Microstates Tax Havens in Europe

Have you ever noticed that every major European country has its own microstate tax haven? Think about it. There is Liechtenstein for Germany and Austria, and there’s San Marino for Italy. Besides San Marino, the Italians also have the lesser-known tax haven Campione, which turns out to be attractive for the Swiss too. Spain has Andorra and British Gibraltar. The latter is still British territory, just like the Channel Islands and the Isle of Man which are all tax havens for Great Britain. Between Croatia and Serbia, we find Liberland. Liber-what? That’s right. For any of you who have ever dreamt about creating their very own tax haven, we encourage you to keep reading (or to scroll down straight to the part about the unique story of this unclaimed piece of land). Last but not least, the most famous of all: Monaco. Positioned at the Cote d’Azur, the luxurious dwarf state is the tax haven of France. But with increasing political pressure and changing policies as a result, can these microstates really still be called tax havens?

 

Before we can answer that question, we need to have a clear understanding of what a tax haven really is. We use the definition of Investopedia: “A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment”. In the more traditional definition, it also states that generally, tax havens only share limited or no financial information whatsoever with foreign tax authorities.

MONACO – FRANCE

With no personal income tax at all, The Principality of Monaco has a vital characteristic to be considered a tax haven. However, stating that the land of Monte-Carlo is a tax haven to the French isn’t entirely true. French nationals are still fully taxed in Monaco, even if they get residency in Monaco. Other foreigners who become residents in The Principality of Monaco do however enjoy the absent personal income tax. That even extends to the situation in which a Monaco resident doesn’t work in Monaco but elsewhere. No income tax whatsoever is then paid on this income earned in foreign countries: in Germany, Spain, the United Kingdom, you name it. It wouldn’t surprise you that the governments of these other states are not really happy about it. Not only is the income earned in their respective countries only partly spent there (hence, injected back into their economies) but on top of that they don’t earn a single percentage of the money in taxes. Hence, to non-French citizens Monaco can be considered a tax haven. 

 

Monaco doesn’t have a general corporate income tax. However, in 1963 the tiny country signed a treaty with France in which it was specified that there are some businesses whose profits are taxed. For example, companies that have 25% or more of their business activities outside Monaco and companies that engage in selling the licensing of trademarks, patents, manufacturing processes or artistic copyrights. However, with no general corporate income tax and no taxes on dividends paid by local companies, Monaco can definitely be considered a tax haven for companies. 

 

Since 1963, there has been a Customs union in place between France and Monaco. Therefore, the Value Added Tax is applied on the same basis and at the same rates as in France. The standard VAT is 19.6% except for the product and services to which a reduced rate applies. 

 

LIECHTENSTEIN – GERMANY, AUSTRIA

This little country in the mountains wedged between Switzerland and Austria has a basic personal income tax of 1.2%. However, the different communes in Liechtenstein impose an additional income tax which leads to a combined income tax of 17.82%. An additional income tax applies for people under the social security program and the self-employed. For this latter category, an extra 11% is implied so the income tax becomes almost 29%.

 

The corporate tax rate in Liechtenstein is 12.5% and it’s an important source of income for its government. Resident companies in Lichtenstein need to pay the corporate tax on their worldwide income. Non-residents companies need to pay the corporate tax solely on the income earned from properties or branches within Liechtenstein.

 

The Value Added Tax in Lichtenstein is 7.7%, except for the products to which a rate of 2.5% applies (to food, medicines and books for example). To lodging and accommodation a reduced rate of 3.7% applies. Tourism is an important economic activity for this Alpine country. 

 

Unlike Monaco, Liechtenstein does imply a personal income tax and a corporate tax. However, historically speaking, Liechtenstein has always been considered a tax haven as it is especially well-known for its secrecy and security. Many of the wealthiest people on earth have been storing their capital in Liechtenstein. Also, when we compare Liechtenstein’s personal income tax with those of Germany (up to 42%) and Austria (up to 42%) and we do the same for the corporate tax rate (Germany: 29.8%; Austria: 25%), we understand why Liechtenstein, with tax rates largely below those of its peer Alpine countries, has been an attractive destination for both individuals and companies. 

 

SAN MARINO – ITALY

San Marino is an enclaved microstate close to Rimini and completely surrounded by north-central Italy. It’s one of the world’s oldest republics. The personal income tax in this tiny country ranges from 9% to 35% (the latter charged for all income over € 80.000).

 

San Marino has a corporate tax rate of 17% and an extra withholding tax (an income tax that has to be paid by the payer of the income instead of the receiver) of 5% that is applied to profit distribution. However, San Marino has been wanting to attract new businesses and therefore, it has put a discount in place. From 2013 on, all new companies receive a 50% reduction on their corporate tax for the first six years they are in business in San Marino. Hence, for these newly registered companies the corporate tax rate becomes 8,5% + the 5% withholding tax. 

 

San Marino doesn’t apply a Value Added Tax, but they do charge a single-staged tax on all goods and services that are imported to San Marino. The standard rate is 17% and reduced rates are 6% and 2%. However, companies can completely recover this amount paid on importation so the impact of this tax goes down to zero. 

 

When we compare the personal income tax of San Marino with that of Italy (ranging from 23% to 41%) and we do the same for the corporate tax rate (Italy: 24% plus an additional 3.9% regional production tax), we definitely recognize the tax advantages of this microstate. Wealthy Italians have been depositing money in banks in San Marino for a very long time. Banking is the strongest asset of San Marino’s financial service sector. However, due to a series of events (black lists, regulatory changes and other incidents), the international pressure has built up for San Marino to become more transparent. Right now, San Marino is called a “tax haven in transformation”.

 

CAMPIONE – ITALY, SWITZERLAND

Have you ever heard of Campione? It almost seems too good to be true. Campione d’Italia is part of the Republic of Italy but it’s situated in the heart of Switzerland. With its 1.7 square metres and 3000 inhabitants (of which 1000 foreigners) it truly is just the size of a village. It was the casino of Campione, Europe’s oldest casino founded in 1917 as a place to gather information during the First World War, that generated sufficient income to operate the microstate. As a consequence, there was no need to impose any taxes on its residents, both individuals and companies. Although the casino is no longer in business, some of the very particular tax concessions for the residents have remained in place.

 

Contrary to foreigners living in Switzerland, you’re not subject to the double taxation treaties with most Western European countries when you’re a resident in Campione. All profits from bank deposits, real estate, shares and bonds, and other transactions arriving from a Swiss or international source don’t get registered for tax purposes for the residents of Campione with the requirement that they are channelled through a Swiss bank. 

 

Residents of Campione pay less taxes compared to Italian standards too. The first CHF 200,000 of their income is changed into euros at a special exchange rate. Thanks to this exchange rate, their taxable income is lower and consequently a lower tax rate applies. Foreigners living in Campione need to pay taxes to the Italian authorities over their worldwide income. 

 

For companies, the usual Italian corporate tax rate applies (24% plus an additional 3.9% regional production tax). However, also for them Campione can still function as a tax haven because of its remarkable specifics. All banking is Swiss – hence, companies profit from financial privacy – while at the same time they are not subject to Switzerland’s income and withholding tax. Moreover, companies can be completely owned and controlled by foreigners, something that’s limited in the Swiss law. 

 

There is no Value Added Tax to be paid in Campione. 

 

ANDORRA – SPAIN

Andorra is a micro-country situated in the Pyrenees mountains between Spain and France. It is no longer completely tax-free after the political pressure was built up. Nowadays, residents of Andorra pay 10% income tax when they earn more than € 40,000. Income from (most) foreign investments are subject to this rate too. Non-residents pay 10% income tax on all income sourced in Andorra.

 

Let’s compare the 10% income tax charged in Andorra for any income over € 40,000 with the income tax to be paid in Spain: for any income over € 35,201 you pay 37% and for any income over € 60,000 you pay 45%. Also taking into account that Spain’s lowest rate is 19%, you’ll quickly understand that with its 10% income tax Andorra is considered a tax haven. However, that doesn’t illustrate the full picture yet as Spain has a partly decentralized tax system. The Spanish income tax to be paid is divided by a national portion and a regional portion. The tax rates on the regional portion vary per region. Catalonia, the Spanish region bordering Andorra – the language spoken in Andorra is Catalan in fact – has the highest regional tax rate (which can bring the total personal income tax up to 48%). 

 

The corporate tax rate in Andorra is, like the income tax, set at 10%. Compared with a corporate tax of 25% in Spain, Andorra is a tax haven for businesses too.

 

Andorra also has made a name for itself when it comes to shopping. No sales tax is charged at the register in Andorra. Products and services do have a Value Added Tax, but with a general rate of 4,5% it’s the lowest VAT in Europe.

 

BRITISH GIBRALTAR – SPAIN

Located at the southern tip of the Iberian Peninsula, British Gibraltar isn’t part of the United Kingdom, but it’s British Overseas Territory. The currency used is the Gibraltar Pound, which isn’t the same as the English Pound. The personal income tax system in Gibraltar is not completely straight forward. However, to keep things rather comprehensible we can say the maximum effective rate of taxation is 24%.

 

The corporate tax rate in British Gibraltar is 10%. Utility and fuel supply companies and companies abusing a dominant market position pay 20% corporate tax. Gibraltar has a territorial basis of taxation, which means that businesses are taxed for their profit accrued in or derived from the territory of Gibraltar. That makes Gibraltar a tax haven for non-resident businesses, even more if you consider that Gibraltar doesn’t charge a capital gains or wealth tax. 

 

There is no Value Added Tax in Gibraltar, but just like San Marino, there is a tax to be paid on importing goods, ranging from 0% to 12%. 

 

British Gibraltar is also considered a tax haven because of its strong banking system that offers many offshore accounts and investment opportunities for both resident and non-resident companies.   

 

 JERSEY (INCLUDING ALDERNEY AND SARK) – GREAT BRITAIN 

Jersey is part of the Channel Islands, a group of islands right off the coast of France. It’s part of the British monarchy but has complete financial and political autonomy. And you guessed it, that’s where its attractive status as tax haven has developed from. 

 

In 1928, an income tax rate was introduced of 2.5%. However, during the German occupation, they raised the income tax up to 20% on which it is still today. 

 

The corporate tax rate in Jersey is 0%. That’s right, back in 2008 Jersey eliminated all taxes for companies doing business on the island. Financial services firms are taxed at 10% however, and utilities, rentals and development projects at 20%. 

 

Jersey doesn’t belong to the Value Added Tax area, but they have introduced a comparable tax: the so-called Goods and Services Tax (GST). It’s set on 5% and also applies to imports. 

 

Besides its personal income tax of only 20% and its non-existing corporate tax, Jersey offers a great climate for offshore accounts as no registration of trust accounts is required among the businesses that administer individual financial accounts on the island. It has all elements to be considered a tax haven.

 

GUERNSEY – GREAT BRITAIN 

Guernsey is the second largest island (after Jersey) of the Channel Islands located near the French coast. Just like Jersey, residents of Guernsey pay a personal income tax of 20%.

 

The standard corporate tax rate is 0% (did somebody say tax haven?). Financial services are taxed at 10% however, and a couple of other business categories (including retail businesses that have annual taxable profits of more than £ 500,000) are subject to a corporate tax rate of 20%.

 

The island of Guernsey doesn’t have a Value Added Tax and unlike Jersey, there’s also no Goods and Services Tax.

 

Safe to say that Jersey, just like its bigger sister Guernsey, can be considered a tax haven.

 

ISLE OF MAN – GREAT BRITAIN

The Isle of Man is an independent island located in the Irish sea between Ireland and England. It’s famous for its straightforward taxation regime which is completely separate from its neighbours.

 

On the Isle of Man, you pay 10% personal income tax on the lowest part of your income, and 20% on the higher part of your income (over £ 6,500). Moreover, there is a tax cap in place on the total income payable – set on £ 125,000 per person – which makes the island an attractive destination for the very wealthy. 

 

Corporate tax rates on the Isle of Man are comparable with those on Jersey and Guernsey. The standard corporate tax rate is 0%. Banking activities are subject to 10%, just like retail businesses with taxable profits of £ 500,000 or more per year. 

 

The Isle of Man has a Value Added Tax of 20% which is applied to most goods and services. Additionally, there’s the reduced rate of 5% (applied to home energy and children’s car seats among others) and 0% (applied to most food and children’s clothes). 

 

The low tax rates for both individuals and companies, the tax cap, the total independence of the tax system from neighbouring countries like the United Kingdom and Ireland and a modern Companies Registry that enables speedy and efficient access to company records to both local and foreign users make the Isle of Man a tax haven. 

 

LIBERLAND – CROATIA, SERBIA

Undoubtedly, Liberland is the most special “tax haven” in this list. Has it ever crossed your mind to just claim a piece of land and create your own state? Then keep reading, because that’s exactly what people have been trying to do with this special piece of land. 

 

Liberland is a micronation with no inhabitants (yet) situated on a parcel of disputed land on the western bank of the Danube river between Croatia and Serbia. When we look up the tiny nation on Google Maps and take a closer look on how vaguely the border is drawn between the two neighbouring countries, we can better understand how Liberland even came into existence. A border dispute between Croatia and Serbia that is still ongoing today, makes for these 7 square metres of land (the size of Gibraltar) to be nobody’s: Croatia considers it to be part of Serbia, but Serbia doesn’t claim it. 

 

To cut a long story short: Czech politician and activist Vít Jedlička proclaimed the country of Liberland in 2015. A provisional government was presented a couple of months later and the free republic has tried to get diplomatic recognition since. The aspiring country has also published a draft version of a constitution and started looking for inhabitants that will be considered suitable for receiving Liberland citizenship. In February 2018, the former candidate for the United States Presidency Ron Paul was officially presented with a passport and citizenship certificate of Liberland. 

 

But what about taxes? Until today, the country of Liberland isn’t recognized by any member of the United Nations. However, on its official website we can read that the founders wish “to create a society where righteous people can prosper with minimal state regulations and taxes’. They are inspired by states like Monaco and Liechtenstein, two tax havens that we’ve already discussed in this list. Liberland chose to use the Bitcoin as their official currency.

 

The Free Republic of Liberland is no official tax haven yet, but its founders are determined to become an independent state with very attractive tax laws. As soon as any interesting developments happen, we’ll update you of course. 

 

 but what about the NETHERLANDS..?

So, we have seen that the major part of the Western-European countries – France, Italy, Spain, the United Kingdom, Germany, Switzerland and Austria – all have their own tax havens. But what about The Netherlands? 

 

This country might not have its own tax haven like the other western-European countries, but perhaps that is because it doesn’t really need one. At least, speaking in terms of tax for corporations as the personal income tax goes up to nearly 50%. For companies however, The Netherlands is an attractive destination. On the first € 200,000, the corporate tax is 16,5%, and after € 200,000 it’s 25%. However, in 2021 these rates will decrease to respectively 15% and 21.7%. A Dutch company pays this corporate tax on its worldwide profit, hence it’s pretty attractive for any company doing business globally to set up their headquarter in The Netherlands.

 

 And LUXEMBOURG? 

Most likely, Luxembourg might have been the one of the first names popping up in your head when speaking about European tax havens. But do you actually know why? 

 

When looking at their corporate tax rate, we quickly understand the association with being a tax haven. Luxembourg’s rates are very comparable to those of The Netherlands. Companies with a taxable income up to € 175,000 pay 15% corporate tax, companies with an income between € 175,000 and € 200,000 pay a rate between 15% and 17% and companies with an income over € 200,000 pay 17% corporate tax. Needless to say, these percentages attract many companies aiming to optimize their tax strategy.

 

 … and BELGIUM?

Together with The Netherlands and Luxembourg who offer pretty attractive corporate tax rates as we’ve seen, Belgium is part of the Benelux. Its corporate tax rate of 29% doesn’t give the impression of being a tax haven and unlike its Benelux peers it hasn’t got the reputation of being one. However, in a research by order of the European Union Belgium was labelled a tax haven because apparently, companies that employ practically no-one have lots of money circulating in the country with the aim to benefit from a maximum of tax exemptions. Belgium’s favourable tax regime enables them to do so.

 

 …and wasn’t IRELAND rather attractive for the big multinationals too?

That’s right, there’s many multinationals who have set up their business and consequently lodge their taxes in Ireland. No surprise, they have a very good reason to do so. The country’s corporate income tax is 12.5% and could safely be called iconic. Back in 1999, it was lowered from 32% to 12.5% in one go. On top of the very attractive corporate tax rate, Ireland’s legislation heavily favours the establishment and operation of businesses. Their economic environment is very hospitable for all kinds of corporations, but especially the ones in research, development, and innovation. 

 

COMMENT

 

How does Europe feel about its tax havens?

So, we’ve seen that almost all western-European countries have their own tax haven, which are all microstates. One of the reasons that these tax havens enjoy the total freedom of making their own tax laws and are able to offer a high level of secrecy at the same time, is that they aren’t real members of the European Union. Although they have some form of relationship with the European Union (being part of the customs territory for example) they remain outside the Union. Despite the increasing international pressure to become more transparent, the EU is not in the position to lawfully enforce it, in case they wanted to.

 

In 2019, the EU issued a report in which it had its own member states being investigated for tax haven practices. Seven EU-countries were accused of ‘aggressive tax planning’ or in other terms: showing characteristics of a tax haven: Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands. Based on this report, negotiations on new tax laws have started. In the future, the EU might adopt new tax regulations that will eliminate some of the tax optimization opportunities that are in place now. However, although the microstate tax havens will most likely share more and more information with other countries, as non-EU states they will continue to enjoy a relatively high level of freedom in shaping their own tax environment.

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