Choosing a Residence – Nordic and Baltic Region

[Dockhead]

Expatriate Americans – and there are hundreds of thousands of them, if not millions, living in Europe – were previously keenly interested in tax rates in their adoptive homes, because U.S. taxes were not all that bad once you figured the Foreign Earned Income Exclusion, which got you out of the first 100-odd thousand and let you run through the brackets again after that. I had a lot of American friends living happily in Russia, paying the 13% flat tax. Especially important was capital gains tax, as the U.S. in those days had reasonable rates topping out at 20%.


NOW things look like they are going to change completely. The new administration is out to make us the most heavily taxed country in the world, which is a big mistake, because unlike Europeans, especially Northern Europeans, we don’t get anything for our taxes, so it becomes a spectacularly bad deal, which means that people will vote with their feet. We already pay income taxes at rates which can exceed 50% (depending on the state), then we pay separately for our own health care (at vast expense), then we pay for our own and other children’s education through property taxes which are 5 to 10x higher than European property taxes – even if we're paying for private schools separately -- it was a bad deal already, which is about to become intolerably worse.


It gives a new perspective to choosing a country of residence in Northern Europe. So I’ve just run through the various tax regimes again, and was kind of surprised at what I found.


Finland
Top federal income tax rate 31.25%, regional income tax (Helsinki) 18.5% flat rate, capital gains and dividend tax 34%, social taxes (both employer and employee paid parts) about 25% (capped at about €177k), corporate income tax rate 20%. Inheritance tax top rate 14%.


Sweden
Federal income tax 20% flat tax, municipal income tax 32% flat tax, capital gains and dividend tax 30% flat tax, social taxes 31.42% (uncapped). Inheritance tax – nil. Corporate income tax 20.6%
Sweden has an excellent special flat tax on income from rental property – 20%.


Denmark
Income tax – flat rate of 27% (effectively 31%) for expats, for up to 8 years. Social tax – almost nil – it’s included in income tax. Capital gains tax – 24%. Inheritance tax – estate tax of 15% does not apply to a surviving spouse, and the inheritance tax of 25% does not apply to close relatives. Only applies to Danish assets. Corporate income tax – 22% Dividend tax – 22%.


Estonia
Income tax – 20% flat tax. Social tax – 33% uncapped. Capital gains tax – 20%, but you can reap and reinvest capital gains without any limitation and without any tax by setting up a capital account – superb system. Tax on dividends received – 0% so long as the dividends come from non-tax haven countries. Inheritance tax – 0%. Estonia has a radically simplified tax system, all online. Annual return takes 10 or 15 minutes to fill out and file if you have your data collected.


Latvia
Income tax top rate 31%. Social tax – 35%, but some options for lesser rates and less scope of pension/social insurance. Capital gains tax – 20%. Inheritance tax – zero. Corporate income tax – 20% Dividend tax – zero. N.B. -- if you receive dividends from a company which paid corporate income tax, your dividends received are tax free.



Latvia has the excellent Swedish system of separate flat tax for income from rental property – 10%.


Germany is not analyzed in detail here, but capital gains tax in Germany is zero.


It should be mentioned also, since the U.S. may soon have a wealth tax, that NONE of the countries in the Nordic and Baltic region has any wealth taxes, the last of which were abolished in the 90’s after everyone realized what a spectacularly bad idea they are.

So what’s the net net of all of this?


First of all, in all of these countries, the taxes are far less progressive than in the U.S. and there are far lower disincentives for investment and entrepreneurship. No wonder that all of these countries are rated as more capitalist than the U.S., with higher, “economic freedom index” ratings by the Heritage Foundation. Corporate income taxes are far lower even than those in the U.S. after the Trump cuts. If Biden raises the corporate income tax rate to 39% as he wants, then we will have corporate income taxes approaching 50% in some states – never seen before in history and an enormous disincentive to doing business as a corporation as opposed to an LLC, partnership, REIT, etc. This is economic illiteracy. Other disincentives to investment include capital gains tax at 28% federal and up to 13.3% state rates, for an eye-popping total of 41.3%, and the administration is even pushing to abolish the like-kind exchange rule.



For those with significant employment income, Denmark shines – 27% flat tax including social taxes, and you get the splendid Danish health care, free and excellent education for your children through PhD, and you get to live in a society where no one is poor. This is an astonishingly good deal – that’s basically the rate for social taxes, and already a good deal considering what you get for them, so figure the income tax is zero. Capital gains tax is 24%. Dividend tax is 22%. So in Denmark, as an expatriate, you will not pay enough tax to avoid paying more to the IRS, if you’re an American, even before the coming tax increases, and your investment income is very lightly touched.


If you don’t have a lot of salary (or consulting fees) income, Estonia is the country that shines. Next only to Monaco, I guess there's not a better place to live for a person who lives on investment income. Particularly efficient is the corporate form of doing business, which is taxed identically to any other kind of entrepreneurship – total tax burden including corporate income tax plus dividend tax is a flat 20% rate. Social taxes are high and uncapped, so Estonia is no good if you (like me) have a lot of current income. Total of income tax and social tax is 53% (better than Sweden, but compare to 27% in Denmark), and you get relatively little for that, more than in the U.S., but the health care systems and so forth are very modest compared to Scandinavia. So Estonia is good for those who live on interest or dividends, but not for others. Tallinn is a fantastic place to live (I lived there for a year), one of the most beautiful cities in Europe, with fantastic cultural life, and very cheap housing and altogether cost of living. But that 33% uncapped social tax is a problem for people with current income.


So I am now seriously thinking about moving to Denmark and registering and paying taxes there. I am expecting a large capital gain in 3 or 4 years. I don’t know if I can get rid of my American passport by then. My old friend, a near-billionaire, burned his U.S. passport and took Swedish citizenship more than 10 years ago. I thought at the time that he was crazy. Now it looks prescient.