EU countries offering tax relief to foreign skilled workers

The measure proposed by the German government under its new so-called growth initiative last week envisages tax incentives of 30%, 20% and 10% for skilled people from abroad who are willing to take up jobs in Germany. This means their taxable income will be lowered by these percentages in the first three years of employment. However, there will be minimum and maximum gross salary limits for the tax credits which have yet to be defined.

The measure, which is planned to be reviewed after five years, has drawn strong criticism from German labor unions who've dismissed the plan as "two-class taxation." Supporters believe though it'll make the German job market more financially attractive to foreigners.

Economy Minister Robert Habeck told German business daily Handelsblatt that skilled workers prefer countries with better tax conditions, such as the Scandinavian nations, and that it's "worth trying to attract people to Germany this way."

A 2018 study commissioned the German parliament shows that at the time 15 EU countries had enacted regulation favoring foreigners with tax incentives. Among them were the Netherlands, Greece, Croatia, Cyprus, Italy, Spain, and Portugal.

Portugal and Spain

Portugal has been giving tax incentives to foreigners since 2009 under a policy to attract skilled workers and overcome Portugal's debt crisis and boost productivity.

High-income individuals and freelance workers — who can work from anywhere in the world basically — are enjoying, for example, a flat tax rate of 20% on their income for ten years. Portuguese citizens, by contrast, are subject to a progressive tax rate of between 14.5% and 48%. To qualify for the 20% rate, workers must work and life 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 news agency Reuters, some 74,000 foreigners benefited from Portugal's flat-tax incentive in 2022.

In October 2023, the previous government in Lisbon promised to close the scheme for tax breaks for new applicants in 2024 after it was blamed for higher property prices in the country. The new Portuguese government said earlier this month that it plans to reintroduce the scheme.

In Portugal's neighbor, Spain, the special foreigner-tax rate is higher with 24% but also comes as a flat tax on all income they earn.

Italy

Paying income tax in Italy is a more complex undertaking, no matter if you are an Italian or a foreign citizen. The latter, however, can claim some tax breaks depending on how long they have lived in the country, how much they earn, as well as the number and age of their children.

According to the Itaxa blogpost that claims to explain "international taxation 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 exactly know for low taxes. But there too, foreign nationals enjoy some privileges.

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

The ZEW-Leibniz Center for European Economic Research in Mannheim, Germany, has found in a study that Sweden's income-tax model was "effective" in attracting skilled personnel from abroad. At the same time, it bemoaned the "brain drain of talent in their countries of origin" as a downside of the policy.

Danish citizens usually pay their income tax on a progressive basis according to their salaries. Danes in the highest tax bracket need to hand over up to 53% of their income to the state.

Not so for foreigners earning more than €10,000 a month. Their top tax rate is capped at 32.84% and remains there regardless of how much more they earn. Highly qualified specialists and scientist pay even less during the first seven years of their employment in Denmark, with a tax rate of just 27% plus social insurance contributions.

The Netherlands

The Dutch government is also keen on attracting the best brains from all over the world to boost the economy. The country already has what Germany is aiming for – the 30% rule setting almost a third of foreigners' income tax-free.

The regulation is intended to level the playing field between foreign employees and Dutch nationals who can claim multiple tax credits in their income statements that foreigners cannot.

Unlike in Germany, the Dutch income-tax system doesn't have tax brackets into which people fall automatically according to their income. There are minimum and maximum salary thresholds for taxation, and numerous possibilities for reducing taxable income which make the system difficult to understand even for the Dutch.

Last year, the Dutch government made life a little harder for foreign workers reducing some of the benefits they can claim under the so-called Expat Tax Regime.

The complexity of the Dutch income-tax system shows that it was never intended to attract foreigners with financial benefits, which is what Germany wants. What the Dutch government wants is to ease the transition of foreigners in the country for a certain period of time.

This article was originally written in German.