Digital nomad tax residency: often I overhear fellow digital nomads stating they don’t have a tax residency anywhere. What they mean with this from a legal point of view can differ. Nevertheless, it’s definitely something to look deeper into as it could save you a lot of troubles down the road.
This also poses the question: do you even need a digital nomad tax residency?
How is tax residency established?
Before diving deeper into the topic, you should first understand how you establish tax residency in a country. In another article we dive deeper into the two main ways countries determine whether or not they consider you a tax resident there. Let’s give a quick recap.
The first most common way countries deem you a tax resident of their country is by looking at the amount of days you spend in the country. Most countries who apply this rule, deem you a tax resident of their country if you spend 183 days or more in the country during the year. However, different variations on this rule exist.
The second common way countries see you as a tax resident is when they consider you to have your center of vital interest in the country. For this rule, they take both your personal and economic interest into account.
While the days test is rather straightforward, the center of vital interest leaves much more room for interpretation and discussion.
Digital nomads and tax residency
If we look at the two ways countries establish tax residency we mentioned before, we could ask ourselves if these even apply to digital nomads.
Days rule: not for digital nomads?
A lot of us might not stay more than 183 days in a row in one country over a one year period due to which this rule doesn’t apply.
Center of vital interest: also not applicable?
Even if we look at the center of vital interest, most nomads won’t have a close link with the different countries they are living in. They won’t own real estate there, they’ll only have temporarily memberships to coworkings, gyms etc.
However, as mentioned before, this second method of determining tax residency is much more open to interpretation and discussion. Therefore, the local tax authorities could grasp every small link you have with the country to plead you are a tax resident there. This will differ from one country to another and depends on how strict they apply their rules.
This brings us to the initial statement I often hear of fellow digital nomads that they don’t have a tax residency.
Tax residency: not applicable to digital nomads?
When fellow nomads state they don’t have tax residency, this could mean two things.
Your opinion on digital nomad tax residency
The first is that they don’t consider themselves a tax resident in any country and therefore don’t file tax returns in any country. Consequently, they’ll of course don’t pay any taxes in any country. The question is, however, always if this is also in accordance with local tax regulations of the countries they visit.
The tax man’s opinion on digital nomad tax residency
This brings us to the other interpretation of this statement. The local tax authorities of the countries you have a link with don’t consider you a tax resident in accordance with local laws.
The nuance between both statements is small but of major importance. To state it boldly, what you think of your tax status isn’t important if the legislation leaves room for interpretation or discussion in favour of the tax authorities.
What to look out for with digital nomad tax residency?
This brings us again to the days test and the center of vital interests.
As we discussed before, the days test is rather simple: you just need to count the days you are in the country. You could discuss whether or not your day of arrival and departure should be included in the calculation – which, by the way, differs for each country – but apart from that, it’s simple math.
For the center of vital interests, it’s a lot harder to assess if you are considered a tax resident somewhere. Most of the time you’ll only find out when the local tax authorities are on your tail.
The solution: digital nomad tax residency
For the above reasons, I always recommend to not leave your tax status in a country up to faith or the goodwill of the local tax man. The best way to scare of tax authorities is to proactively claim digital nomad tax residency in a country. Preferably in some country with a tax regime that is favourable for your situation.
It’s even better if this is a country which has double tax treaties with a lot of other countries. These double tax treaties set out the rules between countries when they both claim taxes from you and limits their capacity to tax you. The reason countries close such treaties is – as their name suggests – to avoid double taxation of the same income.
The one exemption
There is only one exemption when you could opt not to proactively setup your tax residency somewhere. This is when you only spent time in places based on the digital nomad visas they offer where your tax status is explicitly arranged by that visa as well.
There are numerous digital nomad visas which exclude the applicants from taxes within the country. Other digital nomad visas will have a specific (favourable) tax treatment linked to them for the time you’re residing in the country on that visa.
If you’re planning to go this route, you should be sure to adhere to all rules that come with it and it might limit your flexibility.
Conclusion on digital nomad tax residency
As a conclusion, I want to state that I do think that you do need digital nomad tax residency somewhere to proactively protect you as a digital nomad to claims from tax authorities around the world. If you have to confess you don’t pay taxes anywhere, they’ll be very interest in your case.
Nevertheless, everything depends on your personal circumstances and your risk appetite. If you are not bothered by the fact that sooner or later some tax authorities start claiming taxes from you, that’s fine. If you want to take matters in your own hands and pick yourself where to establish tax residency that might cost you some money in taxes but will probably benefit you in the future.