How Taxes Work When You Retire Abroad
Understanding the basics before you talk to a professional
I got my first real paycheck in Germany in November 2014.
I was 26, fresh out of university, working at a consulting firm in Frankfurt.
My salary looked decent on paper.
Then I saw what actually landed in my bank account.
About half my salary was gone.
I read things on the paycheck such as:
Income tax.
Church tax.
Health insurance.
Solidarity surcharge.
Pension contributions.
And I wondered, why did we not talk about those terms in school? Or university? What do they mean, and why am I paying them? And why in those exact percentages?
That moment turned me into a “tax nerd”.
I started reading tax codes.
When I moved abroad in 2020, I learned how different countries handle all sorts of money flows.
And once I started this topic at dinner conversations, I realized most people have no idea how any of this works.
No abroad, but also not at home.
And that is by design.
Tax systems are designed to confuse you.
To not ask questions, but get so overwhelmed, that you simply hand them over to a professional.
And if you are reading my newsletter, you’re probably thinking about retiring abroad.
And now, someone mentions another tax system on top of your US obligations.
I can understand, how this alone makes you rethink retiring abroad entirely.
But I won’t let that happen.
Which is why we are taking a “first step toward clarity” today.
And at the end, as always, there will be practical advice.
After reading this article, you will understand taxes abroad better than 99% of people I speak to on a regular basis.
In this article:
The five tax systems countries use (and what each means for you)
Why different income types get treated differently
What tax treaties actually do (and what they don’t)
A simple way to think about taxes when choosing where to retire
One thing before we continue:
I am not a CPA.
I am not a tax advisor.
I am not licensed to give financial advice in any country.
What I am:
Someone who has lived in seven countries, holds five active residencies, and has spent way too much time reading tax codes that normal people avoid.
This article is about clarity.
About understanding concepts and knowing what questions to ask before you sit down with a professional.
Do not make any tax decisions based on what you read here.
Talk to someone who is licensed to help you with your specific situation.
The 5 Tax Systems
Tax professionals might slice this differently.
Some would say there are three core systems, with variations.
Others would argue there are even more than 5.
For our purposes, five categories cover what you need to know.
What matters is understanding which category the country you’re considering falls into, and how that affects your income.
Once you know that, you can start asking the right questions.
1. Citizenship-Based Taxation (“Always Taxed” No Matter Where You Live)
Two countries on Earth tax based on citizenship:
The United States and Eritrea.
If you hold a US passport, you owe taxes to the IRS on your worldwide income, no matter where you live.
Even if you spend 20 years in Portugal without setting foot in America.
You can reduce what you owe through the Foreign Earned Income Exclusion (FEIE), which lets you exclude a 6-figure amount every year, but that’s about it.
And of course, you can also claim Foreign Tax Credits for taxes paid abroad.
But you cannot stop filing.
The only way out is to renounce your citizenship, which comes with its own tax consequences (the exit tax) and is a decision that cannot be undone.
Takeaway: If you are American, you file with the IRS for life.
2. Residence-Based Taxation (Worldwide Income Taxed Based on Where You Reside)
Over 130 countries use this system.
Most of Europe, Canada, Australia, Japan, and some countries in Latin America fall into this category.
The rule:
If you become a tax resident, you owe taxes on your worldwide income (in principle).
That includes income earned outside that country.
US pension, rental income, dividends from a brokerage account. But what you actually owe depends on the type of income and whether a tax treaty changes the treatment.
We’ll get to treaties later (this can get quite complicated).
But what we can remember so far is the term “tax resident”.
So, how do you become a tax resident?
Usually by spending 183 days or more in a country within a calendar year.
However, some countries have stricter rules that “days spent in the country”.
Portugal and Spain look at where your “center of life” is.
If your spouse lives there, or your kids go to school there, you might become a tax resident even without the 183 days.
Tax rates vary and can go up to 40%+ (e.g. Portugal, Spain, Germany).
These are among the highest in the world.
And yes, they are progressive, meaning you’re not paying those rates on every single dollar.
Some countries within this system offer special regimes that reduce the burden:
Greece has a flat 7% tax on foreign pension income for retirees.
Italy has a similar program, for people willing to relocate to a small Italian town.
Malta has programs for non-doms.
Spain has the “Beckham Law” for certain workers.
These regimes are there to attract people for retirement (or living off independed means before retirement).
But those regimes can also change.
Portugal’s NHR program, which offered a 10% flat tax on pensions, ended in 2024.
If you are planning around a special regime, understand it could disappear whenever the government “feels like it”.
Takeaway: In residence-based countries, you pay tax on everything you earn, everywhere. Look for special regimes, but do not depend on them lasting forever.
3. Territorial Taxation (Only Taxed If You “Earn Within Borders”)
Around 40 countries use this system.
Panama, Paraguay, Costa Rica and Malaysia are among them.
The rule:
Pay tax on income earned inside that country, while foreign income stays untaxed.
To give an example:
If you live in Panama and collect Social Security from the US, Panama does not tax it.
If you have rental income from a property in Florida, Panama does not tax it.
If your brokerage account in New York generates dividends, Panama does not tax it.
The only income Panama cares about is income generated inside Panama.
For retirees with US-based income streams, this can be very attractive.
Once you establish residency, you pay local taxes only on local income (which may be zero if you have no Panamanian clients or businesses), and your US income flows in without a second tax layer.
But remember from earlier:
You are still American.
Territorial taxation abroad means you avoid adding a second layer of tax on top of your US obligations.
Which means you are not paying less than you would in the US.
You are paying the same to the US, and nothing extra to the country you moved to.
Takeaway: Territorial countries only tax local income. If your income comes from abroad, you may owe nothing locally (exceptions apply).
If you are between 50-75 and want to emigrate within the next 0-5 years, and don’t want to navigate healthcare, banking, visas, taxes and country selection by yourself, reply to this mail with “RETIRE”.
You’ll get a private invite to the “Retire Abroad Priority List” with some of my best tactics for retiring abroad.
4. Non-Dom And Remittance-Based Taxation (Taxed When You “Bring It In”)
A tax professional would classify these countries as residence-based systems.
Technically, they are.
The UK, Cyprus, Malta, and Ireland all tax residents on worldwide income in principle.
But they offer a carve-out for people who are “non-domiciled.”
I’m showing this as a separate category because understanding it will help you see options that pure residence-based countries do not offer.
So what is “domicile”?
Domicile is different from residence.
Residence is about where you live now.
Domicile is about where you permanently belong, your long-term home, your roots.
You can be a resident of one country while being domiciled in another.
Each country defines domicile differently:
In Cyprus, you are considered non-domiciled if you were not born there and have not lived there for 17 of the last 20 years. You can benefit from non-dom status for up to 17 years.
In Malta, domicile is based on your domicile of origin (typically where your father was domiciled when you were born). There is no time limit and you can maintain non-dom status indefinitely (or until Malta changes the program).
In Ireland, domicile works similarly to Malta. Your domicile of origin follows you unless you take deliberate steps to change it.
If you qualify as non-domiciled, you can choose to be taxed only on income you bring into the country, while foreign income that stays outside remains untaxed.
This is called “remittance-based taxation”.
Let’s make Malta’s system more tangible, since it is the clearest example of remittance-based taxation.