As a professional tax advisor I get a lot of questions about digital nomad taxes. Some questions are rather basic, while others are very specific. In order to put you on the right track, I created this guide.
You will learn different things like:
- Do digital nomads even have to pay taxes?
- What defines if you pay taxes and where to pay them?
- How you can benefit from using a tax system to your advantage
- And, some strategies to lower your tax burden as a digital nomad. As part of this, I’ll also mention some countries which are interesting from a tax perspective.
Do Digital Nomads Pay Taxes?
Probably one of the most searched questions is “Do digital nomads pay taxes?”. The answer to this question is simple and complicated at the same time: “It depends!”
Everything depends on your personal situation and how you structure yourself. There are definitely nomads that pay no taxes at all or very little. At the same time, some nomads still hand a big chunk of their paycheck over to the tax authorities.
In the next section, we’ll have have a look what determines your liability to digital nomad taxes.
What Defines Which Taxes a Digital Nomad Has to Pay? Fundamental Concepts
As mentioned, there are many elements to take into account regarding digital nomad taxes. In this section, we’ll take a look at some fundamental concepts. These will help you to assess your tax setup as a digital nomad.
Citizenship, Residency, Domicile
Citizenship refers to the country of which you hold a passport. Most people will have just one citizenship or passport. However, maybe you are the exception to this and you hold passports from different countries. In principle, being a citizen of a certain country, doesn’t immediately impact your tax situation. However, this isn’t true for US citizens. We’ll have a look at this later on in the article.
Residency refers to the place where you live or allowed to live. If I look at my own example, I’m a Belgian citizen. However, with that I basically have the right to live anywhere in the European Union. So, it would be easy for me to move to another European country and apply for a residency permit. Just like citizenship, residency in itself normally doesn’t have any immediate tax consequences. However, a lot of times residency and taxes are interlinked to some extent.
Domicile is a concept that is often used in countries with an Anglo Saxon or common law background. It basically refers to the place where you are considered to have your long-term permanent home. From that perspective, it’s a stronger form of having your residency somewhere (1). In countries like Malta and Cyprus you can benefit from lower taxes if you have your residency there but not your domicile.
Tax Residency
Tax residency is of course the key concept if we talk about digital nomad taxes. Everything starts from the point where you have your tax residency as a person.
If you have your tax residency in a high-tax country, there is only so much you can do minimize your tax burden. Therefore, the easiest win is mostly to just move your tax residency to a low tax jurisdiction. Yet, you do want to handle this the proper way so you don’t get any run into any nasty surprises.
183 Days Rule
One element that countries use to assess if you qualify as a tax resident of their country is the amount of days you spend there. This day rule is rather well known by most digital nomads. I often get the comment “I don’t spend more than 183 days in any country so I’m not a tax resident anywhere”.
First of all, you need to know that the 183 days is not a general concept. I mean with this that some countries look at the amount of days in an alternative way than just the 183 days. Furthermore, some countries also look at the centre of your vital interests to determine your tax residency.
Centre of Vital Interests
Your centre of vital interest is another key concept to determine your tax residency as a digital nomad. Here you look with which country you have close connection.
There are various elements that come into play here. Traditionally, you look at where you are registered, where you have housing available, where you have your business, bank accounts and other assets. If you have a partner and kids, it will also important where they spend their time.
Substance
What the centre of vital interests is for private individuals, this is substance for companies. Technically, you can set up your company wherever you want. However, that doesn’t necessarily mean that in this way you can choose where your company will pay taxes. If it would be as easy as that, no one would ever start a company in a country with high corporate taxes.
You can set up a company in one country, but in reality run and operate it from another country. However, in that case, that other country can still ask you to pay corporate taxes to that country because it will say the company will have substance in that country. In these cases, you will tax professionals speak about a permanent establishment. This is one of the most common mistakes I see with digital nomad taxes.
Digital Nomad Visa
Before you obtain a digital nomad visa, you want to make sure you understand what tax consequences are attached to it.
In some countries, you will be subject to the normal tax rules. While in other countries, you could get an exemption from taxes. Yet, sometimes conditions apply to get such exemption. In order to help you, I created a list of 22 countries that offer a tax free digital nomad visa. This could be another way to optimize your digital nomad taxes.
Double Tax Treaties
Double tax treaties are key in international taxation. Thus, also if you live an international lifestyle as a digital nomad. As the name states, double tax treaties are there for you to avoid double taxation.
However, avoiding double taxation doesn’t necessarily mean you’ll get a good deal. You might still end up paying taxes in a high tax country. Therefore, proactive tax planning is required.
Personal Tax vs Corporate Tax
You need to distinguish between personal taxes and corporate taxes. Also these names give it away. You pay personal taxes on the income you receive as a private individual. While corporate taxes apply to corporations or companies.
Yet, where many people mess it up is when they operate a business. Basically, you have to options to set up your business. The first one is to register as a sole trader in your personal name. The second option is to register a separate legal entity, a company. The difference is important from a liability perspective, but also from a tax point of view.
As a sole trader, you will pay personal income tax on your income. Furthermore, most of the time you will also pay social security contributions based on this income. However, your company will pay corporate taxes. Most countries have different rules and, more importantly, tax rates for individuals than for companies. Therefore, understanding the difference and picking the one that serves you best is key.
The Different Types of Tax Systems that Affect Remote Workers’ Taxation
Worldwide Taxation
Most countries around the world apply a system of worldwide taxation.
This means that you need to declare and pay taxes on all of your income. This is irrespective from where the income comes from, from the actual country you live in or anywhere else. If you receive income from abroad, this often lead to two countries wanting to tax you on that income. Therefore, we have the double tax treaties which we discussed before to fall back on.
Territorial Taxation
Nevertheless, there are also many countries that apply a territorial tax system.
The actual nuances differ between countries. Yet, basically it means that you only pay income tax on income that you generate within that country or income you bring into the country. With the right setup, this can of course help you to limit your tax burden.
Have a look at this article if you want to learn more about the difference between worldwide and territorial taxation.
US Citizens
If we talk about digital nomad taxes for citizens of the United States, the situation is always a bit more complicated. The reason is that if you are a US citizen, you will always need to file taxes in the United States. Even if you don’t live there anymore or if you already pay taxes in another country.
Luckily, this doesn’t necessary mean that you will actually have to pay taxes in the US. You could use, for example, the foreign tax credit to offset your taxes. Another way is to use the foreign earned income exclusion.
Strategies to Reduce Taxes as a Digital Nomad
As a digital nomad you can apply different strategies to reduce your taxes. However, the most easy and straightforward one is probably to change your personal tax residency.
I often see that people keep paying taxes in their home country. So, they pay taxes to a country just because they did it in the past and they are used to it. Most of the time even while they barely spend any time in that country.
In my opinion, it doesn’t make sense to keep paying a high amount of taxes to a country if you don’t really spend much time there. Therefore, we’ll have a look at a few countries which can help you to lower your tax burden.
Best Tax Countries for Digital Nomads
Bulgaria
Bulgaria applies a fixed income tax rate of 10%. This is one of the lowest tax rates around Europe. The rate both applies to individuals as well as to companies.
There are some other elements to take into account like social contributions and withholding taxes. Nevertheless, having tax residency in Bulgaria as a digital nomad is a good solution for many.
Czech Republic
The Czech Republic offers an interesting tax regime for freelancers. They have a system called the 60/40 method whereby you only pay taxes on 40% of your income. Hence, you can easily decrease the taxes you pay.
Like with everything, some conditions apply though. For example, you only get this 60% cost deduction up to an income of around €85.000. This doesn’t mean you don’t qualify for the regime if you make more. It’s just that your cost deduction will be limited. You can have a look at my article about the Czech Republic for a full overview of this regime and everything else about paying digital nomad taxes in the Czech Republic.
Paraguay
Paraguay applies a territorial tax regime. As we discussed before, this means you only pay income tax on local income. However, most nomads won’t do any actual business in Paraguay. Consequently, with the right setup you can pay no tax at all.
If you want to read all the details about how this work, you can have a look at my article about tax residency in Paraguay and learn how to lower your digital nomad taxes.
United Arab Emirates
Many people know the United Arab Emirates, and more specifically Dubai, for its interesting tax climate. Basically, the UAE doesn’t levy personal income tax.
Recently, they did introduce a corporate income tax of 9% if your profit surpasses around €95.000. Nevertheless, some exemptions apply here.
I wrote an article where you can find out more about tax residency in the UAE and how you can benefit from it.
Why a Digital Nomad Tax Advisor Can Save You Time, Money and Headaches
Taxes in general are a complicated thing. Add an international lifestyle to it and it becomes even more complicated.
I’ve met countless people who did hours and hours of research. Then, they come to me with a complicated plan on how to reduce their tax burden. Only to realize that they misunderstood some of the basics about international taxation which undercuts everything. Sometimes people even end up contacting me after implementing such a plan to only find out they spend a lot of money and time for nothing.
On the other side, sometimes people do need a more sophisticated approach to pay less taxes as a digital nomad. Here you also want to make sure you deal with a tax advisor who is used to working with digital nomads.
Finally, I many times see that people reach out to a service provider in a specific country or who specializes in a specific matter. Unfortunately, they will just try to sell you their solution. And, many times, they won’t be fully transparent with you about the disadvantages or possible risks of their solution. Because if you don’t pick their solution, they will lose a customer.
That’s why I operate as an independent advisor and I charge you for the actual work I do. For me, it doesn’t matter if you move to country X or Y or even keep your status quo.
Reach out to me, if you want independent and unbiased solutions for your tax strategy as a digital nomad!
