Digital nomad tax residency is one of the most popular topics if we speak about taxes for digital nomads.
Do I even need a tax residency?
If so, where do I best have my tax residency? And, how do I set this up?
How do I avoid becoming a tax resident in other countries?
All valid questions at which we’ll have a look at in this article.
What Exactly is a Digital Nomad Tax Residency?
A digital nomad tax residency in itself is no different than a tax residency for any other person. Nomads are subject to the rules regarding tax residency as everyone.
However, because of the specific lifestyle of digital nomads applying these standard rules sometimes pose challenges. But with these challenges also come opportunities.
We’ll have a look at the rules that define digital nomad tax residency and how to use them to your advantage.
Rules that Define the Tax Residency of Digital Nomads
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
Many nomads I speak to always tell me ‘I don’t spend more than 183 in one country’. That’s the typical example when we are talking about the days rule or day test.
Many countries apply the rule that if you spend more than 183 days there, you become a tax resident. However, some countries have different threshold.
In Thailand, for example, the threshold is 180 days. While you can become a tax resident of Cyprus with just spending 60 days there.
Other countries even look at the amount of days spend over a few years. Ireland and South Africa are such examples.
Once you know the rules a country applies, 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.
Overall, it depends on your lifestyle if this test applies to you or not. If you travel rather fast, there should be no issue.
Center of vital interest
With the center of vital interest we look at different ties to countries than just spending time there. For example, owning a place or renting something long term, having your business setup there, bank account and other investments, etc.
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 rent something for a rather short term and only have temporarily memberships to coworkings, gyms etc.
However, 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. This will differ from one country to another and depends on how strict they apply their rules.
Therefore, for the center of vital interests, it’s a lot harder to assess if you are considered a tax resident compared to with the days test. Most of the time you’ll only find out when the local tax authorities are on your tail.
Tax Residency vs Digital Nomad Visas: What You Need to Know
I get more and more questions about the impact of digital nomad visas on one’s tax residency.
More and more countries launch digital nomad visas and you could use them to your advantage in the setup of your digital nomad tax residency.
However, first I want to remark that each digital nomad visa is different. Therefore, you need to assess the conditions and (tax) consequences on an individual basis. Depending on the time you spend in a country based on the digital nomad visa or the links you create, you can become a tax resident in those countries.
Luckily, there are many digital nomad visas that offer tax benefits or even totally exempt you from tax. Recently, I made a list of 22 tax free digital nomad visas. Yet, some of those come with the condition that they only exempt you from tax if you keep paying to your home country. Hence, not paying in one country doesn’t necessary mean you’ll be tax free overall.
Nevertheless, there are also many countries who don’t have such requirement. You can use their digital nomad visa to get access to the country and live a tax free life.
Some countries offer a solution in the middle whereby you can start paying taxes to them but at beneficial rates. Recently, Malta clarified their advantageous tax rules for digital nomads.
What Should You Look for When Choosing your 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 off tax authorities is to proactively claim digital nomad tax residency in a country. Preferably in some country with a tax regime that is favorable 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 (1).
Furthermore, you want to make sure that the requirements to become a tax resident fit your lifestyle. Although Thailand offers attractive tax benefits, this won’t suit you if you don’t want to live there for six months per year.
Bonus: Best Countries for Establishing your Digital Nomad Tax Residency
I’ll share with you some countries in which many digital nomads setup their digital nomad tax residency. Ideally, these are countries where you don’t need to spend six months every year to be considered tax resident. In this way, you keep your freedom to travel around.
For each of those countries, I’ll share the most important attention points with you. Furthermore, I’ll share with you a link to dedicated articles in case you want to learn out more. I’ll list them in alphabetical order as one is not necessarily better than the other.
Bulgaria
The first country we’ll discuss is Bulgaria. You’ll find some information below. However, if you want to have the full details you can check this article on tax residency in Bulgaria. In Bulgaria it can be both interesting to register yourself as a freelancer or to setup a company there.
- Tax residency: have your central of vital interests in the country or spend 183 days
- Personal income tax: 10%
- Freelancer can get a lump sum cost deduction of 25% bringing the actual tax rate at 7,5%
- Social contributions (freelancer): maximum ~€530/month
- Corporate income tax: 10%
- Withholding / dividend tax: 5%
Czech Republic
The Czech Republic is another European country on the list. You will only want to pick it to establish digital nomad tax residency by registering as a freelancer. Setting up a company is not interesting. For all the details, I refer you again to my dedicated article on tax residency in the Czech Republic.
- Tax residency: have your central of vital interests in the country or spend 183 days
- Personal income tax: progressive tax rates up to 23%
- Specific regime for freelancers whereby you get a lump sum cost deduction of 60% up to an income of ~€85.000 per year
- This results in a total tax rate (income tax plus social contributions) of around 13% for an income up to €85.000 per year. Above this threshold, you’re tax rate starts to increase slowly. Someone with an income of €120.000 per year would pay around 20%.
Cyprus
Cyprus offers a special regime for digital nomads who want to become a tax residency there by setting up a company locally. We’ll focus on this setup but if you can learn more about tax residency in Cyprus.
- Tax residency: spend 60 days in the country (and meet additional conditions)
- Personal income tax: first €19.500 are exempted, progressive rates after that
- Social contributions: employer pays 12% and employee 14%
- Corporate income tax: 12,50%
- Withholding / dividend tax: 2,5% (technically this is a social contribution but it is due on dividend payments)
Paraguay
Paraguay is getting popular with many nomads to setup their tax residency. The reason is that it offers flexible rules to become a tax resident and applies a territorial tax regime. You can read the details about tax residency in Paraguay here.
- Tax residency: you can apply to become a tax resident if you have a residency permit. In order to keep your residency permit active, you need to visit the country once a year.
- Personal income tax: 10%. However, this only applies on local income. With the right setup, your income can remain tax free.
- Social contributions: not applicable if you don’t have local income
Let me Create the Best Tax Setup for You
If you are reading this and already know me, you know I am a digital nomad myself. I come from a tax background working in international taxation for years before becoming a digital nomad tax advisor.
Therefore, I cannot only relate to your struggles from my personal experience. But, I can also help you to find solutions bases on my technical knowledge about international taxes. I helped over more than 100 nomads with their tax setup and I’m happy to help you as well.
In that way, we can create a personalized plan which suits your lifestyle and goals. This will save you hours in doing research on your own. Furthermore, I have noticed all too many times that even after doing a lot of research, people still don’t have the clear answers they need. So, they still end up needing additional advice and all their time researching was basically a waste of time.
