosen to protect vulnerable households, a costly but essential measure. With national inflation standing at over 6%, the tax burden in France remains extremely high.
At the same time, France still requires international talent and foreign investors, meaning that further taxation was not an option. Despite the inflationary context, the country has been one of the most attractive in Europe in 2021, with +32% of foreign investments. To continue to attract wealthy expatriates, France is counting on a virtuous ecosystem that boasts free zones, subsidies, and economic ecosystems.
Is the high tax pressure in Denmark scaring away foreigners? Not really. Denmark, one of the happiest countries in the world, remains a favorite expat destination. With an economy that relies on nearly full employment (4.3% in April), it is one of the most dynamic countries in the Eurozone. Expatriates value the Danish working environment, which is based on a concept called "flexicurity", a contraction of the expressions "extreme flexibility" and "extreme security" for employees. Companies also benefit from low taxes (22%), and foreign entrepreneurs benefit from a special subsidy. Nevertheless, taxation continues to be at the heart of Danish policy. What may seem like a high price to pay for happiness, in fact, allows the government to justify a high level of taxation that ensures a favorable and safe living environment for the Danes. However, the energy crisis and resulting inflation are causing the government to wobble. Rampant inflation soaring at 8.7% has precipitated the holding of early elections on November 1. The Social Democrat Prime Minister Mette Frederiksen, who ensured a drastic reduction in electricity taxes as part of a "winter aid" package for the Danes, barely managed to save her majority.
How can expats save on taxes?
Foreign investors and wealthy expats seem to be the most susceptible to government tax incentives. To retain them, European and Eurozone countries apply a harmonized strategy, namely with tax gifts in the form of cuts or freezes, or even preferential rates, subsidies, and so on. But as far as expatriate individuals are concerned, there are very few incentives. They can always try to optimize their tax situation by investing in retirement savings plans, in life insurance, which is one of the expatriates' favorite placements, or in real estate, also considered a star investment for expatriates. They can also turn to countries with advantageous tax regimes, such as Cyprus, which continues to offer a number of advantages to expatriates, like exemption from income tax, reduced withholding on revenues received from abroad, etc.
None of the European countries dares to further inflate their fiscal regime, be it through income or corporate taxes, in order to remain attractive to foreign investors. On the other hand, local tax pressure from other sources is growing. Local taxes, taxes on imports, taxes on assets, social security contributions are the main items that are directly affected. This obviously means a higher cost of living for expatriates, a good reason for them to leave the country. But is that enough to make them quit? Not really, and that is the case even for wealthy investors because, at the end of the day, beyond the tax advantages, other variables may or may not motivate expatriation, such as the geographical area, the employment rate, the presence of innovation clusters, the living environment, etc. But the situation is still that of a crisis, and European countries have little room to counter the effects of global inflation.
