You can set up a company as a digital nomad for many reasons.
In this article, we will take a deeper look into the reasons why you should think about setting up a company as a digital nomad.
At the same time, I will also show there are some misunderstandings about setting up a company.
Reasons to set up a company as a digital nomad
Limit liability
The first reason to set up a company as a digital nomad is that it creates a boundary between you as a private person and your professional activities. (1)
Your company performing its activities and yourself are two different persons from a legal point of view.
So, you create a separation between all the contracts and work you do under the name of the company and yourself. This entails that if your company is liable to something, it is in principle just your company that is on the line for it.
This is definitely useful if you have a profession where a lot of liabilities are common.
Limit taxes
The second reason to set up a company as a digital nomad is to limit your taxes.
As a self-employed nomad, you have the option to perform your activities in your personal name or through a company. From a tax point of view, these are two very different things.
If you perform your activities in your personal name, you will be liable to personal income taxes.
Most of the time the tax rates are progressive: the more you make, the higher your tax rate.
In addition, and this is something many nomads don’t think about, you will need to pay social contributions. These contributions are again based on your income and can be even higher than your income taxes themselves.
In case you work through a company, your company pays corporate tax on its profit.
Corporate tax rates are mostly fixed. Once the company paid its taxes, you have your profit after taxes left.
This is, however, still in the bank account of the company. In order to get it to your private account, you’ll make a dividend distribution. The dividend is normally taxed with a withholding tax. The percentage depends on the country of the company.
Most people apply a combination of both. They incorporate a company and take out a basic wage each month to cover living expenses. They pay personal income tax and social contributions on this wage. The surplus they save up in their company and pay it out at the end of the year as a dividend.
Which setup is the most suitable for your situation depends on a lot of elements and should be assessed case-by-case.
Set up a company as a digital nomad and get (tax) residency
A final reason to set up a company is that it establish a link with the country in which you incorporate the company.
In this way, it could give you the opportunity to obtain a visa for the country.
In addition, it can also provide a link to a country in which you want to establish your personal tax residency without the need to spend most of the year in that country. Very helpful for nomads who don’t want to be bound to one country.
Misunderstandings about setting up a company as a digital nomad
Pick the easiest to set up
A lot of digital nomads decide to just set up a company in a country where it is most convenient.
In practice this most of the times means you pick a country where they can set up a company themselves online.
The Estonian e-Business is a good example of this. You don’t need any help of (expensive) advisors and just go with what you know is out there. There are many reasons why this isn’t such a good idea.
First of all, if you don’t work together with an experienced professional, you might still missing some points.
A professional can tell you what to think about when setting up and running your company once you make a decision for a certain company form and country. Not following all the rules might get you in trouble and can cost you a lot of money in the long run!
Furthermore, your digital nomad tax advisor can give you an overview of the different options out there so you can make an informed decision. There might be options available to you which you weren’t aware of.
Basically, we can summarize that it is not because something is the most convenient in the short run, it is also the best option for you in the long run.
Choose solely based on tax rate
I already mentioned that setting up a company can limit your taxes. The main reason is because you can play around with the amounts taxed under personal income tax rates and those taxed under corporate tax rates.
Yet, most people look at companies in jurisdiction with very low or no taxes at all. The reason is quite clear, they want to pay as little taxes as possible.
Although I do understand this, you should take all things into consideration. For example, some of your clients might only want to work with you if you operate under a European VAT-number or from within certain jurisdiction.
In any case, it’s not as simple as just setting up a company in the most beneficial country from a tax point of view. This brings us to the misunderstandings about the tax consequences.
Misunderstanding the tax consequences
A lot of people think minimizing taxes is as easy as just setting up a company in a low tax country. Unfortunately, this isn’t how things work in reality.
The reason for this is that you should make a distinction between incorporating or setting up a company somewhere and paying taxes.
If you incorporate a company in a certain country, you will need to take into account legal obligations of that country when running your company.
Yet, for tax purposes, we rather look to where the company performs its activities and where it creates added value.
The starting point is that both the incorporation and activities, and thus taxes, are aligned. However, this isn’t necessarily always the case. Let me give you an example to demonstrate this.
Let’s say you are a freelancer and you set up a company in Dubai (United Arab Emirates) because you know there is no corporate tax there up to a certain threshold.
Yet, at the same time, you are registered as a tax resident in Germany and spend eight months per year there.
Because you are the main person in your freelancing business and you conduct your business mostly from within Germany, Germany can actually qualify (part of) the profits of the company as taxable in Germany.
Consequently, you will pay German corporate income tax on the profits of your company in Dubai.
So, basically you set up a whole structure which doesn’t work and which is gonna cost even more because you need additional advisors to defend your case with the different tax authorities.
For this reason, it is important to align your tax situation with your professional situation while getting the most beneficial outcome possible.
Conclusion: why set up a company as a digital nomad
You can set up a company as a digital nomad for many reasons.
Nevertheless, it is imperative that you know the consequences beforehand so you can make an informed decision.
Therefore, it’s probably not the best idea to solely focus yourself on the stories out on the internet. You rather want to discuss your options together with someone who has experience in these matters.
If you are looking for a digital nomad tax advisor to assist you with optimizing your tax setup, feel free to reach out.
