When thinking of a digital nomad life, most people imagine chilling on a beach or staying in a hilltop homestay. But the truth is far from it. Digital nomads have to manage their work and travel plans while exploring and enjoying new locations and cultures. In addition, there are lots of laws and compliances that need to be followed which are different in every country and province that you go to.
One tends to forget the bureaucratic complications nomads have to go through in order to be able to live their preferred lifestyle (visas, working rights, no residential address, phone numbers…). Amid all these, complicated tax laws can prove to be a nightmare, especially for the new and upcoming travelpreneurs. Thus, it is very important for every digital nomad to understand the tax implications applicable to them while planning their travels.
When you are on a constant move, you will have to deal with taxes in different countries. Having to deal with different tax systems can be exhausting and as a Digital Nomad we want you to enjoy your adventure and leave it up to us to make your tax situation feel easy and simple. Below is a short guide that will explain to you how you can best approach your tax situation as a Digital Nomad.
1. Avoid paying taxes in multiple countries
To avoid paying taxes in more than one country you need to stay informed about the current tax rules in those countries that you’re spending a significant time in. We’re not talking about places that you visit for a couple of weeks but instead places where you end up staying longer than planned. Yes, it happens. You meet someone or you finally feel home with a community and the next thing you know 4 months have passed.
Why is this relevant for your taxes? Well, as a rule, if you stay in a country for more than 183 days (6 months) then you become a tax resident of that country. Which means that you have now created a tax obligation with that country and should file a tax return here.
But with everything in the law it is not that simple. In fact, every country has its own tax residency rules and the 183-day rule remains a general rule. It is therefore, super important that you know exactly from when you’ll start to trigger a tax obligation in a new country. This is something I teach in more detail inside of Global Tax Strategy Design, my signature program.
2. Other factors that could determine your taxability
To make things even more complicated your taxability is not only determined by the number of days you’re present in a country. There are so many other factors that can contribute to your taxability.
One unique factor for Americans is their citizenship. USA has a citizenship-based tax system, which means that if you are a US citizen then you will be required to pay tax on all the income earned anywhere in the world even if you didn’t set foot in the US territory in the year.
On the other hand, a lot of countries take into consideration whether you maintain strong ties to its territory. These ties could involve you regularly visiting, you have strong social ties, you have a home readily available to you, or you make your main income from there. These factors don’t mean that you should now go and live completely tie-free with any possible country.
It really depends what countries you’re dealing with. Some follow a far lenient approach in taxing individuals. We call them tax-friendly countries. These countries should be on the radar of every digital nomad and location independent business owners. You may check the detailed explanation about such tax-friendly countries in our previous blog.
3. The nature of your income
There are various ways in which you can earn money while fulfilling your passion of travelling the world. You may be a salaried employee working for a multinational company as a working nomad or a location independent business owner, running your own business online. You may also earn income via investment in traditional areas like real estate or equity funds or new areas like crypto currency. The nature of your income plays a key role in determining whether you and/or your employer (if you are a salaried employee) will be required to pay tax in the visiting country.
For different types of incomes, the place of origin or source of income will be determined as follows.
For employees, generally tax will be paid in the country of their tax residency irrespective of where the work is done from. But for employers, taxes and compliance liabilities have to be followed in the country in which work is done by the employer. This creates an additional burden on the employer to maintain the data of different places their employees are working from and complying with country-specific laws for each employee. Thus, you should inform your employer about your travelling in advance and get permission to avoid difficulties for your employer.
If you are a remote worker, you might want to check out our latest blog that goes in depth about the tax obligation of a remote worker and their employer.
If you run your own show and have your own business, generally the country in which your business is registered will determine how much tax you owe. However, if you’re running the business from another country, and the economic activity creates a significant economic presence in yet another country, it may be taxed there.
If you live off investments, the location of the asset can be the place where income is earned. For example, a real estate investment will be taxed in the country of property. However, in the case of digital assets like crypto currencies which are not traded on a registered stock exchange of a country, it is not possible to determine the country of investment. In such cases, the taxation will be determined as per the tax residency status of the taxpayer.
Double Tax Agreements
Digital Nomads aren’t the first ones to be confronted with potential double taxation. That’s why countries have established Double Tax Agreements to exempt taxpayers from this problem. If the countries you’re dealing with have entered into a Double Tax Agreement you can most of the times avoid being double taxed on the same income. Generally, these agreements are bilateral i.e. between 2 countries, so each agreement is different from the other, needing a thorough study on a case to case basis
If you plan properly, you can definitely avoid triggering a tax obligation with a country. However, it very much depends on the country you’re dealing with and how strict their tax rules are. A so called ‘Western country’ will definitely be stricter with its tax rules than a country that has low taxes and is foreigner friendly. Plus right now we also have the added benefits of newly designed Digital Nomad visas and some of them even come with a tax exemption. We have provided a detailed list and procedural explanation of such digital nomad visas in this blog.
These types of visas have provided a new arena of work while travelling opportunities for the digital nomads. However, these new systems and laws can be confusing and overwhelming for a newbie digital nomad. We can help you relieve your stress and find out the best course of action for your digital nomad journey.
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We hope you have enjoyed this article. If you have any further questions please leave us a message below and we’ll get back to you as soon as we can.
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.