I just spent 3 months researching investment taxes in every single European country. In this article I’m going to share a 5 step tax optimization process that will help you reduce and simplify your investing taxes – no matter where you live in Europe.
These steps can potentially save you thousands of euros and hours of tax bureaucracy, and help you avoid problems with the tax authorities.
I will also share the number one tool that I use when researching investment taxes in Europe..
So make sure to read this article BEFORE you start investing.
Taxes are the biggest problem for investors who live in Europe.
Each country in Europe has its own tax laws.
The best investments in Spain or Italy could give you a big tax bill in the UK or Switzerland.
The best brokerages if you live in Greece or Cyprus could cause you a painful headache if you’re in Germany or Austria.
And when you move to another country, things get even harder. Not only does the tax system change – all the laws might be in a language you don’t speak.
But you’re not gonna give up, are you?
I mean, you get taxed when you make a profit, okay?
So if you let taxes stop you from investing, your only choice is to stay poor, and that sucks.
Let’s embrace the suck and figure out investment taxes.
Here’s my 5 step process for making taxes easy.
But first a quick note – I’m not a tax advisor and this article is not tax advice. Use this blog post to get educated, then do your own research.
Step number 1 – Figure out your tax residence
If you want to optimize your investments for taxes, the first question is – which country’s taxes?
That’s determined by your tax residence.
For example, meet Anton, a German software developer.
He was born and raised in Munich and he still lives and works there, and he has no ties to any other country.
In Anton’s case it’s easy – his tax residence is almost certainly Germany.
Now meet Anton’s brother Otto.
His house is in Germany, but he commutes to work in Switzerland every day. He also rents an apartment in Zurich where he stays sometimes. What’s his tax residence?
Not so obvious, right?
In Europe, a lot of us move around.
Maybe you live in Paris but your children live and go to school in Portugal.
Maybe you’re from Turkey living in the UK.
Maybe you’re an American expat living in Barcelona.
In such scenarios tax residence can get tricky.
Some people make the mistake of thinking you can choose where to pay taxes.
The other day this guy e-mailed me and said – Hey, Tom, I’m Estonian but I live in London. What do you think, would it be better to pay tax in Estonia or the UK?
Listen, it’s not up to you. You can’t just choose whatever’s more convenient.
Your tax residence is determined by a series of rules around where you live, where you work, where your family lives and so forth.
The first thing to check is the physical presence test.
In most European countries, if you spend more than 183 days there in any given year, you will likely be considered a tax resident in that country.
So that’s simple, right – spend more than half a year in Spain or France or Portugal, and you’re probably a tax resident there.
But there are exceptions.
For one, in some countries the physical presence test is more complicated. I’m looking at you, Cyprus.
For another, if you have close ties to another country, that country may want to consider you a tax resident even if you don’t spend much time there. For example, my friend Ernest works most of the year in Riga, Latvia, but his ex-wife and kids live in Frankfurt Germany. And he tells me he’s actually considered a German tax resident.
And finally, if you’re an American citizen or green card holder living in Europe, I’m sorry for you – although you might be a tax resident in Europe, you also need to file US taxes, and investing will be a real pain in the butt for you.
So that’s step number 1 – make sure you know your tax residence before you even think about investing.
If your situation is at all complicated, talk to an expert or do your own research carefully – I’ll share some resources for that later in this video.
Step Number 2 – Learn which investment taxes apply in your country
There are several kinds of standard investment taxes you should be familiar with.
If you want to make money investing, this is stuff you really need to know.
So take a deep breath and hold on tight, cause shit’s about to get real.
First, capital gains tax.
This is basically a tax on buying low and selling high, okay?
If you manage to buy something cheap and sell it more expensively, you pay capital gains tax on the profit.
For example, let’s say you bought Tesla stock for ten thousand euros and later sold it for fifteen thousand – well, Elon just made you five thousand euros richer, but you’ve got to pay capital gains tax on that.
With some exceptions such as Switzerland, Belgium, Cyprus, and the Netherlands, most European countries will tax your capital gains from investments.
Second, distributions tax.
Whenever you got some sweet cash coming from your investments, the government wants part of it.
For example, let’s say you invested in Coca Cola stock. You walk around town with a smile on your face because every time you see someone drinking a coke you feel like a boss.
Well, whenever Coca Cola pays you a lovely dividend, you will get taxed on that. In fact, depending on your country, you might get taxed both in America and locally here in Europe.
Third, transaction tax.
You know that song, right? How did it go?
Every breath you take, every move you make, I’ll be taxing you.
That’s transaction taxes. They apply to each purchase and sale of financial instruments. You will find transaction taxes in many European countries such as Belgium and the UK.
Fourth, wealth tax.
Tax the rich. It’s a great idea, isn’t it. I mean, it really is.
But it’s annoying when it happens to you. Especially if you don’t feel rich.
Wealth taxes are charged on your assets regardless of whether you have actually earned a profit in a given year. These taxes apply in a limited number of countries such as Spain and the Netherlands.
And finally, fifth, exit taxes.
You know how they say – don’t let the door hit you on the way out?
Well, a lot of governments want that door to hit you as you leave the country – and to shake some cash from your pockets.
Exit taxes are taxes charged on your unrealized investment profits when you stop being tax resident in a particular country.
For example, let’s say you bought a bunch of Apple shares while living in Country X and you didn’t sell them. Currently you have a ten thousand euro paper profit on these shares.
Then you leave Country X to move to Country Y. When you stop being tax resident in Country X, you may need to pay tax on your ten thousand euros of theoretical profit.
Exit taxes are found in quite a few European countries, including Spain, France, Germany, Poland and others. If you plan to move around a lot, research this first.
Okay, so these are the 5 big taxes investors should be aware of – capital gains taxes, distributions taxes, transaction taxes, wealth taxes and exit taxes.
And that’s not even all. Other taxes also sometimes apply in particular countries. But I would start by investigating these five.
Listen, don’t freak out. It’s a lot, but it’s doable.
Just keep breathing, okay. Take one step at a time and you’ll figure it out.
Later I’m gonna share some ideas for how you can research investing taxes quickly and painlessly.
Step Number 3 – Explore tax advantaged investments
Hello everyone who skipped ahead to this part. This is the stuff everyone wants to know, right? How do you pay less taxes – without going to jail of course?
Well, you’re in luck.
Most European countries offer investors some tax advantaged investments or tax exemptions. And in the best cases, using tax-advantaged investments can allow you to invest essentially tax-free.
And you don’t have to scheme or cheat or hire an expensive law firm from Panama. It’s all perfectly legal.
Here are four common types of tax-advantaged investment that you should look for:
First, tax-advantaged brokerage accounts.
This type of account lets you invest while paying less tax or no tax at all. It’s typically a great choice because it’s self-directed, meaning that you can pick exactly where, when and how to invest your money.
One example is the UK’s Individual Savings Account or ISA. When investing through an ISA, which has very generous annual contribution limits, investors don’t pay any tax on capital gains or distributions.
Second, tax-advantaged investments.
In some countries particular investments can have lower tax rates or may be altogether tax free.
For example, in Bulgaria, no capital gains tax is charged on financial instruments traded on Bulgarian or qualifying EU or European Economic Area stock exchanges. So if you buy stocks or ETFs on the German exchange XETRA, for example, you may be able to invest virtually tax free.
Third, tax-advantaged pension funds.
In many countries, you can get tax rebates or generous tax exemptions when investing in pension funds. The downsides are that pension funds typically charge significant fees, they are usually not self-directed – you don’t control the investments, and you may not be able to withdraw the money before retirement.
Fourth, tax exemptions.
In some countries the first few hundred or the first few thousand euros of capital gains or distributions each year may be tax free. If this is available, make sure to take advantage of it.
Naturally in some countries there are other interesting tax optimization opportunities, but these are the four most common ones – tax-advantaged brokerage accounts, tax-advantaged investments, tax-advantaged pension funds and tax exemptions.
So it’s absolutely vital to figure out which of these may be available in your country.
How do you do it? It’s actually pretty easy.
The good news is, your local bank or brokerage will usually just LOVE to tell you all about these opportunities because it’s a great way for them to attract clients.
It’s a dirty little secret of the financial industry, but every tax advantaged investment is basically a gift from the government to the industry because it helps sell investments with close to zero effort.
So just ASK your local bank or brokerage about what’s available.
If this doesn’t work, a bit later I’ll share some other resources you can use to research these opportunities.
Do this BEFORE you start investing because after you’ve started it’s typically too late. I’ve seen a lot of people skip this step and lose literally thousands of euros because of it, so don’t make that mistake.
Step Number 4 – Choose a tax optimized brokerage
So imagine it’s lunch time and you decide to get yourself a slice of pizza. . .
How do you choose it?
It’s simple, of course – just choose the cheapest pizza, right?
Of course not. But for some reason a lot of people think choosing the cheapest possible brokerage is the way to go.
And I get it, fees really matter for your investing results. But there are other important factors to consider: safety, customer service and, yes, taxes.
First of all, many of the tax advantaged investments in your country may only be available through a local brokerage.
Buy local pizza or else.
And second, in some countries, choosing the right local brokerage makes your tax filing and reporting much, much, MUCH easier. The worst offenders here are Austria, Germany and Denmark, but it’s true in other countries as well.
So when you choose a cool low-cost foreign brokerage such as International Brokers or Trading212, make sure you’re not getting yourself into a tax reporting nightmare.
Now let’s pull it all together with
Step 5 – Optimize your portfolio to pay less tax, later in the future
This is the hard part so let me put on my serious tone.
Obviously I can’t optimize taxes for you in this article because, depending on your country and situation, you’re gonna be considering many different kinds of taxes and investments.
In my training programs, I actually give people very different training depending on the country where they live.
But let me sketch the big picture here.
To optimize your portfolio for taxes, most people focus on two priorities:
- Pay less tax
- Pay tax later in the future
The reason for the first priority should be obvious.
The second priority is a little more subtle and it’s not ALWAYS the right choice. But in most countries and most situations, it’s better to pay taxes later in the future than it is to pay today.
Think about it like this – let’s say you’ve got to pay the government a thousand euros in tax sooner or later.
Which do you prefer:
- Pay the government now
- Invest the thousand euros to make you some profit for 10 years – and then pay the government?
It’s a no brainer, right?
Doesn’t it make sense to get 10 years of use out of this money, to squeeze some profit out of it, before you hand it over to the government?
So that’s the logic behind tax deferral. As long as you expect your tax rate to be similar or lower in the future than today, most of the time it’s a smart idea to pay tax later.
So you want to look at the investment taxes in your country – for example, capital gains and dividend taxes – and the investments you’re considering – for example, stocks, bonds and ETFs – and figure out which combination of investments will let you pay less tax, later in the future.
For example, in many European countries so-called accumulating index funds and ETFs let you invest without paying any taxes for years. This achieves an excellent tax deferral effect.
But of course this is where things get tricky. In other countries such as Switzerland or Austria this approach doesn’t work because these accumulating ETFs get taxed on a yearly basis.
The truth is that there’s no one right solution for everyone in Europe.
There’s no single tax-optimized portfolio that works great everywhere from London to Berlin to Budapest.
So if you want to do step 5 and optimize your portfolio to pay less tax, later in the future, you’ll have to research your local laws and regulations.
Now if you’re a busy professional like most of the people I work with in my training programs, you might be feeling a bit overwhelmed right now. There’s just too much information, right?
I can offer you a couple of solutions.
One, at the beginning of the article, I said I’d share the number one resource I use for researching European investment taxes. Here it is.
It’s the Worldwide Tax Summaries database compiled by PriceWaterhouseCoopers, the big international auditor company. The link is taxsummaries.pwc.com
If you want to quickly learn the key facts about taxes in the country where you live, the PwC Tax Summaries are great.
That said, this database will make a ton of sense if you’re an accountant or tax professional. For beginners it’s going to be tough. Also, it doesn’t go into details about popular investments such as ETFs and index funds.
If that’s interesting to you, I’ve got another solution for you.
I specialize in helping people all across Europe go from 0 to invested in their own passive portfolios in just a few weeks. That’s exactly why I just spent 3 months investigating investment taxes in all European countries. I cover all that for our program members.
I work with Europeans, with expats who moved to Europe from somewhere else, and with nomads who move around between countries a lot.
So if you live in Europe and want to invest, come watch the first big module of my training program – it’s available as a cool free webinar at go.indexmasterclass.com.
People usually really enjoy the webinar, so I’d love to see you there.
So that’s it. Don’t let the fear of taxes stop you from investing.
Embrace the suck. Master taxes and put yourself in a position to grow your wealth without stress or fear.