Most Tax-Friendly Countries in Europe for Entrepreneurs

As a business owner, sole proprietor, or freelancer, you’ll be looking for ways to keep more of the money you earn in your company and ultimately in your pocket. In this article, let’s talk about which countries in Europe have the lowest tax and social contribution rates for businesses and self-employed individuals. 

Living in a country with a reasonable tax burden can not only make it easier to build wealth for you and your family, but it can also bring you new cultural and personal growth opportunities. However, moving abroad can be a bit of a challenge, and the relocation expenses can easily add up, so it’s crucial to carefully consider the pros and cons of each potential destination before you jump in with both feet.

The limits of effective expense management

A common problem among people who have an online or remote business is that they have very few expenses to offset their taxable income. Managing expenses, deductions, and write-offs effectively are universal strategies that big and small companies use to reduce their tax bill and they work almost everywhere.¹ If you own a limited company, reinvesting whatever you make into the business during the tax year, in the form of equipment, employers, advertising, etc., is another simple way to keep your corporate tax bill low.

However, for a one-person business, whether that’s a limited company or self-employed one, these methods can quickly reach a point of saturation where they stop being effective, as the limit after which it gets hard to justify expenses as necessary is typically quite low. After all, you can only spend so much on IT equipment, software, web hosting, and accountants without going out of proportion.

The problem is that if you run out of reasonable expenses or try to keep costs down for whatever reason, you’re rewarded with a larger tax bill. It can seem counterintuitive that costs should have a positive impact on your tax liabilities, but “revenue minus expenses” is the blanket formula most tax authorities operate with, regardless of what type of business you have.² This model may be fine if you’re living somewhere with a favourable tax system, but for those living in countries with onerous taxes, it makes it hard to improve your financial situation and can discourage your motivation to keep running the business.

The solution 

What can you do about it? To quote Harry Nilsson, go where the weather suits your clothes. Consider packing your bags and moving to a more tax-friendly country in Europe or a country in Europe with low taxes specifically for entrepreneurs or expats. Every year, around 1.2 million people move from one EU country to another, and it’s not really that hard to do.

If you find yourself stuck in a place with people, mentality, climate, nature, living expenses or taxes you don’t like, switching countries can be the biggest act of self-empowerment. It’s a big decision, and there are a few pitfalls along the way, but it’s not impossible if you do your research and plan ahead.

Level setting expectations

The idea of relocating to greener pastures is problematic because there is no single definition of “a good country”. Obviously, your list of criteria for a country of choice will differ from someone else’s since everyone is looking for something that fits their lifestyle needs.³

Taxes should generally be a secondary factor in the decision-making process since what you primarily want is a country that provides you with a suitable culture, language and environment, access to markets and customers, or whatever else you need to be content in life and successful in business.⁴

To distil the problem, it can be helpful to think in boxes: In broad terms, we can categorise entrepreneurs who work online as completely or partially location-independent. 

• Completely location-independent entrepreneurs are unconfined by external social constraints and can potentially move freely whenever and wherever they want. People in this category have the freedom to incorporate or register as self-employed in a low-tax jurisdiction and then either live there or roam around. These individuals are typically not very dependent on public services; what mostly matters is finding somewhere inexpensive where one can gain tax residency through either renting or purchasing property.
• Partially location-independent entrepreneurs are more restricted in their movement because they have family or other types of obligations that limit their list of potential destinations. This category includes people with spouses, kids, or elderly parents whose needs need to be taken into account. While still able to move to a different country, these individuals must carefully consider which countries offer quality private and public services such as good schools, reliable healthcare systems, and infrastructure.

Needless to say, there is no manual you can follow. Some countries offer a more stable and predictable environment for couples with children but come with a higher tax burden. Others rank lower on things like the Human Development Index (HDI) but are very affordable to live in and have favourable taxation systems where you can build wealth fast. Finally, there are places with high costs of living but with low taxation rates. Ultimately, we need to appreciate the subjectivity involved in picking a new home. 

Most tax-friendly countries in Europe

Andorra

Interesting for: Business owners with digital products

Background

Andorra is one of those microstates you know exist, but you’re not quite sure where it is and what you can do there. It’s a sovereign nation, a principality in fact, with an odd political system where the president of France is the Co-Prince of Andorra (I’ll leave the rest for you to explore on Wikipedia). Andorra is hidden in the Pyrenees mountains, bordered by Spain and France. It’s been an independent country since 1278, but it also has a tax-friendly environment, and it has managed to stay out of the limelight.

The country is popular among the Spanish, French, and Portuguese, but increasingly also among expats from all over the world. It’s tiny and has a population of only around 80 thousand people, so it’s not somewhere you go if you like living in big cities or being surrounded by hundreds of thousands. It’s not a very expensive place to live if you’re coming from Northern Europe, but by Southern and Eastern European measurements it can be. Aside from that, it’s perfect if you like winter sports, outdoor activities, and a more quiet life.

The set-up: A digital business in Andorra

Andorra is not part of the EU, which means you can’t just move there tomorrow as an EU citizen or any other nationality for that matter. You’ll need to go through a few hoops. Because there has been an increase in foreign nationals applying for residence permits to live in Andorra, the government has tightened the laws – but nothing too serious.

One of the easiest ways to gain residency in Andorra is to start a company there, for which there are 900 places available per year. Those willing to open their own company can apply for residency through the Active Residency Program, locally known as the “residència i treball per compte propi” in Catalan, or “compte propri.” There are a few requirements for both yourself and your company, one of which is to make an initial share deposit and deposit to the Andorran Financial Authority.

Andorra is well-integrated into the EU system, and, though not a part of it, most physical products from the Principality can be exported to the EU with zero tariffs. However, its geographical location is better suited for selling digital products and services, which don’t require physical transportation or complex operations. In fact, many Spanish YouTubers and influencers have moved to Andorra because they were making good money from their videos.

Andorra tax benefits and rates

The tax system in Andorra is pretty straightforward: Income and corporate taxes reach a maximum of 10%. Until 2015, there were no such taxes, but they were introduced after pressure from the EU. On the positive side, this meant that the EU and OECD removed Andorra from the list of uncooperative tax havens in 2017. But not all Andorrans are happy with the change.

Andorra today has no wealth tax, no inheritance tax, no gift tax, no capital gains tax on profits from shares if you own less than 25% of the company, 0% gains tax on property profits if owned for 13 years or more (to avoid speculation), and a low value-added tax (VAT) from only 1% to 9.5%. The property ownership tax is almost symbolic, ranging from zero to 0.75 euro per square meter.

The income tax rate in Andorra ranges from 0% on income up to €24,000 (or €40,000 for married couples), 5% on income between €24,001 and €40,000, and only 10% on income above €40,001. This means that an unmarried person who earns €40,000 per year pays 0% income tax on the first €24,000 and 5% on the next 15.999 (€40,000 – 24,001) or €800, equal to an effective tax rate of around 2%.

Corporate tax rates are also just 10% on profits. If that wasn’t low enough, for the first 3 years, newly established micro-businesses with profits below €100,000 only pay 5% tax on the first €50,000 and 10% on everything above. Moreover, there is no withholding tax on dividends paid to natural shareholders in Andorra, and dividends are also exempt from personal income tax.

See the official source from the government if you want to dig in deeper.

Tax summary for this set-up

• Income tax: Andorra’s income tax rate is tiered into three brackets. For unmarried persons, the Andorran tax rates on income excluding social contributions are: €0 to €24,000: 0%; €24,001 to €40,000: 5%; €40,001 and over: 10%.
• Social security: Salaried employees, incl. salaried directors, must contribute 22% of their gross monthly salary to the Andorran Social Security and Pension System or CASS. The amount is distributed between the employee (6.5%) and employer (15.5%). In return, the CASS covers 90% of hospital care costs.
• Corporate taxes: Andorra taxes company profits at a flat 10%, which is among the lowest rates in Europe. Company owners residing in Andorra with an Andorra company can usually receive dividends tax-free, which means they can often optimize social security contributions through dividends.
• Capital gains: Capital gains on profits from shares is 0% (except property) if you own less than 25% of the shares in a company. Dividends from Andorran companies are exempt from tax.
• Crypto taxes: Gains from crypto-to-crypto and crypto-to-fiat are taxed as personal income at 10%, of which the first €3,000 are exempt.

Read more

• Andorran Government website
• Andorra Insiders tax guide
• Setup Andorra tax guide
• AndorraGuides tax guide

Cyprus

Interesting for: Company owners, digital nomads, high-net-worth individuals/FIRE people.

Background

Cyprus is a fascinating island with a rich and eventful history. The first recorded mention of Cyprus was in the 15th century BC by the Egyptians, who referred to the island as “Alashiya.” Cyprus has been ruled by several different empires and conquerors over the years, including the Egyptians, Assyrians, Persians, Greeks, Romans, Byzantines, Arabs, Venetians, and British.

Today, Cyprus is an independent republic and a member of the European Union. The official language is Greek, which Cypriots speak in their own distinct variety. However, English is increasingly widespread. The currency of Cyprus is the Euro, which makes business life so much easier. You can access all the benefits of the single market, European online banks, SEPA transfers, all while enjoying the Mediterranean lifestyle and climate.

The set-up: Company owner with non-domicile status in Cyprus

Cyprus has attracted a lot of expats and new companies thanks to its low corporate tax of only 12.5% and its non-dom tax program. When we look at official statistics, both the population of expats and the number of companies continue to go up every year.

The “package” many foreigners make use of when moving to Cyprus is to combine the non-domicile (“non dom”) program with a Cyprus limited company. The nom-status, along with the general tax rules, grant expats tax-exemption on interest, dividends, capital gains (other than on the sale of immovable property), among other benefits. High-income earners with salaries above €55,000 can also enjoy a 50% tax cut for a period of 10 to 17 years. It’s primarily the part about tax-free dividends that is interesting in this set-up.

It’s not cheap to open a Cyprus limited company, and it can easily cost around €2,500. Compared to the UK, where it the price is just £12, this is a major disadvantage. However, if you run a successful business, the price should be a minor inconvenience compared to the future benefits available.

Say your company has a financial result of 100,000 EUR. After corporate taxes, the net result is 87,500 EUR. The company then pays out dividends to the shareholder/director. The director has to pay a 2.65% health care contribution of the amount, leaving 85,181.25 EUR. Because the director is a non-domicile resident, dividends are exempt from taxation. The result is an effective tax of only 14.82%.

Another way to withdraw money from your company throughout the year is to pay yourself a tax-exempt salary of up to 19,500 EUR per year. This would be subtracted from your profits. Thus it will not be subject to the 12.5% corporate tax. Although the amount is free from income tax, social security contributions of around 25% (employer and employee combined) would still apply. Discuss with your accountant if a salary makes sense in your situation.

Tax summary for this set-up

• Income tax: Cyprus has a progressive tax system where high earners pay more than low earners. The tax rates on income excluding social contributions are: €0 to €19,500: 0%; €19,501 to €28,000: 20%; €28,001 to €36,300: 25%; €36,301 to €60,000: 30%; €60,001 and over: 35%. In many cases, it makes sense for a business owner to receive up to the tax-free threshold and take out the rest through dividends.
• Social security: Cyprus has a number of social security contributions that add up to around 25% on employment income. Non-domiciled residents can apply to become exempt from Special Defense Contributions.
• Corporate tax: Cyprus taxes corporate profits at 12.5%.
• Dividends tax: Dividend payments do not incur any withholding taxes in Cyprus. Non-domiciled residents do not pay Special Defense Contributions on dividend income. However, all individuals must pay a 2.65% contribution to the health care system.
• Capital gains: There is no tax on profits from shares, dividends, or interest income. The tax situation for cryptocurrencies is not fully clear.

Czech Republic

Interesting for: Self-employed/freelancers

Background

The Czech Republic has an interesting but complicated history. When I speak with Czechs about their country, I always learn something new. Archaeologists tell us settlements in the historical Czech lands date back to the Paleolithic era, and the area has been influenced by many different cultures throughout time. Celtic tribes dominated the area in the first millennium BC during the Iron Age, while Germanic tribes presumably moved in during the Migration Period. The Slavs expelled the Germanic tribes when they entered the early sixth century, and a lot more happened from there.

As you can read, the country has been ruled and transformed by several different cultures and empires over the years, and it’s easy to get lost in the details. However, the important part for us right now is that the Czech Republic is now an independent country and a member of the European Union. Another important detail? The Czech Republic has the world’s highest rate of beer consumption per capita and some of the best brews in the world. That’s reason enough for you to move if you ask me.

The set-up: Self-employed/freelancer Czechia & long-term investor

Besides brewing that famous golden pilsner, the Czechs have crafted a tax-friendly system for self-employed individuals (OSVČ). If you’re self-employed in the Czech Republic with a yearly business income below 1 CZK million, you can reduce your taxable income significantly by applying a lump-sum deduction. The lump sum is a fixed percentage amount that you can deduct from your taxable income, rather than having to calculate and declare your actual expenses. The flat tax is intended to relieve entrepreneurs from administration burdens with a single monthly payment.

With the Czech lump sum deduction scheme, you can calculate a fixed percentage sum from 40% to 60%, depending on your business activity, as expenses in your accounting from the taxable base instead of calculating actual expenditures. If you are a software developer, you can apply for a license and get 60% deductions. After that, you’ll pay income tax at a rate of 15% on the remaining 40% to 60% fictive tax base, resulting in an effective tax rate of around 9%.

Say you have an income of 1,000,000 CZK. In this example, we subtract 400,000 CZK (40%) in lump sump expenses. In theory, it doesn’t matter if your real expenses are much lower, like 5% or 10%; we’re stilled allowed to deduct 40%. From the remaining 600,000 tax base, we pay 15% or 90,000 CZK in tax. However, most Czech taxpayers have a personal tax allowance (tax relief) of around 30,840 CZK, which lowers the amount of taxes paid to 59,160 CZK. If our real expenses happened to be equal to 200,000 and not 400,000, we’re left with 800,000 – 59,160 = 740,840 CZK after taxes.

• Income tax (self-employed): Self-employed individuals who use the lump-sump scheme pay 15% income tax on their profit. The profit is calculated on income after deducting a flat-rate expenditure of 80, 60, 40, or 30%, even if actual expenses are lower.
• Social security: The flat tax, which can be used since 2021, consists of a minimum amount of health insurance premiums, 1.15 times the minimum amount of the advance on social insurance, and an income tax of CZK 100 per month. The total for 2021 was CZK 5,469 per month. For the year 2022, it amounts to CZK 5,994, so it has increased by CZK 525 per month compared to the previous year.
• Capital gains: The Czech Republic is one of the few European countries that does not levy a capital gains tax on profits from shares if the person holds them for a minimum of 3 years. Furthermore, sales proceeds of less than 100,000 CZK are tax-free. Dividends and other returns from equities and limited liability companies are taxed at 15%. In a nutshell, a fantastic location for long-term investors that invest in accumulating ETFs and stocks.
• Crypto taxes: Bitcoin and other cryptocurrencies are taxed at a rate of 15%, or 23%, if the gains exceed 48 times the national average wage per year.

The lump-sum tax system is often worth it if you’re a freelancer in the Czech Republic with a high-profit margin, such as web designers, developers, consultants, etc., who often have few expenses. On the other hand, lump sump reductions for freelancers with low-profit margins may increase the overall tax payment and are thus not worth it. Work with a professional and determine whether lump-sum tax is beneficial for your situation.

Read more:

• Self-employed tax calculator
• Official tax law for freelancers
• How to file Czech income taxes
• Czech self-employed tax guide
• Lump-sump tax overview

Bulgaria

Interesting for: Company owners

Background

Bulgaria is often overlooked from an entrepreneurial point of view due to its geographical position on the fringes of Europe. Coming from Western Europe, everything is extremely cheaply priced (even more so outside Sofia) from rental flats, groceries, utilities, and the list goes on. It’s also one of the few places left where beach and water-side properties are still affordable. Bulgaria’s nature is absolutely stunning. From forests to mountains, it’s an oasis of untouched beauty. Even if you don’t want to live there, I highly recommend visiting.

That said, don’t expect things to work the same way as they do in Western Europe. Many things operate ad hoc, so if you dislike everything being scheduled and organized, this might not be the right country for you. The country is still working through some growing pains, and the bureaucracy can be nightmarish at times.

Bulgaria has a long and eventful history evident in the country’s culture today. The Thracians settled the region, which was eventually conquered by the Romans. After the fall of the Roman Empire, Bulgaria then came under the rule of the Byzantine Empire before being conquered by the Slavs in the 700s. The Slavs had a profound influence on the country’s language and culture, which is why Bulgarians today speak a Slavic and not Romance language. After the Slavs, Bulgaria came under the rule of the Ottoman Empire for five centuries, which has also left its mark. It has since then been ruled by many different states, including the Russian Empire and Nazi Germany. In 1989, Bulgaria became a republic, and in 2004, it joined the European Union.

Bulgaria tax rates and benefits

Despite being overshadowed by established names like Malta and Cyprus, Bulgaria’s tax system is quite intriguing. The country has a flat 10% tax on personal and corporate income, one of the lowest in Europe and perhaps one of the easiest to understand. Thus, very similar to Andorra in many ways. Bulgaria is also part of the EU, relatively well-integrated into the EU banking system (although Bulgarian banks are not the best), a member of SEPA, and is slowly adapting the Euro as its currency. However, the deep corruption and bureaucracy that plague the country are still quite prevalent. Don’t let the lure of low taxes blind your decision.

Bulgaria has no wealth tax, no inheritance tax for direct relatives, and no tax on gifts to children. There is a 10% capital gains tax on profits from property sales but no tax on profits from selling shares traded on stock exchanges in the EU. Not many people think the current system is going to change. It would be foolish to tamper with the low rate as Bulgaria needs more taxpayers and foreigners in its economy. In fact, according to Bulgarian legislation, the 10% tax rate can only be increased (or lowered) with a two-thirds majority in parliament.

The set-up: A Bulgarian limited liability company (EOOD)

Setting up a Bulgarian limited liability company (EOOD) is simple, and it can be done for around 750 EUR. However, as a foreigner, it’s imperative to work with a trustworthy accountant or lawyer to take care of most things for you. When looking for an agent, it’s often better to search in Bulgarian rather than English since you’ll avoid getting a “tourist rate.” It takes about two to three days to register a company, while the bank account takes a few weeks for non-residents. There are no yearly fees to the Bulgarian government. However, you may need to pay for a virtual office address, bookkeeping, annual filings, notarizations, etc.

Single directors/shareholders can combine salary and dividends to optimize taxes in Bulgaria. This is done to heavily minimize social security payments, which can go up to 33.4% (employer and employee combined). Given the state of Bulgaria’s healthcare system, a private insurance policy may be a smart idea.

Regardless of whether you take out a salary equal to the minimum wage or choose not to employ yourself, you must pay a minimum of circa 250 BGN in monthly personal social contributions. If you take out a larger salary, those contributions will be higher, up to a maximum of 3,000 BGN per month. 

Say a company has a financial result of €100,000 (195,506 BGN) at the end of the tax year after operational costs are paid. We can choose not to get a director’s salary since the law doesn’t require it. If the personal level doesn’t have enough cash, we may always adjust the wage to a reasonable amount.

At the end of the tax year, the company pays the corporate tax of 10% or €10,000, leaving a net of €90,000. The company then distributes all net profits as dividends. Dividends paid to natural person shareholders are subject to a withholding tax of 5%. Thus, the tax-man gets another 4,500 EUR in his pocket, and the director/shareholder receives 85,500 EUR in dividends. In this simplified example, the effective tax rate amounts to a meager 14.5%.

• Income tax: Bulgaria has a flat 10% income tax
• Social security: There’s a 13.78% social security tax for the employee and 19.62% paid for by the employer. The minimum base for calculating monthly social security payments ranges from 650 BGN (the minimum wage) to 1,763 BGN. The maximum monthly insurance base is BGN 3,000.
• Corporate taxes: Bulgaria taxes corporate profits at 10%.
• Tax on dividends: Dividends paid by Bulgarian companies are subject to 5% withholding tax.
• Capital gains: Capital gains from the sale of shares on a regulated exchange in an EU/EEA member state are tax-free. Shares traded on non-EU/EEA exchange are subject to 10% tax. Other gains from other financial instruments, including cryptocurrencies, are usually taxed at 10%.

Many people in Bulgaria are moving to the cities (Sofia, Plovdiv, Varna, or Bansko if they like skiing) or leaving the country searching for better opportunities. While the rural exodus has resulted in the depopulation of many villages and areas, living remotely can be advantageous. If you have an online-based company with no desire to reside in the city center, you can find some really fantastic properties at a bargain.

Read more:

• Tax Monkey Bulgaria
• Deloitte’s tax guide (pdf)
• Taxes for expats in Bulgaria

The case for living in Europe

While Europe is often talked about as a socialist tax hell (which isn’t true at all, see the options below), many prefer living in Europe over anywhere else because of the history, rich cuisine, and the cultures that are so diverse. Even though they are so close to each other, countries like Iceland and Italy may seem as if they exist in two different dimensions, much like Portugal and Bulgaria can feel like two different worlds.

A lot of people wouldn’t settle anywhere but in Europe: High quality of life, personal freedom, low crime rate, ease of doing business, and the list goes on. Of course the continent has its fair share of problems like everywhere else, but the fact is that every year, millions of people with a European or international passport pull up stakes and move to a new home in another country on the continent. The allure is real.

When it comes to employment or doing business in Europe, it’s mostly a smooth sailing. Many people now live in one country, work remotely for a company from another country, and have a bank account in a third country. A small business owner can move to another country and set up a company with relative ease if they feel the tax burden or bureaucracy is too much.

How to optimize your taxes

Dear reader, time is your most precious gift. I will keep this section brief and to the point. But before we move on, I feel it’s important to introduce some common tax-optimization strategies and clarify how to use them.

I see more and more people pulling six figures or more in revenue from their online business while having almost no expenses. Of course, I’m not familiar with their specific situations, but I would imagine many of them could easily reduce their tax rate if they knew how.

Tax-optimization is the process of reducing salaried income to increase after-tax profits. The easiest way to reduce income tax is through a business structure or being self-employed, depending on the country and profession.

Step 1 – Reduce salary

As a single or joint shareholder and director of a limited company, there are two reasons you might want to reduce your money earned in the form of salary. 

First, income is often taxed at progressive rates, meaning that the more money you make, the higher percentage of your income you will pay in taxes.

In countries where income is taxed progressively, it can make sense to take a salary that stays within the bracket of the lower tax rates. The rest can be kept within the company as a retained profit, which is taxed at a lower rate, or paid out as dividends.

Again, we’re talking about a small company with only one or few additional employees aside from yourself. Since business profits are rarely taxed at higher rates than personal income, the company can be used as a piggy bank.

Furthermore, many countries have a personal allowance that reduces income tax (for example, the first £12,570 of income is exempt from UK tax). This means that if you keep your salary within the low-tax brackets, the allowance combined with other personal deductions can lead to a very generous effective tax rate.

Step 2 – Reduce social security contributions

Second, social security and health system contributions (or social security tax) are often just as high as income tax in Europe. Social security contributions are payments made to the government to acquire a future social benefit. In some cases, the social security contributions can even be higher than the income tax rate.

Social security is most often levied on an employee’s salary, so by reducing your income through a business structure or self-employment, you can also lower the amount of social security contributions you pay.

There are countries with a cap on how much or little social security contributions can be made. For example, in the Netherlands, social security contributions are capped at 9,713 EUR per year. So, by keeping your salary to a reasonable amount, you can reduce your social security contributions and effective tax rate.

Step 3 – Dividend payments

Combining salary and dividends is often the most tax-efficient way to pay yourself from your limited company.

Dividends are a distribution of company profits to the shareholders. The term “shareholder” simply means the owner of the company. So, if you own and direct your limited company, you can pay yourself a dividend.

Dividends are paid out after the company has paid corporate tax on its profits. When a company distributes its profits to natural persons, it is usually obligated to withhold and pay a fixed percent dividend tax to the tax authorities. 

Dividends are generally taxed lower than a comparable salary, and the social security contributions are usually lower as well or non-existent. So, by paying yourself a dividend, you can save on both income tax and social security contributions.

It’s worth noting that you may need to take out more from your company in salary to cover your living costs and other expenses. It’s a balance between calculated numbers and reality.

Step 4 – Optimization through a holding company

A holding company is a company that owns another company or group of companies. The company it owns is called a trading company because it trades goods and services. The holding company itself is usually not engaged in trade. Instead, its primary purpose is to hold shares and assets and invest in other companies.

So, when you have a holding company, it will own the shares of your trading company. This means you, as an individual, won’t hold shares in the trading company. Instead, the holding company will own them, and you will own shares in the holding company.

There are a lot of advantages to employing a holding structure, including asset protection, legal protection, taxes, and investments. That being said, having a holding structure involves more paperwork, accounting fees, and tax filings. So make sure you investigate all the options before going ahead with a holding company structure.

From a tax point of view, the biggest attraction of holding companies is the potential for tax savings. European holding companies can usually receive dividends from their subsidiaries in most countries without being taxed. While companies are typically obligated to withhold tax on dividends distributed to natural shareholders, as we discussed above, there is no withholding tax on dividends paid to a holding company.

Another advantage of holding companies is that they can sell off trading subsidiaries without being subject to capital gains tax. So, if you have a profitable trading company, it’s worth considering setting up a holding company to take ownership. If you hold shares in the trading company as an individual, you will typically be liable for capital gains tax on the profits you made from the sale.

Say you have a company that owns multiple buildings. If the company sells one of those buildings directly, it will generally be liable for tax on its profits. However, suppose you own a building through a company owned by a holding company. In that case, the holding company can sell off the subsidiary with the building without being taxed on the profits. Of course, this is a very simplified example and may not work everywhere.

Putting it all together – the best way to pay yourself as a director

Taking all of the taxes into account, it’s usually most tax-efficient for limited company directors to take a monthly salary up to the threshold for personal allowances, a lower tax bracket, minimum wage, or even nothing at all. It all depends on where you and your company pay taxes.

In most cases, the minimum wage does not apply to company directors unless they have contracts that designate them as workers. As a single shareholder director, this means you can choose the amount of salary and dividends you’re paid.

How taxes work in Europe

It’s important to understand that not every country is ideal for every situation.

From a tax-only perspective, some countries are excellent if you just want a normal job and pay without the headaches of running your own business. We won’t be discussing those countries here.

Other places offer far more opportunities for those who are self-employed/freelancing. The third category is attractive if you run a company and structure your income. So, we’ll concentrate on the last two types of people in this post.

It probably won’t come as a surprise to you, but countries in Europe have widely different tax systems and rates. Despite EU and other harmonization efforts, the fact remains that Europe’s tax systems remain a patchwork, and many people prefer it that way.

The amount of taxes you will pay depends mainly on the country you live in, where you perform your work, whether you’re a freelancer, have your own company, and so on.

Let’s try and go through some of the key tax elements to keep in mind when migrating to a European country, whether you’re coming from another continent or not.

Income tax

The tax on salaries and miscellaneous income is probably the one that will have the most significant impact on your ability to build wealth. The tax rate on income can vary between 10% to 55% from country to country, depending on whether social contributions are included or not. 

Most countries have a marginal tax rate system where you pay more as your income goes up. A few countries have a flat tax system that taxes everyone at the same percentage. 

The tax on salaries and miscellaneous income is probably the one that will have the most significant impact on your ability to build wealth. The tax rate on income can vary between 10% to 55% from country to country, depending on whether social contributions are included or not. 

Most countries have a marginal tax rate system where you pay more as your income goes up. A few countries have a flat tax system that taxes everyone at the same percentage. 

• Self-employed (freelancers): A growing number of countries have introduced tax-friendly schemes for self-employed individuals with regard to income and social security contributions. These can be anything from a flat “lump sump tax” like in the Czech Republic to a “simplified regime,” as in Portugal.
• Company owners can usually structure income from their limited company tax-efficiently. Director shareholders can pay themselves a salary below the top tax bracket and take out the rest as dividends, depending on what makes more sense. A holding structure is another efficient set-up in which funds are kept inside the company and used as an investment vehicle.

Social security taxes

Social Security contributions are rarely mentioned in the same breath as income tax, but they can be just as onerous, if not more so. 

Many websites fail to point this hidden tax out and don’t explain how to legally avoid it. For example, I’ve noticed how lawyers and consultants always fail to mention the huge social security payments when promoting Portugal’s NHR plan.

Social security contributions are usually made up of two or three parts: pension contributions, labor market contributions, and health care system contributions. They are generally deducted from your salary but can sometimes be much higher than expected.

The rate is often between 15-35%, depending on the country’s system. Many countries have a maximum ceiling so that you don’t pay more than a certain fixed amount. Others don’t, so the contributions can continue to increase infinitely as your income goes up.

Look into the social contributions whenever you see a shiny low-income tax percentage advertised.  

Corporate taxes

People who earn decent money and want to save and protect that money know that a limited liability company is often a way to go. The number of micro-sized companies in the EU has continuously grown for more than 10 years. More and more people are using a company structure to perform their job and perhaps minimize their tax liability and liability for their work.

In Europe, corporate taxes differ significantly from one country to the next. They are usually based on the company’s yearly profits (income minus expenses), but a few countries calculate the tax based on revenue rather than profits. People who run a business with a high-profit margin, such as consultants, YouTubers, etc., will often benefit more from a revenue-based tax system. Companies of this sort can’t keep their end-of-year earnings down because they don’t have enough deductible expenses.

Common misconception

Unfortunately, many people still believe that simply setting up a company in another country will enable them to take advantage of a more favorable tax structure. This is rarely the case these days. More and more often, your business needs actual “substance” in that country in the form of local employees, a local director, an office, or similar signs of actual physical presence.

If you’re not living in the country where your company is registered, you may be liable for tax in the country where you live. This is because the country where you live may consider your company a Controlled Foreign Corporation (CFC). A CFC is a company registered in a low or no-tax country, but its management happens in your office at home. As the owner of 100% of the shares in a CFC, you and your company are often considered local tax subjects.

Capital gains and dividends taxes

Most European countries have capital gains taxes. Some don’t. They differ in how they tax the income you earn from trading stocks and other investments. Countries with no capital gains taxes often have wealth taxes instead, and some have neither if the investor doesn’t sell the instrument within a certain number of years.

Dividends are taxed in different ways, too. Some countries exempt them from taxation, others tax the income at a lower rate than regular income, and others tax them at the same rate as ordinary income.

Put it another way: some nations are better suited for living off your investments than others, whereas if your goal is to operate a company, other places could potentially serve you better.

Crypto taxes

Many people have gotten rich from cryptocurrencies, and tax authorities all over Europe have started to pay attention. If you’ve struck gold with a particular coin, believe you’ll discover one in the future, or if cryptocurrency trading is your primary source of income, you want a jurisdiction that matches your situation. This isn’t necessarily a 0% tax country, but it could be one with a little more tax where the banking system understands your source of wealth.

The takeaway

There are a variety of exciting options for improving your taxes on the individual and business levels. I didn’t get into the details of every country, but I hope this post has given you a good introduction on what to look for.

I asked myself whether to include more complicated corporate structures but ultimately decided against it because I don’t want you to feel overwhelmed. If you’re making decent money, you probably have the resources to have a good accountant or lawyer to help you.

While the countries listed above are interesting in my view, it’s important to remember that tax laws and regulations can change at any time. Please consult a qualified accountant or tax specialist to get the most accurate information about how taxes will apply to you.

The important thing is that you take the time to understand your own situation and find the best option for yourself. The world’s a big place, and there are plenty of amazing countries to live in. So get out there and explore.

1. Irish Tax and Customs. “Claiming a deduction for expenses. 2022, https://www.revenue.ie/en/starting-a-business/claiming-a-deduction-for-expenses/index.aspx”
2. OECD. “Tax on corporate profits.” 2022, https://data.oecd.org/tax/tax-on-corporate-profits.htm.
3. Helliwell, John F., Richard Layard, Jeffrey Sachs, and Jan-Emmanuel De Neve. “World Happiness Report 2020“. Sustainable Development Solutions Network, 2022, https://worldhappiness.report/ed/2020/
4. Aaker, Jennifer. “If Money Doesn’t Make You Happy, Consider Time.” Journal of Consumer Psychology, 2010, https://www.gsb.stanford.edu/faculty-research/working-papers/if-money-doesnt-make-you-happy-consider-time.