Do digital nomads pay taxes?
That’s probably one of the most common questions I get.
Maybe you want to learn more about the topic while already being a digital nomad? Or, maybe you see living as a digital nomad as a tax strategy?
Need help optimizing your taxes? Contact me!
Do Digital Nomads Pay Taxes?
It depends… Some digital nomads do pay taxes while others don’t.
If you are a tax resident somewhere, you will be subject to the rules of that country. The applicable rules will determine if and how much taxes you will pay.
Nevertheless, you could also end up in the situation where you aren’t a tax resident anywhere. This can happen because you simply don’t meet the criteria to qualify as a tax resident.
A good example is the case where you only visit countries which focus on the amount of time you spend there. In most cases, you’ll only qualify as a tax resident after spending six months there. So, if you move around quicker than that, you won’t have to pay income tax there.
How Do Digital Nomads Pay Taxes?
If you are serious about your financial wellbeing as a digital nomad, you make sure you have the right tax structure in place.
This could mean different things depending on your situation. You could decide to setup an offshore company. And, maybe you combine this with tax residency in a country with a territorial tax regime.
Another option is to opt for tax residency in a country with low overall taxes.
Where Do Digital Nomads Pay Taxes?
Just like any other person, digital nomads pay taxes in their country of tax residency.
Yet, unlike a person who has a fixed lifestyle in one country, it’s not always as easy to determine the tax residency of digital nomads.
This isn’t surprising: the rules aren’t made for digital nomads but for people who spend almost all year in one place.
Most digital nomads, on the contrary, spend only limited amount of time in each place. Therefore, their ties to one specific country are also rather weak.
This also comes with benefits. You can leverage your lifestyle to lower your tax burden by creating a tax strategy around it.
How Tax Residency is Determined
In order to understand taxes for digital nomads it is essential to understand the concept of tax residency.
Tax residency refers to the country where you are a tax resident and pay your personal income taxes.
There are various ways how you can establish tax residency in a place. However, in general, countries apply two systems. Some countries apply one of these systems, some use both of them combined.
The first reason why some countries consider you a tax resident is because you spend a certain amount of days in the country. This rule is called the days test. For most countries the amount is set at 183 days.
The other way you can become a tax resident in some countries is by having your center of vital interest in the country.
For this, you have to make an assessment of your economical and personal interest. Where do you have a home, work, bank and where is your family and personal life situated.
To conclude we should also make clear that citizenship (i.e. holding a passport of a country) is not linked with tax residency.
There is one main exemption: people from the US need to keep filing taxes even if they move abroad (1).
Can You Be Tax Resident Nowhere?
Yes, you can be a tax resident nowhere.
If you don’t meet the criteria for tax residency in any country, you can be a tax resident nowhere.
Yet, more and more countries try to introduce anti-abuse rules in this regard.
Moreover, you will notice that many institutions (e.g. banks) will still ask you for your tax residency and might even want to get proof of this.
Type of Taxes Paid by Digital Nomads
As a digital nomad, you might have to pay different types of taxes. Let’s have a look at the most important ones.
Personal Income Tax
The most important tax you will pay is personal income tax.
Any income you receive as an individual, can be subject to personal income tax.
Many countries will have different tax rates depending on the nature of the income. For example, different rates can apply to professional income versus investment income.
Social Contributions
If you have professional income, you will also have to pay social security contributions on this income in most cases.
Many digital nomads forget the impact of social contributions on their overall tax burden. That’s a big mistake! Many times social contributions can make or break a tax setup.
Most of the time social contributions will only apply to professional income and not to investment income. In that case, working through a company can be interesting.
Corporate Income Tax
If you run your business through a company, that company will pay corporate income tax on its profit.
Sometimes it is interesting to optimize your taxes by receiving your professional income through a company instead of in your personal name.
With this setup, you can limit your professional income as an individual and save on income taxes and social contributions.
Instead of getting a salary, you would take your money out of the company as a dividend distribution.
Withholding Tax
If your company pays you a dividend, it will most likely will have to retain a withholding tax and transfer it direclty to the tax authorities.
Withholding taxes can also apply to other types of passive income like interests and royalties.
Value-Added Tax
Many people forget that digital nomads also pay VAT. Every time you make a purchase, a percentage of that will actually be VAT.
In this way, you still contribute to the tax revenue of the country you are visiting.
That’s also why smart countries try to attract digital nomads. They know they might not pay any income taxes there but the country still benefits economically.
Tax Obligations by Citizenship
In most cases, your citizenship will not be of much importance to determine your tax liability. As set out before, your tax obligations are rather linked to your tax residency.
Nevertheless, there is one important exception to this rule. That’s the case for countries which apply citizenship based taxation.
This means that you’ll owe taxes to the country of which you have a passport even if you never set a foot in the country.
This is the case for Americans. Wherever they go or live, they will still have to file taxes back home in the US.
This might lead to double taxation if they also qualify as a tax resident of another country. In that case, a double taxation treaty might provide relief.
How to Reduce Taxes as a Digital Nomad
How you can reduce taxes as a digital nomad will depend on your personal and professional situation.
In general, you’ll have most options to optimize your taxes if you have your own business.
The easiest way to save on taxes is to move your tax residency to a country with low or even no taxes.
However, while doing so, you want to make sure you avoid some common mistakes many digital nomads make.
Common Tax Mistakes Digital Nomads Make
From my experience of working with hundreds of digital nomads, I’ve seen many mistakes. Here is a list of the most common ones:
- Focusing on the 183-days: “I don’t spend 183 days in any country so I’m not a tax resident anywhere”. That’s a common saying you’ll hear amongst nomads. However, most countries have different ways to determine tax residency. Therefore, only focusing on the amount of days is not a smart plan.
- Not changing tax residency: a lot of nomads just keep paying taxes to their (former) home country because that’s what they are used to. If you’re doing this, you’re most likely leaving a lot of money on the table.
- Forgetting about social contributions: many nomads come to me with their self-designed tax setups. A common element they seem to forget about is social contributions. Finding a place with a low personal income tax is nice, but it doesn’t help you much if you pay a boatload in social contributions.
- Falling for sales people: these days you have a lot of ‘advisors’ out there who will sell you a premade tax setup. Yet, they don’t take into account your personal situation or needs and they try to sell this setup to anyone. Many times they’ll even try to ignore the negative sides of the setup just to make a quick sale. So, watch out for free introductory calls as they’re often rather sales calls.
- Not getting proper advice: linked to the previous point, you want to make sure you get proper advice from someone who has extensive experience with international taxation, as well with working with digital nomads. Moreover, you want to make sure they can provide multiple options depending on your needs and don’t push you towards one solution.
Work With Me
Need help navigating international tax as a digital nomad?
Every situation is unique, and the right setup can make all the difference.
If you’d like to discuss your personal circumstances and explore the best options available, feel free to get in touch.
FAQ about Taxes for Digital Nomads
Let’s now have a look at some Frequently Asked Questions about taxes for digital nomads.
Do Digital Nomads Pay Taxes in Host Countries Too?
As long as you don’t become a tax resident you normally shouldn’t pay any income taxes in your host country.
Nevertheless, if you spend so much time in a country that you actually become a tax resident there, you will have to face the consequences.
Do Digital Nomads Have to Pay Taxes?
Digital nomad do not necessarily have to pay taxes.
Nevertheless, digital nomads need to follow tax regulations just like anyone else.
So, whether or not you have to pay taxes, will actually depend on your personal situation. Yet, you can optimize your situation to pay as little taxes as possible.
Do Digital Nomads Pay US Taxes if They Live Abroad?
Yes, digital nomads pay US taxes even if they live abroad.
At least, if you’re a US citizen of course.
The United States apply what we call citizenship based taxation. So, it doesn’t matter if you don’t spend any time in the country or still have connections there. As long as you keep your US passport, you’ll have to face the tax consequences.
What is the 183-Day Rule?
The 183-day rule refers to the fact that most countries will see you as a tax resident if you spend the majority of the year there.
So, if you spend 183 days within the country, they’ll expect you to start paying taxes there.
You can learn more about the 183-day rule here.
Can Digital Nomads use Foreign Earned Income Exclusion?
Yes, digital nomads can use the Foreign Earned Income Exclusion.
Of course, you will need to make sure you meet all the requirements. You can find these and much more in this article about the FEIE.