‘Are there any tax treaties or agreements that could affect my tax liability as a digital nomad?’ is a question that pops up regularly. As a digital nomad you are operating in an international context. However, this also means you need to navigate the tax laws and regulations of multiple countries. This can be challenging. Your tax liability is affected by tax treaties and agreements between your home country and the countries where you are earning income or residing.
What are tax treaties?
Tax treaties are agreements between two or more countries that aim to prevent double taxation and tax evasion. They typically include provisions to determine which country has the primary right to tax certain types of income. This can differ for employment income, profit from a business, investment income, etc. Tax treaties can also provide relief from or lower certain taxes, such as withholding taxes on dividends and interest.
For digital nomads, tax treaties can be particularly important because they can prevent the same income from being taxed twice. This can be the case if both the country where you earn the income and the country where you are a tax resident want to tax you. By using tax treaties to your advantage you can reduce the overall tax liability and avoid double taxation.
However, not all tax treaties are created equal. Some countries have more favourable tax treaties than others. This largely depends on the nature of your income and your tax residency status.
You need to understand the specific provisions of the tax treaty that applies. This will be the tax treaty between your home country and the country where you are earning income or residing.. Only in this way you will have a thorough understanding of your tax liability.
Social security agreements
In addition to tax treaties, some countries have also signed social security agreements that can affect your tax liability as a digital nomad. These agreements typically determine which country is responsible for social security contributions and benefits for individuals who work or live in multiple countries.
Like tax treaties, social security agreements can be complex. The outcome will again vary depending on the countries involved and your employment status. Therefore, you need to understand the specific provisions of the social security agreement between your home country and the country where you are earning income or residing.
Let’s say you are a German citizen and resident who works remotely as a freelancer for clients in France. You spend a few months each year in France, but you are primarily based in Germany.
In this scenario, the tax treaty between Germany and France will determine which country has the primary right to tax your income.
Under the Germany-France tax treaty, you generally pay tax on this income in the country where the self-employed person has his main place of business. Since your main place of business is in Germany, you would normally pay taxes on your income in Germany. Consequently, France should not tax this income.
However, there are some exceptions to this rule. For example, if you have a fixed base of operations in France. In this case, you should pay French income tax on the portion of your income that is attributable to your activities in France. In this case, Germany should exempt this income. Yet, it’s not always so easy to assess which income should be attributed to which country. Consequently, this can lead to discussion with the different tax authorities.
In addition to income tax, you might have to pay social security contributions in both Germany and France. The social security agreement between Germany and France will determine which country can levy social contributions.
If you are a self-employed person who works in both Germany and France, you are generally subject to social security contributions in the country where you have your permanent home. In this case, that is Germany. However, there are some exceptions to this rule.
The answer to the question ‘Are there any tax treaties or agreements that could affect my tax liability as a digital nomad?’ is simply yes. Even more so, tax treaties and social security agreements can have a significant impact on the tax liability of digital nomads. These agreements can provide relief from double taxation and determine which country is responsible for social security contributions and benefits. However, the specific provisions of these agreements can vary depending on the countries involved and the nature of your income. Therefore, you should understand these provisions and consult with a tax professional or accountant to ensure compliance with the tax laws and regulations of all relevant countries.