A reader asks:
I am a freelancer working largely through agencies. I am retired and a US citizen, and I currently live in Vietnam. I am considering relocating to Europe – more specifically, France – and I am uncertain what the tax consequences would be. Currently I do not pay taxes to anybody except the USA, I am not paid directly in Vietnam for any work I do and none of my agency contacts are in Vietnam. My suspicion is that if I were to relocate to France I would have to pay French taxes on my work (and perhaps charge VAT) even though none of my clients are French and I am paid for all my work by transfer to accounts in the USA or Thailand currently.
I should say that I’m not an international tax expert, and I don’t live in the EU, so I’m mostly looking for input from other readers here. I have investigated freelancing in Switzerland since my husband is a Swiss citizen, but that’s a different situation since Switzerland is a member of the Schengen Area but not the EU. It seems to me that freelancers who want to do the location-independent thing for a while (and why not…it’s a huge advantage of our profession) have a few issues to think about:
- Immigration/visa requirements
- Tax requirements
- Getting paid
So let’s have at it! Readers, I’m looking to you for tips, so please add them in the comments.
Immigration/visa: this reader didn’t mention whether he’s a citizen of any EU/Schengen Area country, but let’s assume not. If you’re a US-only citizen, you’ll need to figure out how to legally stay for more than 90 days in the EU (after which, on a US passport at least, you have to leave for at least 90 days before you can re-enter). Here’s a post from Nomadic Matt that gives a good summary of the situation and your options. There are EU countries that issue long-stay tourist visas (I know two freelancers currently using that option: one in Spain and one in Italy), but it’s a long process to apply for one, and many countries will require that you have a significant amount of money in savings and that you waive your right to work while you’re there. It’s also a little unclear whether you’re considered to be “working” if, for example, you’re freelancing for clients in the US but living in France? More on that later…
Out-of-the-box options that might be worth investigating: The Savvy Backpacker has a full rundown of these, which may be more or less appealing depending on your financial resources and risk tolerance. Apparently, Germany has a freelancer visa that you can apply for in Germany, as opposed to other countries’ long-stay visas that you must apply for in your home country. If you have even a moderate interest in being a full-time student, you could investigate the student visa requirements for the country where you’d like to stay. There are also ethically dubious, but probably often-used, ways to stay in the EU: finding an inexpensive university program and paying the tuition in order to get a student visa, but never attending classes (or attending only on the first day so that there’s some record that you attended; overstaying your tourist visa, hoping you don’t get arrested for anything, leaving the EU over land or on a ferry (where you’re less likely to have your passport checked), and then flying out of a non-EU country. Not recommended, although many people probably do pursue those options.
Taxes:
Here I’ll have to defer to readers who know more about this than I do. Do not take any of this advice as reliable: always consult an attorney or tax professional before you make any decisions about taxes. Short version: it’s complicated. Basically, if you’re a US citizen, you probably have to file US taxes no matter where you live or earn money. This is unusual: I’ve even seen claims that only the US and Eritrea require non-resident citizens to pay tax on the income they earn while living abroad.
However, there is a substantial (up to $99,200 for the 2014 tax year) exclusion for *earned* income (not pensions, interest, capital gains, etc.). Note that this applies only if you meet the definition of “living outside the US”: currently, you must live outside the US for at least 330 days in the calendar year, not just for a majority of the year. I’m also not clear on whether that exclusion applies to income earned from US clients, because it’s called a “foreign income exclusion.” Here’s an article from The Freelancers Union that touches on some of those issues. Whether freelance work performed in a foreign country for a US client would be considered US-sourced or foreign-sourced, I’m not really sure.
Depending on where you live, you may also have to pay taxes in your country of residence. Here’s the IRS web page for US citizens and resident aliens abroad, and here’s the introduction to taxes abroad page from the American Citizens Abroad organization. Whether you have to pay in-country income tax depends on the US tax treaty with the country where you live. To answer our reader’s question, my impression (see disclaimer above) is that a US citizen in France would have to file a tax return in both the US and France, and pay French tax at least on his/her French-sourced income. Our reader comments that he doesn’t have any clients in France, so this might not be an issue for him.
To address the VAT issue: again, it’s complicated, not least of all because EU-based clients seem to have differing views on paying VAT on non-EU translators’ work. For example, many of my clients have told me that it’s financially advantageous for them to use non-EU translators because translation services procured outside the EU aren’t subject to VAT. But then, other translators have told me that that’s completely false, and that any translation service that an EU client pays for is subject to VAT. No clear answer there, unfortunately. Readers, I’m counting on you for some insights!
Getting paid
If you live abroad, it’s worth thinking about how your clients will pay you: not least of all because the payment method may affect your immigration status (complicated enough for you yet?). For example, if you’re a US citizen living in France, but with no French clients, and all of your clients are paying into your US bank account, it seems that you could make a reasonable argument that you’re not “working on the local economy.” But if you do have French clients and they’re paying into a French bank account, it might be hard to make that same argument. I think that it’s ethically fairly straightforward if your clients are in the US and paying into a US bank account; it’s less straightforward if you have clients in the country where you live. For example if you direct those in-country clients to pay into your US account, that might look fishy (tax evasion) if the in-country tax authorities investigate you.
The bottom line
Like lots of other things in life, this whole process is easier if you have a significant savings cushion. If you have enough money in savings or enough income from other sources (retirement accounts, investments, etc.) that you can present yourself as not needing to work in order to pay your basic living expenses, you have a much better chance of getting a long-stay tourist visa from an EU country. If you have all of your clients pay into your US bank account, with no income funneled through the EU country and no EU-based bank accounts, and you pay US taxes on what you earn, the chances are probably slim that you’ll run into trouble. The situation gets more complicated if a) you’re dependent on your freelance income to support yourself (as most of us are!) and/or b) you have clients in the country where you’re hoping to live.
I’m sure that there are some social/cultural factors at work as well. For example in our reader’s case, the fact that he’s retired from another career is probably a plus: he has an ostensible source of income in the form of personal savings, Social Security or a pension. I’d say that in the EU, it’s also more common for people to completely retire in their 60s, so people probably won’t wonder how our reader supports himself; that situation would be different for a younger person and certainly for a family. So, lots to think about here!
Readers, over to you (help!).
The case of the person who asked the question is not really that complicated (if you don’t mind wading through tax treaties). The main question is where are they going to be a resident for tax purposes: here the person is considering France. And in France, if you are fiscally resident (i.e. you live there for most of the year) then you most declare all of your earnings (worldwide) in France.
The bilateral tax agreement between France and the US (http://www.impots.gouv.fr/portal/deploiement/p1/fichedescriptive_1835/fichedescriptive_1835.pdf in French) suggests that most freelancers (read practically everyone) have to declare their overseas earnings in their country of residence (an exception is if you perform the work exclusively outside of your country of residence, something not many translators do, but which could apply to some interpreters…).
Should there be double taxation? It can happen, but unless the system messes up you won’t pay any more than you would in the country with the highest tax rate amongst those countries concerned 🙂
VAT should be a non-issue: companies might have to collect it, but they never pay it like a consumer (they can claim the VAT back), unless they are unregistered (micro)companies (think of a translator who also acts as a mini-agency). And if the cash flow (treasury) situation of the company is so bad that VAT causes them a problem, then they might have other more pressing concerns to deal with…
As you say, the best advice for this person is to get advice on their exact situation from either a tax adviser in the country they’ll be moving to, or from the tax authorities of that country. As the person lives in Vietnam, they could also try contacting the French embassy there for info on French tax law and how it might affect them if they move to France.
Thanks Duncan! Good point about the double taxation: definitely something to investigate!!
Corinne, my congratulations on an excellent and complete reply to the reader’s question. I am in his situation, living in Italy on an elective residence visa. I used my two pensions and Social Security to qualify for the visa, with no mention of translation income or the investment returns on my life savings. Because I am forbidden to work in Italy, I am in the happy situation of never having to file an income tax return in the EU. It actually makes my situation simpler. The key reason is that my business is incorporated, and is therefore a separate legal person from myself. I left the business behind in Virginia, my customers have no dealings with me directly, and all of the banking, invoices, estimates, etc., etc. take place in the United States. Obviously, the business is ex-EU, and therefore VAT is irrelevant. One change I have had to accommodate is that I can no longer take interpreting assignments, unless someone is willing to fly me outside Italy for the gig; interpreting requires physical performance on site.
Disclaimer: I am neither a tax attorney nor an immigration lawyer, and my situation applies only to Italy. I know that France has different, though similar, immigration requirements. Anyone contemplating doing what I’m doing should read the fine print very carefully, and be prepared to make two or more visits to the consulate, because there may be questions that come up that no amount of research would prepare you for.
As you correctly inferred, I do not need to “domiciliate” my translation income to get by. Keeping all the money flow in my American accounts further protects me from the appearance of earning money in Europe. I have not yet set up a European bank account or a European credit card. My credit union charges very little for the foreign transaction fees. I don’t know yet, but they may prove less than the infamously onerous banking fees in Italy.
My EUR0.02 worth. IHTH.
SR&T, Jonathan
Thanks Jonathan! I was hoping you’d write in! That’s great to know how you’re handling it, and maybe our reader is in a similar situation! Smooth roads and tailwinds 🙂
Hello Corinne and US freelancer thinking of moving to France,
That is a complicated question and Corinne, you’re very brave to try and answer it!
I’m not a lawyer either nor a tax adviser but as far as I know, in France, the tax authorities will consider where the service is rendered (ie where you are established as a freelancer, in your example in France) to determine the origin/country source of income, not the country in which the client is established nor the exact spot where you were when you delivered the translation.
So I think if you live and work in France, as a freelance translator, all your income derived from your work is deemed to be of French provenance regardless of the provenance of the funds used to pay you.
And also, important point about taxation in France: there are two types of taxes for freelancers, income tax for which there is, I think, a tax treaty with the USA to avoid double-taxation, and social security and national health insurance contributions which amount to a significant proportion of your profits as a freelancer (up to 49% when I left France 7 years ago. And no, I’m not making this up http://www.guide-tns.fr/simulateurs/chargesprofessionnelliberal.html ).
One last thing: I don’t think that membership of the Schengen area is important for tax and right to work matters. The Schengen zone deals more with freedom of movement than with freedom to work and trade.
Good luck!
Sandra
Thanks Sandra! That’s great information! On the Schengen issue, I was thinking of it more for immigration purposes: for example my husband’s a Swiss citizen and he can work in the EU without a work visa, or stay indefinitely as a “tourist.” Thanks for your response.
Hi Corinne, I’ll just stick to the tax issues, if that’s OK with you!
First, let’s lay the VAT myth to rest for once and for all. I would be cautious about working for any client in the EU who claims that non-EU translators are “cheaper” because they don’t charge VAT, as it’s probably the case that those clients don’t understand much about business and finance. Not a good sign!
“Third country” suppliers (meaning translators outside the EU) are not “cheaper” for EU-based clients because the translators don’t charge VAT on the face of their invoices. In fact, the EU-based clients themselves have to “charge” VAT on those supplier invoices in their VAT returns, but they can reclaim the same amount as input tax, provided certain formal criteria are met.
Essentially it’s no different to the treatment of EU-based suppliers who are not registered for VAT. And for EU-suppliers who are registered for VAT, the only major difference is that the VAT (“output tax”) they charge (which is “input tax” for the clients) is actually remitted by the clients to the suppliers (who in turn have to pay it to the taxation authority after deducting their own input tax). As somebody who buys translations from VAT-registered and non-VAT registered (including third country) suppliers, I can actually say that paying VAT involves less administrative effort than having to do all the paperwork for translators who don’t charge VAT. And if anybody in the US complains about how complicated VAT seems to be, please remember that it’s actually (originally) an American invention!
Second, the case of the translator currently residing in Vietnam. It’s worth bearing in mind that personal income tax is generally a matter of residence, so unless you’re so super-rich that you can afford to strike a personal deal with the taxation authorities (think of “non-doms” in the UK), you are going to be liable for income tax wherever you are a permanent resident (and also possibly in other countries as well if you have non-permanent residence elsewhere, but that’s another story), at least if you’re living in major western economy.
If the asker moves to France and is registered there as a resident, his worldwide income will normally be subject to French income tax. Of course there will be some deductions and allowances, but basically the fact that he only has foreign-source business income shouldn’t really affect his liability for taxation in France. And US income tax will kick in above the threshold you already mentioned.
Additionally, he’s going to have to pay various potentially unpleasant social security taxes and similar levies on top of his income tax, and (as a resident of Germany) I can only say I’m full of admiration for anybody who voluntarily moves their tax residence to France (Germany is almost a tax haven by comparison if you’re a freelance translator).
None of the above comments may be relied on in any shape or form, of course, and they should not be construed as constituting legal or tax advice. The asker is really going to have to consult an expert in the field, and my experience is that they are few and far between, and cost rather a lot of money. But spending that money could save a whole lot more in subsequent fines, penalties, back-taxes, etc. BTW, I presume that “Jonathan” has a really good lawyer, because I have a sneaking suspicion that what he’s doing might not regarded particularly favorably by the taxation authorities in countries other than Italy (in particular France, Germany, the UK, etc.).
This is all very useful information for me, as I am considering the European option. One sticking point seems to be the question of health insurance, and I’d be interested to hear any opinions specifically related to this.
It looks as if it is a general rule for any non-EU citizen seeking to live in EU countries that they purchase health insurance. This is not a negligible expense, especially if (like me) you are over 60 years old – it looks as if it is in the realm of 6-8000 euros a year for full coverage per person, so double that for my wife and me. It would be interesting to speculate if it would not be more cost effective to pay taxes and social fees to the local government and get on their national health plan – the question is, how would one get in a position to do that? I suppose purchasing property in the country is an option, and I’m not opposed to that in principle, but does anybody have any specific experience with that?
Alternatively, it would be theoretically possible to pay as you go for health care if the costs are not horrendous for this (in the USA they are horrendous), but apparently this is illegal, at least in France or Germany – it appears that all people, resident or not, must have health insurance if they are in country on a visa. I can’t tell if this applies in other EU countries. Does anybody know? While I am interested in France I am not locked in to the idea, and other countries are also options.
I can only speak for Germany and the UK as far as health insurance is concerned, as each European country (EU and non-EU) has its own rules and arrangements for health insurance and there are no general rules applying across all EU countries.
Health insurance is (now) compulsory in Germany. If you are not employed, you have the option to go private (the same applies to wage-earners who earn considerably more than the average), but the older you get, the more expensive that will become. So if you’re moving to Germany and you’re over 60, you will most likely want to join one of the public healthcare insurance plans (with e.g. top-up private insurance, especially for things like dental and eyecare). The cost of that public healthcare insurance plans is tied to income, but with an upper limit.
But to give you an example, my private healthcare plan in Germany (I’m in my late 50s) currently costs about EUR 7,000 a year, of which about EUR 6,000 is tax-deductible. It covers most costs, including all hospital costs, and there’s no upper limit (that would be unlawful here anyway), though there is an annual deductible equivalent to about one month’s premium.
In the UK, all (legal) residents are automatically covered by the National Health Service, which is primarily taxpayer-funded (with relatively modest contributions by employed and self-employed persons). If you can, you will most likely want to take out top-up insurance for a whole range of treatments.
You asked about pay-as-you-go. It’s not an option in Germany (or UK), as explained above, but I do know from the bills I send on to my insurer that treatments, especially anything involving things like MRI and other scans, as well as surgical procedures, cost about 20-30% of their equivalent in the US (and the quality of treatment is often considerably higher).
@Palomnik
As Robin said, each EU country has their own rule for health insurance.
In France, if you work in a salaried job or self-employed, compulsory national health insurance (called Sécurité Sociale), state pension and welfare contributions are part of the taxes and contributions taken on your income. These contributions amount to a significant proportion of your income (see my comment above).
There is no opt-out.
This offers quite good cover for medical costs, except dental and eyecare, for which the cover is notoriously rubbish.
To cover what is not covered by the state health insurance, you can have top-up private medical insurance, commonly called a “mutuelle” and usually tied to the industry/public sector you’re working in or negotiated by your employer.
For example, for translators, the Société Française des Traducteurs has, I think, negotiated rates with a freelancer mutuelle for its members.
For most mutuelles, premiums get more expensive the older you are.
If you aren’t employed nor self-employed, the scenario is different..
Students pay a lump sum at the beginning of each school year to have a state health insurance cover. This is compulsory but the amount isn’t too high (not sure how much it is nowadays but family members who are currently at university don’t complain about that particular cost).
I’m not sure how it works for retired people who aren’t on a French pension plan and generally people who don’t work, aren’t students nor claim unemployment benefits under the French welfare system.
As far as I know, purchasing property in France won’t open you rights to the Sécurité Sociale.
In any case, if you work, as a freelancer presumably in your case, I think you have no choice in the matter: you have to pay the compulsory taxes and contributions and that will get you on the state health insurance. You’d have to check but I believe your wife would be covered too at no additional cost, as long as she doesn’t work. If she does, then she would pay the contributions from her income.
I hope this helps.
Good luck with your expatriation project.
Sandra
Hi! I’m an American translator living in Mexico, and I just wanted to comment on something you said regarding paying US taxes abroad… I recently filed my taxes with an accountant (first time) and was informed that my income as a translator wasn’t “earned income” because I’m a freelancer and don’t have an employment relationship, and therefore I’m not entitled to the exclusion. In order to benefit from the exclusion, I would have to incorporate and pay myself a salary. All my income (regardless of whether it is from a US company or a Mexican one) is taxed at 15.3% self employment tax in addition to normal income taxes, and on top of that, I have to pay Mexican taxes on any work for Mexican clients down here. The complicated and crappy tax situation is part of why I’m intending to move back to the US. Have I been wrongly informed?
thanks,
matt
Thanks Matt! This does sound like a complicated situation; maybe other expat freelancers can weigh in? It’s hard when you deal with accounting issues that aren’t black and white: for example in terms of deducting general-purpose trips to your source/target language country, my accountant says it’s OK to deduct one trip a year, some accountants say you can deduct as many as you want (and argue that they’re required in order to keep up your language skills), and some accountants won’t deduct anything that’s not 100% work-related. In your case, I’d say that a) incorporating isn’t that difficult, depending on the state that you live in, but the benefits versus the costs depend on how much you earn, and b) double-taxation is definitely something to avoid…hopefully some other readers will chime in here!