December 18, 2024
Moving to Europe as an American expat offers unique opportunities but also complex tax planning challenges, particularly for high earners and high-net-worth individuals. Proper tax planning is critical to minimize potential liabilities, protect your wealth, and ensure compliance with both U.S. and European tax regulations.
This article will reference examples most relevant for Americans moving to Italy, Portugal, France, and Spain, providing a comprehensive introductory guide to navigating international tax laws and safeguarding your financial interests.
Understanding residency-based taxation vs. citizenship-based taxation
In Europe, popular expat destinations like Italy, Portugal, France, and Spain operate under residency-based taxation systems. This means that individuals are taxed based on where they reside for a certain number of days each year. For instance, if you live in Italy for more than 183 days in a calendar year, you are considered a tax resident and subject to Italian taxes on your global income.
On the other hand, the United States uses citizenship-based taxation. As a U.S. citizen, you are required to file and pay taxes on your worldwide income regardless of where you live. This distinction creates a dual taxation issue that needs to be addressed before moving abroad. Ensuring compliance with both U.S. and European tax obligations is necessary and helps avoid financial complications.
The context in which you move abroad matters
Whether you're relocating for work, retiring, or seeking new lifestyle opportunities, the reasons behind your move can significantly impact your tax situation. Below, we explore four common pathways Americans take to move abroad.
As employees: Review your work contract with a foreign tax lawyer
If you're moving to Europe for a new job, having a foreign tax lawyer review your work contract is a tax-savvy move. Many European countries offer beneficial tax regimes for highly skilled foreign workers, but you must meet specific criteria.
For instance, France has the "impatriate regime," designed to reduce the tax burden on highly skilled expatriates for up to eight years. (1) This regime allows a portion of income earned abroad to be exempt from French taxes, but the contract needs to be structured appropriately to ensure eligibility.
For retirees or self-employed Americans, the immigration pathway will look different (and so will your taxes)
The immigration process—and the subsequent tax obligations—will vary significantly depending on whether you’re retiring or working for yourself. Retirees and self-employed Americans must carefully consider which visa to apply for, as it directly impacts their residency status, income reporting, and tax obligations.
Retirees: The Long-Stay Visitor Visa and its tax benefits
Retirees typically enter European countries like France on a long-stay visitor visa. This visa is tailored for individuals who do not intend to work and instead rely on passive income sources, such as retirement distributions. A key stipulation of the long-stay visitor visa is that you surrender your right to legally work while residing in the country. Your income, therefore, must derive from pensions, retirement accounts, Social Security, or other passive streams.
Fortunately, in some cases, a double taxation treaty can save the day. Take Americans retiring in France; the U.S.-France tax treaty helps to mitigate the risk of being taxed twice on the same income. The U.S. and France have clear guidelines on how pensions, Social Security benefits, and other retirement distributions are taxed. For example, certain types of U.S.-based retirement income may be taxed only in the U.S., while others may be subject to taxation in France. Understanding these distinctions is key to maximizing tax efficiency.
This agreement provides U.S. retirees with peace of mind that their financial stability will not be unduly impacted by cross-border tax complications, allowing them to enjoy their retirement years in France without the burden of excessive taxation. (2)
Let’s look at another example
Americans seeking to move to Portugal for retirement commonly do so via obtaining the D7 visa. Obtaining this visa largely depends on having reliable passive income, which is perfect for retirees intending to live off of retirement account distributions and their investments. However, Portugal has a less favorable Double Taxation Agreement with the U.S. compared to France.
Does this mean Americans shouldn’t retire in Portugal? (3) Of course not – many factors go into choosing where to retire, and the details of a double taxation agreement are one of dozens of factors to weigh. However, it does mean that the tax and financial strategy around planning and moving to Portugal (4) will look different than someone planning a move to France.
Are you considering retirement abroad but would like to better understand the implications on your financial planning?
Schedule a call with our team to discuss what tax planning strategies for high net worth individuals are available to you based on your country or countries of interest.
Self-employed Americans: Work restrictions and visa requirements
For self-employed Americans, the situation across the board tends to be more complex. Let’s look at France again. The long-stay visitor visa is not a viable option if you plan to continue earning income through work-related activities. By law, the long-stay visitor visa prohibits any form of professional activity, meaning that self-employed individuals legally need to explore other visa options.
Self-employed individuals wishing to reside and work in France must secure a visa that specifically permits professional activities. France offers various visa pathways tailored to different types of self-employment. Whether you are a freelancer or entrepreneur, choosing the right visa requires careful planning and often consultation with a tax lawyer.
In either scenario—retirement or self-employment—the key is thorough planning and consultation with qualified professionals who can guide you through the specific legal and tax requirements for your situation. The right visa and a solid tax plan can ensure a smoother transition and help you avoid unnecessary financial pitfalls.
A note on remote work
If you are planning to move to Europe with a remote job based in the U.S., the aforementioned digital nomad visa has become quite popular. Securing the appropriate visa will not only allow you to work legally but also establish how your income will be taxed in both countries. The foreign tax rate also tends to be quite favorable.
Of the four countries discussed throughout this article, three have introduced digital nomad visas in recent years in an effort to make living and working there more accessible to non-EU passport holders (Portugal, Spain, and Italy). With respect to 2024, Spain has been recognized many times over as being a top digital nomad destination. (5)
If a country (e.g., France) does not have a digital nomad visa, it may be more difficult or impossible to legally reside and maintain your remote job long-term.
Research cross-border financial advising and tax planning
Once your immigration pathway is clear, it’s time to focus on financial planning. The country you move to will determine which strategies work best for you, but a few general principles remain the same for all U.S. expats.
In most cases, you can keep your U.S. investment accounts open, but certain portfolio allocations may not be permissible in the EU due to regulatory hurdles. For example, under the European Securities and Market Authority’s (ESMA) MiFID II regulations, (6) U.S. banks often don’t provide the required Key Information Document (KID) for certain investment products like U.S. ETFs or mutual funds. Without these documents, U.S. expats may be restricted from holding these investments.
A specialized financial planning firm like Liberty Atlantic Advisors can assist in maintaining your accounts and ensuring compliance with U.S. and European regulations.
Stay on top of state tax obligations
Many U.S. states have what are known as "sticky" tax laws, meaning they might continue to tax you even after you leave. States like California, New York, and Virginia are notorious for claiming tax residency until you demonstrate that you’ve severed significant ties.
Additionally, if you maintain a rental property in a state, you may still be required to file state tax returns. Understanding your state’s tax policies and planning ahead can help avoid unpleasant surprises.
Add foreign tax filing dates to your calendar
As a U.S. expat, it’s crucial to note the tax filing deadlines for both foreign and U.S. returns. While U.S. expats receive an automatic two-month extension (until June 15), you can request further extensions until October 15 (7) or even December 15. Filing your foreign tax return first is generally advisable, as this allows you to claim foreign tax credits and exclusions when filing your U.S. return.
Chose a tax-efficient moving date (if possible)
The timing of your move can have significant tax implications. Your expat CPA will likely recommend moving at a time that allows you to maximize your foreign tax credits and minimize double taxation. Whether this means moving at the end or beginning of the tax year will depend on your specific situation and the tax treaties between the U.S. and your destination country.
Be cautious when opening foreign accounts
Opening a European checking account is typically fine, though the Foreign Account Tax Compliance Act (FATCA) adds complexity. FATCA requires foreign banks to report U.S. account holders to the IRS. (8) This means that banks may be hesitant to open accounts for U.S. citizens or impose strict requirements to comply with reporting obligations.
When it comes to foreign investment accounts, avoid them if possible. Most foreign investment accounts qualify as Passive Foreign Investment Companies (PFICs), which can trigger complex and costly U.S. tax reporting requirements. (9)
PFICs and why expats should avoid them
A PFIC is any foreign corporation that generates 75% or more of its income from passive sources, such as dividends or interest. The IRS subjects PFIC investments to unfavorable tax treatment, including higher tax rates and complex reporting rules. Most European mutual funds and ETFs fall under the PFIC category, making them undesirable for U.S. expats.
Review foreign retirement accounts
Like foreign investment accounts, foreign retirement accounts often fall under PFIC rules. For example, the French Assurance Vie, a popular retirement savings vehicle, can trigger these reporting obligations. Due to the complexity of foreign retirement accounts, it's essential to conduct independent research and consult with knowledgeable financial advisors before committing to any plan.
Make year-end tax planning a ritual
Engaging in year-end tax planning is a good habit for all taxpayers, but especially for expats with cross-border tax considerations. This is the time to review your financial year and strategize for the future. Discuss any changes with your CPA and financial advisor to ensure you're maximizing deductions and minimizing liabilities.
Expats face unique financial complexities, but with careful tax planning, you can mitigate risks and ensure compliance with both U.S. and European tax laws.
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Disclaimer
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.
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