Digital Nomad Tax Tips: How to Stay Compliant While Working Remotely

Ouch. TAX. Not quite a sexy blog post as me smuggling myself into Yemen on a cargo ship, or running the North Pole Marathon! But alas, when that sweet digital nomad money starts to come sweeping in, you’re need to make sure there isn’t a knock on your door coming some day, where a man in a suit asks for his 40%. For the last decade! So let’s have a look at digital nomad tax:

The Debrief

As a digital nomad or remote worker, it’s important to understand your tax residency status and whether you’re creating tax obligations in the countries you visit. It’s likely that you are, so it’s crucial to plan ahead and structure your finances accordingly. Each country has its own definition of tax residency, and the popular “183 days” rule doesn’t apply everywhere.

There are at least five different ways that digital nomads can pay taxes, including paying taxes only in their home country, paying taxes both at home and locally in the countries they visit, not paying taxes anywhere, relocating their tax residency entirely, or obtaining a digital nomad visa. There are tax-efficient ways to structure your taxes, but no matter which option you choose, it’s important to check local tax laws and stay up-to-date.

To know how to run your business remotely with e-Residency and pay taxes with ease is a short-cut to avoid serious headaches in the future.

Digital nomad or remote worker?

• Digital Nomads tend to be Freelancers or Self-Employed individuals who travel the world while working remotely, focusing more on the travel aspect and moving frequently between destinations. Digital nomads have to invoice as freelancers to their clients, wheres remote workers shouldn’t.
• Remote Workers, on the other hand, are typically employees who are able to perform their work remotely, and may work from their homes or other locations for extended periods of time.

While there may be some overlap between these two groups, they have different priorities and lifestyles.

The difference between Digital Nomads and Remote Workers may have an impact on how they pay taxes. Digital Nomads may have a more complex tax situation because they may be working in multiple countries, each with their own tax laws and requirements.

Remote Workers, on the other hand, may have a simpler tax situation if they are working from a single location, but may still need to be aware of any tax implications if they move to a different jurisdiction. In either case, it’s important for individuals to understand their tax obligations and comply with local laws.

Residency For Tax Purposes

Tax residency and residency are not the same things, even though the terms are sometimes used interchangeably.

Tax residency is a concept in international tax law, while residency or domicile determines your right to live in a country.

Your residency and domicile status affect your tax liability and determine your residency for tax purposes.

You may be a citizen or hold permanent residency in one country but not be considered a tax resident there. Alternatively, you may be considered a tax resident of a country without becoming a permanent or ordinary resident there. It is possible to be a tax resident in more than one country at the same time, known as dual residency. You may be domiciled in country A, reside in country B, and still be considered a tax resident of both countries.

Residence refers to the place where you live for a certain period of time, while domicile is the place where you establish your permanent home.

Residence-based Taxation or Territorial Taxation?

It’s important to consider how your country of tax residency taxes your income. Generally, countries that tax income use one of two systems: territorial or residence-based. In the territorial system, only income earned within the country is taxed. In the residence-based system, residents are taxed on their worldwide income, while nonresidents are only taxed on local income. There are two countries (Eritrea and the United States) that tax nonresident citizens on their worldwide income.

For digital nomads, it’s important to understand where they need to pay taxes. Countries with a residence-based system of taxation usually allow for deductions or credits for taxes paid on foreign income to other countries. Additionally, many countries have signed Double Taxation Agreements (DTAs) to reduce or eliminate double taxation.

It’s important to note that each country has its own rules for determining tax residency, and it’s not as simple as the 183-day rule often cited. Therefore, it’s crucial for digital nomads to understand their tax obligations in each country they visit or reside in.

• CHECK THIS LINK FOR A LIST OF COUNTRIES AND HOW THEY TAX THEIR INCOMES

183 DAY RULE AKA half a year?

There is a misconception that digital nomads, who typically stay in one location for short periods of time, do not need to pay taxes in the countries they visit, while remote workers who stay in one location for longer periods of time do. However, this is not accurate. The 183-day rule, which suggests that you only become a tax resident of a country if you spend more than 183 days there in a year, is not always true and varies depending on the country’s tax laws.

Therefore, it is important for digital nomads to understand the tax laws of the countries they visit and potentially seek professional advice to ensure compliance.

In most countries, tax residency is determined by various indicators and not solely based on the length of time you spend living or working there. The 183 days rule is just one factor used to assess tax residency. Short stays can still trigger tax obligations if you have strong ties to the country, such as economic, social, or family connections, or a habitual abode. Other factors include where your bank accounts are located, whether you are traveling with family, and the nature of your remote work. Even if you are on a tourist visa and working during a short holiday or visit, you may still be triggering a tax obligation and working illegally. It’s important to understand the tax rules of each country you visit and seek professional advice to ensure compliance.

Compliance and Risk

Digital nomads currently operate in a grey area of the law, where there are no clear-cut solutions, and managing risks is key. Although theoretically, short-term work in a country may trigger tax obligations, it would be impractical for countries to enforce it. However, increased collaboration and information exchange between government bodies and countries mean this could change in the future.

The line is not clear on when a digital nomad becomes liable for taxes, and every situation is unique, meaning risks vary. It is important to understand the risks associated with each scenario.

Generally, where DO digital nomads pay tax then!?

There are 4 common ways nomads pay taxes:

1. PAY TAX BACK HOME

Having a fixed tax residency is a popular approach among Digital Nomads when it comes to dealing with taxes. This is considered as one of the easiest solutions for now. It is important to have a designated place to establish your tax residency and financial services such as bank accounts and credit cards. However, the downside of this approach is that you may not be paying taxes in the places where you may be creating tax obligations.

Additionally, you may still be working on tourist visas, which is illegal in most countries and can result in deportation or other penalties.

While cases like this are not very common, operating in a grey area can cause anxiety for nomads who are more concerned about not breaking the law, and can ultimately spoil the fun of traveling

2. PAY TAX BACK HOME AND LOCALLY

This approach of becoming an International Assignee is not a new one and has traditionally been used by global companies to send their employees abroad. The company would set up their employees in the new location and cover all their taxes in the country of assignment.

However, this approach is now being used more commonly by Digital Nomads who expect to stay in the host country for longer periods of time. This does not necessarily mean that they end up paying taxes in two places, as Double Taxation Agreements (DTAs) between countries can dictate where and how much tax must be paid.

3. DON’T PAY TAX ANYWHERE!

The appeal of becoming a “tax nomad” is obvious, as it offers the opportunity to save a lot of money on taxes both in one’s home country and abroad.

Theoretically, one can try to eliminate their tax residency in their home country, but this is not an easy task, especially if they are moving it to a location that does not have a center of vital interest or habitual abode.

In such cases, they may end up paying taxes based on their nationality due to various international tax agreements. While some may have successfully lived as tax nomads for years, not having a tax residency is no longer a feasible long-term strategy in the digitalized world.

4. MOVE TO A TAX EFFICIENT COUNTRY

Choosing the best setup for personal and professional affairs as a digital nomad is a complex topic that requires extensive research and often expensive tax consultations.

While there are legal and efficient ways to structure finances, the cost of working with tax advisors can be prohibitive for nomads earning moderate incomes.

Can Digital Nomads really avoid paying any tax?

In recent years, there has been a lot of talk about being a Tax Nomad, or a Perpetual Traveler, who does not have tax residency anywhere. This has been presented as a benefit of the Digital Nomad lifestyle, but is it really possible? In general, no, it is not possible.

While it may be possible to navigate this for a short period of time, such as by becoming a tax non-resident in your home country and moving frequently without spending a substantial amount of time in any one location, it is likely that this will catch up with you sooner or later. There are international tax laws and organizations, such as the Organisation for Economic Co-operation and Development (OECD), that work to reduce and eradicate tax evasion.

The easiest solution is to always be a tax resident somewhere and have tax returns to prove it.