EU countries offer tax breaks to foreign skilled workers – DW – 19/07/2024

The measure proposed last week by the German government as part of its new growth initiative provides for tax incentives of 30%, 20% and 10% for foreign skilled workers who want to take up employment in Germany. This means that their taxable income will be reduced by these percentages during the first three years of employment. However, there are minimum and maximum gross salary limits for the tax credits, which have yet to be defined.

The measure, which is to be reviewed in five years, has drawn strong criticism from German unions, who see it as a “two-class tax”. However, its supporters believe that it will make the German labour market more financially attractive for foreigners.

Economy Minister Robert Habeck told the German business daily: Trade Journal that skilled workers prefer countries with better tax conditions, such as the Scandinavian countries, and that it “is worth trying to attract people to Germany in this way.”

A 2018 study commissioned by the German parliament shows that at the time, 15 EU countries had adopted regulations favoring foreigners through tax incentives. They included the Netherlands, Greece, Croatia, Cyprus, Italy, Spain and Portugal.

Portugal and Spain

Portugal has been offering tax incentives to foreigners since 2009 as part of a policy aimed at attracting skilled workers, overcoming the country’s debt crisis and boosting productivity.

High-income earners and the self-employed, who can work from anywhere in the world, for example, benefit from a flat tax rate of 20% on their income for ten years. Portuguese citizens, on the other hand, are subject to a progressive tax rate ranging from 14.5% to 48%. To benefit from the 20% rate, workers must work and reside in Portugal for more than 6 months per year. Pensions and income from capital investments such as dividends are excluded from the 20% rule.

According to data compiled by Reuters news agency, some 74,000 foreigners benefited from Portugal’s flat-rate tax incentive in 2022.

In October 2023, the previous Lisbon government promised to end the tax break scheme for new applicants in 2024, after blaming it for the country’s rising property prices. Portugal’s new government announced earlier this month that it plans to reintroduce the scheme.

In Spain, Portugal’s neighbour, the special tax rate for foreigners is higher, at 24%, but it is also a flat tax on all income they earn.

Italy

Paying income tax in Italy is a more complex process, whether you are an Italian citizen or a foreigner. However, the latter can claim tax benefits depending on the length of their stay in the country, their income, and the number and age of their children.

According to the Itaxa blog, which claims to explain “international tax rules in simple terms,” ​​foreigners can enjoy tax-free income of up to 90% under “optimal conditions.”

Sweden and Denmark

The two Scandinavian countries are not known for their low taxes. But here too, foreign nationals enjoy certain privileges.

In Sweden, 25 percent of gross income is tax-free for foreign workers, with the Stockholm government this year extending the tax benefit period for those earning more than €10,000 ($10,913) a month from five to seven years.

The ZEW-Leibniz Centre for European Economic Research in Mannheim, Germany, found in a study that the Swedish income tax model was “effective” in attracting skilled personnel from abroad. At the same time, it deplores the “brain drain” to their home countries, which it considers a disadvantage of this policy.

Danish citizens generally pay their income tax progressively, based on their salary. Danes in the highest tax bracket must pay up to 53% of their income to the state.

This is not the case for foreigners earning more than €10,000 per month. Their maximum tax rate is capped at 32.84% and remains the same regardless of the amount of their income. Highly qualified specialists and scientists pay even less for the first seven years of their employment in Denmark, with a tax rate of only 27% plus social security contributions.

The Netherlands

The Dutch government also wants to attract the best minds from around the world to boost the economy. The country already has what Germany is aiming for: the 30% rule, which exempts nearly a third of foreigners’ income from taxes.

The regulation aims to level the playing field between foreign employees and Dutch nationals, who can claim multiple tax credits in their tax returns, which foreigners cannot do.

Unlike Germany, the Dutch income tax system does not have tax brackets that taxpayers automatically fall into based on their income. There are minimum and maximum salary thresholds for taxation, as well as many possibilities for reducing taxable income, which makes the system difficult to understand, even for the Dutch.

Last year, the Dutch government made life a little more difficult for foreign workers by reducing some of the benefits they are entitled to under the expat tax regime.

The complexity of the Dutch income tax system shows that the aim was never to attract foreigners with financial benefits, as Germany wants. The Dutch government wants to make it easier for foreigners to move into the country for a certain period of time.

This article was originally written in German.