How to Optimize Your Taxes in Western Europe: A Guide To 9 Microstates

We haven’t spoken so much about the European microstates, whose benefits are often exaggerated. Most of these so-called tax havens (except Monaco) are not really tax havens any more.

This is because, in some cases, it is very difficult to emigrate to those countries and, at times, you may end up paying taxes that are higher than those in alternative, far simpler situations. Nevertheless, if you decide to stay for a long time in these small states, many of them offer a very high standard of living.

In this article, we will briefly talk about the tax systems and the immigration laws of 9 countries that are considered to be fiscally autonomous territories in Europe.

One could say that, to a certain extent, every major European country has its own microstate tax haven. The Germans, Austrians and Swiss have Liechtenstein, the Italians have San Marino and Campione, the French have Monaco (although French citizens there are still fully taxed).

As well as Andorra, the Spanish have Britain’s Gibraltar which, alongside the Channel Islands, Guernsey and Jersey (including Alderney and Sark), as well as the Isle of Man, is just one of the British jewels.

We are not going to talk here about Malta, Cyprus and the British overseas territories, nor about the City of London, to which we could dedicate an entire article.

We are not going to address the other small, partially autonomous microstates either. Luxembourg, for example, is by no means a tax haven for the people who live there (nor is it necessarily a microstate) but it is of great financial interest. The Danish Feroe Islands and the Swedish Aland Islands are tax hells, just like the countries they belong to, while the Greek Athos area is reserved for Orthodox monks, as is the Vatican City for Catholics.

Out of the nine microstates mentioned so far – Lichtenstein, San Marino, Campione, Monaco, Andorra, Gibraltar, Guernsy, Jersey and the Isle of Man – the only true tax haven without any type of income tax is Monaco. The other countries offer considerable benefits compared to their “mother countries”, but they tend to hold on to a good sum of money for themselves.

The decisions of the European Union also underlie all of this. Due to intense political pressure, some micro countries, like Andorra, have given in and introduced a fixed tax rate of 10%. In other countries, the cost of living or the requirements for inmigration make emigrating there very difficult for the average citizen. Which of these countries or territories is the most appealing? We will find out below.

9. San Marino

San Marino could be the perfect tax haven. The small country in central Italy is the oldest republic in the world (301 A.D.) and, in its long history, has never been conquered. Napoleon himself was so inspired by this that he made his army march through the republic, and he even gifted it with some of his most sophisticated cannons.

The capital of San Marino, situated high on top of a mountain, is a very popular tourist destination, where one can enjoy the dolce vita there at incredibly low prices. However, it is a myth that life in San Marino is tax-free. Income tax can be nearly 50%; only with dividends are there advantages, with only a 5% capital gains tax. Local business tax increases to 17% but in the first five years this can go down by half. There are also other advantages for high-tech companies. A Limited Liability Company must have a social capital of €25,500, and an anonymous company one of €77,000.

Meanwhile, there are several ways to become resident in San Marino:

• By creating a local company with 5 full-time employees and acquiring a building worth more than €300,000 or by making a bank deposit, as well as by taking out a yearly insurance of €30,000
• By maintaining 51% of shares in a local company, employing 1-3 employees (specialists in their field), making a bank deposit of €75,000 and then making another deposit of €75,000 within the first two years of residence.
• By acquiring buildings worth more than €500,000 or 10-year government bonds for 10 years worth €600,000 and a lump sum of €10,000 and €20,000 per family member.

Even if you successfully become a resident, you will still have to wait 30 years to obtain citizenship in San Marino, and this is a unique feature in Europe.The San Marino passport is the only one that allows you to travel to China without a visa.

8. The Isle of Man

The Isle of Man is situated in the Irish Sea, between Northern Ireland and England and is considered, together with the the two Channel Islands, to be one of the three colonies of the British Crown. The island is a very popular tourist destination, known for the Rally and as an ideal place for observing giant sharks, which come in the summer months to feed on the large quantities of plankton.

Before Brexit comes into force, it is still possible for EU citizens to settle easily on the island.For non-EU citizens, the British mother country’s rules are applied. Like the Channel Islands, this does not include a local work permit, which does not have to pose a problem for online entrepreneurs or individuals.

On the Isle of Man, income made anywhere else in the world is taxed and there are no non-dom regulations. However, there is tax freedom on capital gains and no inheritance or gift taxes. Income tax rises to 10% up to GBP 8,500, after the tax-exempt amount of GBP 10,500 and above that up to 20%. The maximum tax is capped at GBP 120,000. The social security contributions of employees and the self-employed must also be taken into account.

7. Guernsey

The small Channel island Guernsey (and Alderney) has a similar tax system to its neighbour, Jersey (and Sark), but with some slight differences. It is still currently easy for EU citizens to emigrate to the Channel islands, but getting a work permit there is hard. After Brexit inevitably comes into force, the obstacles might be much greater. For non-EU citizens the current conditions are GBP 1 million and aquiring a property.

Situated off the French coast of Normandy, not far from the mother country, Guernsey and Aldemey have a tax system similar to the non-dom system, which needs to be explained in more detailed since it is quite complex.

In Guernsey, there is a difference between residence and principle/only residence. Whoever has their principle/only residence in Guernsey, will pay a 20% income tax , with a maximum limit of GBP 110,000, on foreign income or GBP 220,000 on domestic income. On the small sister island of Alderney the cap is currently set at GBP 50,000. The tax-exempt amount is GBP 9,765 GBP and GBP 11,450 GBP from the age of 64 .  You are eligible for making Guernsey your principle residence when you spend at least 183 days there, or you have been there for more than 90 days and at least 730 days in the last 4 years.  You are eligible for making Guernsey your only residence when you no more than 90 days in a third country.

On the other hand, in Guernsey, you only obtain residency is you spend at least 91 days there or 35 out of 365 days over the past 4 years. With these requirements, you can benefit from a special tax, the so-called “Standard Charge”. In this case, you only have to pay GBP 30,000, thereby being able to bring into Guernsey income worth 150,000 GBP free of tax (20% is GBP 30,000). For income worth more than GBP 150,000, a 20% income tax is applied again on domestic and foreign income used in Guernsey.

As complicated as this may sound, the situation in Guernsey is ultimately a type of non-dom system similar to the one in Malta, with a minimum stay of 90 days and a maximum stay of 183 days with an overall taxation of GBP 30,000. Furthermore, we must not forget that capital yields are generally tax-free and that there are no inheritance or gift taxes.

This country may be of interest to millionaires who in summer seek the peaceful, insular life in feudal Guernsey. However, they have to spend at least 90 days in another country to avoid being subject to tax on their foriegn income because of their unique residence in Guernsey.

6. Liechtenstein

Liechtenstein, the small German-speaking state situated between Austria and Switzerland,; not far from the German border, is often mentioned by clients who speak German. However, in most cases, it is not a good option. This is mostly due to the very restrictive inmigration laws. Lichestenstein hands out only 20 residence permits to EU-citizens each year through a lottery. But for them to give it to you, you have to actually live there for 183 days per year.

Besides those from the highest social spheres or with good contacts with the Catholic Church, entrepreneurs can also try their luck in Liechtenstein if they set up and create a medium-sized company that strengthens the local economy. To do so, there is no established procedure; you will most likely need a well-connected lawyer, a convincing business plan and a bit of luck. Consulting or tech companies, for example, have a better chance of moving to Liechtenstein if they have turnover of at least 1 million euros and give their owners or directors a residence permit.

Librestado has already advised many expats in Liechtenstein who have managed to enter this small country in this way. They are particularly pleased with the 12.5% corporation tax and an income tax of up to 28% but without any additional high costs. There is the possibility of an overall tax, as long as the taxes to be paid are sufficient for the authorities. The global taxation is equivalent to 25% of the living costs in Liechtenstein, but from experience it is only applied in cases of tax revenues for Liechtenstein of at least six digits.

There is no longer an equity tax in its original form in Liechtenstein, as it is now included in the income tax. While capital gains are usually tax-free, 4% of total annual equity is collected with income tax.  The municipalities in Liechtenstein may choose to tax the taxable income of their citizens with a multiplier of 1.5 to 2.5. In this way, income tax is fixed, depending on the municipality, between 8% and 28%, which is used ot tax 4% of total equity.

Dividends, interest income, rental income or licences, as well as profits from capital gains, are included in the.  income tax on the 4% of the net market value of the total equity. In some cases, this method of taxation has advantages. Otherwise, Liechtenstein is mainly an option because of the possibility of global taxation, but it entails quite a high tax burden. For €100,000 of partial taxation, it would be better to settle as a non-dom in Italy, a much bigger country.

5. Andorra

Andorra is a small country situated in the Pyrenees, between France and Spain, just a two-hour drive from Barcelona. Andorra is known for having two heads of state: a Spanish bishop (the Bishop of Urgell, in Catalonia) and the President of France. Both of them have purely symbolic roles, apart from the right to veto in matters of foreign policy. As a popular tourist destination, mostly for winter sports, Andorra also offers a fairly light tax burden, although still not as light as in Monaco. Due to pressure from the EU, Andorra introduced a few years ago a fixed tax rate of 10%.

Nevertheless, Andorra might be a very interesting option in certain circumstances.  The first €24,000 of income and dividends from local companies are tax-free.  They are only subject to a 10% corporation tax which for international businesses can go down to 2%, upon prior request. For shares of less than 25%, foreign dividends are also tax-free. In general, you never pay more than 10% in total in Andorra.

In addition, the inmigration system is comparatively easy for entrepreneurs if they found a local business. By spending a minimum of three months there, you can register as self-employed or set up a local capital company. Owning or renting a house and paying social security of €400 a month are mandatory requirements.

The requirements are stricter if you are an investor or have no economic activity. As well as showing proof of a minimum income of nearly €3,000 and private insurance, you must make a bank deposit of €50,000 plus €10,000 for every member of your family, which will be reimbursed once residence is granted. Moreover, you have to make an investment of €400,000 in property, government bonds, shares in local businesses or financial products from Andorran banks. Only for professional international athletes and renowned scientists does this condition not apply.

4. Gibraltar

Gibraltar is an overseas territory that extends over the famous Rock to the south of Spain. There have already been several conflicts between Great Britain and Spain over Gibraltar, after all, the tiny state is strategically positioned to manage access to the Mediterranean. The imminent Brexit would seriously endanger Gibraltar, perhaps to the point of losing its independence, which Spain has called for for a long time. However, this still has not happened yet, and for now EU citizens can keep moving to the Rock, but they must spend at least six months a year there, or 300 days in three years.

As an overseas British territory, Gibraltar widely follows a non-dom system in which foreign non-controllable income in Gibraltar is tax-free.  This also applies to companies with Gibraltarian capital, which do not pay any tax on foreign income, rather than 10%. The normal income tax of 20% applies to dividends, but the corporation tax paid can be offset against this. If you are a category 2 resident there is a maximum tax bracket.

Gibraltar is more interesting for investors and traders thanks to its lack of capital gains tax. Until Brexit actually happens, EU citizens will continue enjoy the right to settle in Gibraltar, but they must comply with some conditions. Alternatively, they become self-employed there, set up a company in Gibraltar or prove that they have sufficient assets. Added to this must be a health insurance policy with at least GBP 100,000 coverage, as well as the exclusive ability to own property in Gibraltar, whether rented or purchased.

In general, this works if you comply with the conditions of having a second home, which are applicable to non-EU citizens.  Apart from the aforementioned conditions, you would have to have  net assets of GBP 2 million. Having a Category 2 status would mean paying a maximum tax of GBP 29,000 , but with a minimum tax of GBP 22,000. This compensates for the taxable income coming into the country for example, to rent a property.

Even if you do not meet the requirements of Category 2, you can still have a residence in Gibraltar as an EU citizen. But that is for the governor to decide. It would be especially beneficial to buy a property rather than just rent one and to have a high income other than just wages.

However, all of this may end after Brexit. Besides, Gibraltar’s independence is in danger. Spain is once again asserting its claims over this strategically positioned Rock in the face of Great Britain’s potential exit from the EU.

3. Jersey

Jersey, the neighbouring island to Guernsey, with its small sister island, Sark, likes to be considered the last feudal state in Europe. Indeed, very little has changed there since the Middle Ages, and taxes are no exception. Before Brexit, EU citizens could settle there easily. Non-EU citizens must contribute to the island with their personality or their capital and buy or rent a property worth at least GBP 1,750,000.

The tax system works in a similar way to Guernsey’s, but with other conditions. In order to be able to benefit from the non-dom system, in which foreign income not used in Jersey remains tax-free, you have to spend six months there, or a total of three months over four years, or make a property in Jersey your principle residence. At the same time, if you have a property in Jersey you should avoid staying there for more than three months, or not have a principle residence in Jersey, but rather use it only for holidays and business trips.

In short, you can be non-dom if you buy a property and stay there for a maximum of three months or stop using it, or if you spend six months there and you have another residence where you spend more time. In this case, foreign income is tax-free, as long as it is not transfered to the country or used there.  Capital gains are generally tax-free, and there is no inheritance or gift tax, either.

Whoever makes Jersey their principal residence will pay a fixed tax rate of 20%, as in Guernsey. Non-EU citizens emigrating to Jersey have the option of limiting the 20% taxation on the first GBP 625,000to GBP 125,000 by claiming to be a “High-Value Resident”. The rest of the earnings will be taxed at only 1%, except income made locally from rent.

Unlike its sister island Guernsey, where the global taxation is GBP 30,000, in Jersey you can be almost tax-free in a non-dom-like system similar to the one in Malta if we have the right structure. Companies with local capital in the Channel Islands do not pay corporation tax, apart from in a few sectors (insurance, banking, etc.), and only the salaries or dividends are subject to a fixed rate. Freelancers and employees in both of the Crown colonies must remember that they must also pay social security contributions, but may take advantage of certains deductions.

2. Campione d’Italia

Campione d’Italia is not a state in itself, but an Italian enclave entirely surrounded by Switzerland with only 2,000 inhabitants. Situated at the foot of Lake Lugano, it cannot be directly accessed from Italy by road. Campione is mainly known for its casino and its fantastic location between the lake and the Alps. There is little more than a few hotels and restaurants and four Italian casinos. Campione does not have its own banks; they are all a few minutes away in Lugano, Switzerland.

Although, in theory, Campeione is subject to national Italian tax law, in practice, they are barely or not applied there for several years, at least for non-Italians and the Swiss. Thanks to its status as an enclave, the city is in the Swiss customs territory and uses the Swiss franc as its currency. As a result, there is no VAT in Campione, either.

Officially, Campione is governed by Italian tax laws and non-dom regulation, which was introduced in 2016, according to which foreign income is tax-free if €100,000 in global taxes is paid. Since Campione is part of Swiss customs territory, when calculating the Italian income tax, inhabitants enjoy a 20% discount on the exchange rate with locally-valid Swiss francs,  which can significantly reduce the tax burden.

Non-Swiss and non-Italian residents in particular in Campione are often “forgotten” by the tax administration, especially when they have “reduced” income worth less than CHF 200,000. But it would be unwise, especially in the current political situation in Italy, to count on this always being the case.

However, for the moment, Campione is an interesting alternative. If you are an EU citizen, you just have to buy or rent a house in Campione. This is not very cheap, even if we compare it to Switzerland, but there are no other requirements besides paying for private insurance.

1. Monaco

At the top of our list of European microstates is Monaco. Given that it is certainly the most famous tax haven in Europe, many people have misconceptions about the conditions for emigration to Monaco. This is not just an option reserved for millionaires.

Monaco is a small principality in the French Riviera, between Nice and Italy.  This country, situated on a steep slope at the foot of a mountain, with its capital Monte Carlo and its famous casino, is one of the most densely populated countries in the world. The prices for renting and buying property are therefore prohibitively high, which is one of the obstacles for those who want to reside in Monaco. They would have to be able to spend around €4,000 a month for a property, and this would only be a small one.

The second obstacle is that a bank in Monaco must determine if your equity is large enough for you to be able to live there long-term. In practice, the criteria for issuing the corresponding certificate vary. I know of cases where it depositing €250,000 was enough, and other cases less than €500,000, In general, from one million euroes successful immigration is guaranteed, but in any case, you should try with less than this. A lot depends here on the bank you have chosen and the impression you give. If you have a clean criminal record and have never been bankrupt, there is nothing that can really get in the way of emigrating there.  The process for EU citizens lasts around six weeks.

However, it is important to remember that the minimum stay in this small country is three months. Monaco strictly imposes this rule and controls, for example, the utility bills of its inhabitants. Taking everything into consideration, Monaco is one of the most controlling states in the world, which is ideal for its wealthy inhabitants, who want to feel secure at all times.

Incidentally, the French cannot exploit the lack of income tax in Monaco. Even if they live in Monaco, they are taxed in full by the French government. Thanks to this exception, Monaco can remain independent and maintain its status as a tax haven. On the other hand, companies in Monaco are subject to a 10% corporation tax. There is also an inheritance and gift tax that should in no way be underestimated; only inheritances and donations to a spouse or child are tax-free. Depending on how distant the relation is, the tax can be up to 16%.

Conclusion

So these are 9 European ministates. As we said at the beginning, emigrating is often difficult and the tax advantages are not always as they once were. There are undoubtedly many other countries outside the EU that are fiscally interesting and, of course, more affordable for people starting out with their business.

Now, if you want more information on the different countries around the world where you can live a freer life, you might be interested in our Emigration Encyclopedia. This eBook contains more than 700 pages of information which will help you decide which country you could move to.

Of course, if you’d rather we help you plan your new tax-free life, you can also book a consultation with us.

Because your life is yours!