Whether you are a Digital Nomad, a Freelancer living on the road, a Remote Worker, a Consultant with clients all over the world or an entrepreneur with a global e-commerce store, you might find yourself struggling to report your income correctly to the tax office but let me tell you that you are not the only one.
Tax laws were written way before it was feasible to generate income from anywhere. As of today, there’s no international tax law regarding digital nomad taxes. The idea of ‘not having a home’ or permanent home base anywhere is simply non-existent in tax regulations.
Current laws were written in the times when people usually stayed in their home countries. It almost seems as if countries are not yet ready for this nomadic kind of lifestyle. Therefore, you need to be clear that travelling the world on a regular basis presents many tax challenges that have no answer as of today. Furthermore, there are a lot of things that are still tied to your citizenship or your permanent residency like health insurance, contracts, work regulations, marriage rights and so on.
Most home countries and any other place where you spend enough time will want your money in the form of taxes. A lot of Digital Nomads think that because they are constantly travelling on a tourist visa and moving from one country to the next that they don’t have to pay taxes anywhere. However, this is not true.
As a rule of thumb, it is true that Digital Nomads will have to pay taxes somewhere. Most of the times it is true that they will have to file taxes in their home countries unless they establish a different tax residency somewhere else. If Digital Nomads fail to file taxes in their home country, they could set themselves up for some hefty penalties and fines.
RULE OF THUMB – 183 DAY RULE
Usually, you are considered a resident of the country where you spend 183 days or more in a year. However, oftentimes you don’t simply become a resident automatically by just living 183 days a year in a different country. In fact, your home country would like to keep on considering you a resident thereof unless you explicitly tell them otherwise. Once you notify your home country that you have a different tax residence you have to make your tax residence effective by either earning a small salary, owning stocks, buying or renting properties, opening a company or performing other economic activity that could be subject to taxation. If you don’t perform any actions to make your tax residency effective, it might still be possible that your home country could claim you to be a tax resident thereof.
It is very important that until you give up your citizenship, you play by the tax laws of your home country or you might risk the penalties of non-compliance.
However, to make things a little more complicated – it is actually possible to become a non-tax resident of any country and therefore, avoiding having to pay taxes anywhere. The 183 days rule specifies that you become a resident of the country where you spend 183 days or more on a year. As a result, you could spend up to three months in a place before traveling somewhere else, avoiding becoming a resident of any country.
Keep in mind that becoming a non-resident is not an easy process. Before telling you how you can become a Digital Nomad that pays no taxes, we need to first define certain concepts that you need to be aware of before dealing with tax laws.
INTERNATIONAL TAX CONCEPTS
A lot of people mistakenly confuse Tax Residency with citizenship. Citizenship is most of the times defined when you are born and can be defined as your home country. Traveling or moving to a different country, won’t have any effect on it and you will always be a citizen of your home country unless you decide to acquire new citizenship or change your current one.
By contrast, your residency defines where you are living or spending most of your time. It is possible to be a citizen of one country and a resident of another country. This will have implications on where you should pay your taxes.
Since changing your residency is much easier than changing your citizenship, you will be given different rights and duties.
Different Types of Tax Laws
The way citizens pay taxes in their countries is regulated differently in every country.
However, most countries apply a Residence Based Tax System. This means that individuals pay taxes in their country of residence and not necessarily in their home country.
In most cases, you are considered resident of the country where you spend more than half of the year.
Different countries apply a citizenship-based tax system. These countries tax their citizens no matter where they are. This means that if you are a citizen of a citizenship based tax country then even if you go and live somewhere else you will still have to pay taxes in your home country.
There are other tax systems such as the territorial tax systems which are implemented in Panama and several other countries whereby individual citizens are taxed only on their local income which is produced in their territory. This basically gives most Digital Nomads the opportunity to earn money from overseas that won’t be taxed.
There are also a few countries in the world that impose no taxes on individuals, like Qatar or the Cayman Islands.
Double Taxation Treaties
In some rare circumstances, two countries could consider an individual a tax-resident at the same time, and both countries could require you to pay taxes on your income. However, in order to avoid this to happen most countries have established double tax agreements. These double tax agreements determine the rules upon which a country should treat you as a resident and tax you on your income.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.