Taxes are complicated. Digital Nomad taxes are even more complicated. The first question that a lot of people ask is “Where am I supposed to pay taxes?”. If you’re lucky, the answer is “nowhere”. If you’re not so lucky, the answer is “it depends”.
What’s luck got to do with it? A lot, really. The country of your citizenship will play a huge role in your tax burden throughout your life. Depending on the laws of your country, who you work with, and several other factors, as an internationally traveling digital nomad you could either completely avoid any taxation or you could still end up paying taxes to your home country and many more jurisdictions.
I’d like to start by mentioning that this article should not be construed as legal advice. The following discussion will center around personal and corporate income taxes. You should always talk to an accountant or lawyer to get that type of advice. This is just based on the breadth of my experience running several businesses while being a digital nomad. I’ve decided to write this guide because I’ve seen a lot of misinformation spread by ill informed (but perhaps well intentioned) internet dwellers. There are several companies that try to sell their services related to these matters and often they will not give you the full picture. Why? Because they’re not liable if they are wrong. YOU are liable for making a mistake in your personal or business tax matters.
So what are the key questions you should be asking yourself?
The first thing you need to know is what the tax year is in any jurisdiction you might be subject to tax in. Different countries use different tax years. India uses April-March, whereas several EU countries use Jan-Dec. This is important in determining your tax residency based on physical presence. So if a tax rule says to qualify as a resident you need to be there 183 days in a year, these 183 days must fall within the definition of days as per the tax year.
Where am I tax resident? Each country defines in its tax code the meaning of a tax resident. Tax residence is not a catch all term based on touristic visits or other factors. Some countries will rely on a physical presence test, some other countries will rely on a center of vital interests test (sounds abstract? it really is!), while some other countries will just rely on the fact that you’re a citizen of that country (hello USA).
As a digital nomad it is perhaps this aspect which becomes really difficult to deal with. But, if you have any income that might be considered significant it is your responsibility to make sure you have your tax situation sorted out.
Now, you don’t necessarily need to go crazy and start reading the tax laws of every country that you’ve ever been to. Broadly speaking, most countries’ tax departments don’t care about tourists who come in for a few weeks and check some emails and make some skype calls.
The first thing you must absolutely look into are the laws in your country of citizenship. What makes you tax resident in your home country? If you check any of the boxes on those tests then the answer is simple: Pay taxes in your home country. Some countries may not tax worldwide income of tax residents (although they are nowadays in the minority) and in this case you might only need to pay taxes on the money you made while in your country or from income you made through working with people in your country. If you want to break tax ties with your home country then you need to speak to an accountant well versed with international taxation. Sometimes you might need to take up residency in a different country for a while but this is not always strictly necessary.
For US citizens or permanent residents, you can get an exemption on income earned while abroad up to certain limits. This is a great way to minimize your tax burden and you’re free for up to $100,000/year of income although you will still probably have to pay self employment taxes.
If you’re not tax resident in your own country based on the various taxation tests, then you’re not required to pay taxes there.
Next, you must figure out if you triggered tax residence in any other countries. Did you stay anywhere for six months in a tax year or longer? You might have some dues there. Different countries use different measures for physical presence tests. Although 183 days in a year is the most common measure, the US uses a split year test (number of days over different years). It’s safe to say that if you spent less than 31 days in the US in a given year, you will not trigger any tax liabilities for foreign income.
The smart thing to do in this case is to make sure you travel in a way that you do not check off any boxes for tax residence in foreign countries. Of course, you also need to watch out for non resident taxes.
Most countries require people who are non-tax-resident to pay taxes on LOCAL INCOME in any case. If you have clients in Berlin, and you went to Germany but you didn’t trigger the tax residence tests you’d STILL legally have to pay taxes in Germany on your German sourced income. The same applies to almost all countries. Locally earned income, regardless of your duration of stay or tax triggers, is usually subject to income tax. This is something important to keep in mind. Are you a remote worker? STAY REMOTE.
As you can tell by now, tax residence is as complicated and messy a subject as they come. My advice on this would be to:
- Speak to a lawyer/accountant in your country of citizenship to gain clarity on what you might owe back home and if/how to break tax ties.
- Speak to a lawyer/accountant in countries where you may have triggered any tax liabilities while traveling. Usually, you should talk to someone if you traveled in a given country for more than 100 days in a year or if you have clients/income sources in that country.
Difference between residence and tax residence
There are big differences between residence, permanent residence, domicile, and tax residence. These are all loaded terms and depending on the context mean different things.
However, receiving mail somewhere or putting in your parents address as your home address on a form does not usually make you tax resident there. Also, having your family address as your mailing address on your offshore bank account also does not usually make you tax resident in a country.
Again, an accountant or a lawyer well versed in international taxation would be the best person to advise you on how to proceed. Take internet advice with a grain of salt, except the previous statement! :)
Of course one of the biggest ways for tax authorities to feast on you is if your country has a “center of life” tax test and you continue to bank in your home country. It’s debatable whether banking constitutes a valid center of life in this age of e-everything but why leave it up to chance? However, this is NOT the reason I recommend that you bank offshore.
Banking offshore has several advantages for digital nomads. The biggest advantage is that your bank will usually be geared to have international on-the-move customers. They will be used to dealing with someone who is not in the same location, time zone, or even the same continent as them. Twenty four hours availability is one of the big advantages amongst other things.
When we were in Norway in late 2014, one of the ATMs there inexplicably swallowed one of my Indian debit cards. It was Christmas week so I couldn’t go to the local Norwegian bank and get my card back. I called my bank in India for a solution. Their response was “Sir, you’ll have to come into the bank and get a new card”. I explained that I was in Norway not New Delhi, but they didn’t seem to understand.
There were other times that I needed to resolve something with a bank over the phone and they asked me to come into their offices. It’s easy to understand how this can be difficult for a digital nomad.
This is why I recommend banking with an institution that is ready to deal with clients who are abroad. There are several reputable banks in Switzerland, Hong Kong, and Singapore that are able to do this. Contrary to popular belief, the minimum balance requirements aren’t usually very high and even if you can’t maintain the balance, you can still have an account while paying service charges. Other jurisdictions known for international banking that you may look into are Cyprus and Latvia.
They might even be able to open an account for you remotely (remember, they are supposed to be good at this?) or depending on your nationality they might require a personal visit. I’m not recommending any particular bank here because each one has different account opening requirements and minimum balance requirements so your mileage may vary. Some of these banks regularly fly their representatives around to fulfill the face-to-face meetup requirement that their laws require. I had once spoken to a representative from a Latvian bank who was flying around Europe to meet new clients face to face. The bank had a 20 EUR monthly charge if you didn’t maintain their (rather high) balance requirement. It’s up to you to decide if you’re willing to pay 20 EUR per month for banking services. There are other cheaper options of course and also the option of maintaining the balance requirement. Please be advised though that these banks often charge for all the services they provide, this is how they make money. However, because of this, they will value your relationship and every interaction with them.
Another reason to bank offshore is the availability of multi currency accounts. Imagine you’re a Czech citizen with a bank account in your country, the account is denominated in CZK (Czech Korunas). If you work with clients in the US and earn in US Dollars, you would be receiving your money in USD, but your bank stores them in CZK. As a digital nomad you’re living in Thailand and spending in Thai Baht (THB). Every time you receive a payment from a US company you are likely to lose up to 3% converting to CZK. The same loss will happen when you withdraw your money to THB. That’s a 6% loss just due to the USD->CZK->THB currency conversion. With offshore banking, you can often have multi currency accounts that can carry most major currencies (USD, EUR, CHF, AUD, GBP, etc.). This means that you can earn, save, and spend in many different currencies while optimizing any fees that you might pay due to conversions. To put this into perspective, you save 3% (and sometimes 6% depending on what currency you’re spending in) of your annual expenses (single currency conversion vs double) just by banking offshore.
Reasons to bank offshore:
- Work with a bank that is used to dealing with international clients
- Multi currency accounts that save you money on multiple currency conversions (up to 6% of your annual expenses)
- Avoid triggering any tax liability in your home country based on center of life tests
A lot of digital nomads ask about incorporating their freelance businesses. I’ve done a ton of research into incorporation in several jurisdictions. I’ve also incorporated a few of my businesses. However, offshore incorporation agencies will make this seem like an easy task. Incorporation is usually fairly easy because every country wants to have businesses there. However, opening a bank account for a corporation can require anything from a high minimum balance requirement to a personal visit to the Seychelles. Maintaining a company might come with further commitments like annual accounts, auditing, tax returns, etc. Furthermore, several companies refuse to do business with entities that are incorporated in a given country but then receive payments in a different country. So if you want to open a corporate bank account for your Seychelles IBC in Singapore, be prepared to pony up $50,000 as the minimum balance and a $3000 yearly fee for many cases. After doing all this, some of your clients might only agree to wire money to a Seychelles account for a Seychelles company. This is rare but it does happen. Of course, offshore incorporation companies will never tell you this stuff because that would mean turning away business.
Hong Kong is another messy jurisdiction to incorporate in. You’ll need to file annual accounts and also prove annually that your income does NOT originate from Hong Kong (this is to avoid local taxation). Then, once the revenue department approves your request you can breathe a sigh of relief until tax time rolls around again next year. Furthermore, auditing, etc. costs money. Maintaining a company costs money. All legal consultations for companies usually cost more than legal consultations for personal requirements. Corporate tax returns always cost more at an accountant than personal tax returns. It’s just the way business is done.
I’m a fan of simplicity. So in terms of incorporation, I’d definitely recommend avoiding it if there’s no pressing reason to do it. Incorporation, especially offshore incorporation can sometimes complicate rather than simplify. You end up dealing with requirements and dependencies in multiple jurisdictions and it doesn’t always end up saving on taxes or other expenses.
If you absolutely NEED to incorporate for any reason (liability, asset protection, credibility, etc.) then you shouldn’t worry too much about personal taxation depending on how you pay yourself. However, you should definitely look into Foreign Control and Management tax laws of countries that you spend significant time in.
Usually, these laws come after a tax residence trigger so you don’t need to worry about your company’s tax residence situation unless you’re personally tax resident. Most companies are tax resident in the country that they are incorporated in unless a tax department of another country says otherwise.
You cannot open a Seychelles IBC (one that you run yourself) and then be personally tax resident in Germany and avoid taxes. The German authorities will say that you are the “Control and Management” of the company and thus the company is a “German” company.
Double taxation treaties
This is the most confusing aspect for digital nomads. I’ve read a lot of forum posts on the internet with a lot of misinformation about this. However, you need not worry yourselves with this unless you are tax resident in two or more countries. Double taxation treaties are usually created for tax relief through tie breakers about where you should finally pay tax and how much that tax should be.
If you are tax resident in up to one jurisdiction, you should not concern yourself with double taxation treaties. Anyone who mentions these in this context does not know what they are talking about. The first few pages of all double taxation treaties will define what residents in both countries are. This is because these treaties only apply to TAX RESIDENTS of those countries. That’s all.
Don’t believe me? Read USA and India, Portugal and Canada, etc. Of course, they all start off talking about residents but then go on to define that resident really means tax resident.
A note on Estonian e-residency
Many digital nomads mention this program as an option. There appears to be a lot of confusion about what the e-residency from Estonia really entails. The e-residency program is supposed to help you open a company and do “legal stuff” in Estonia. At this stage, they issue a digital ID to you that you can use for certain government work like incorporating a company. You’ll still need to visit Estonia in most cases to open a local bank account.
However, you cannot use this digital ID to become an Estonian resident. You definitely can’t use it to become a tax resident in Estonia.
There is a lot more that can be said but every individual situation is unique. In a way, tax law doesn’t really take into account people who live like us. Most of these laws were made before computers were ubiquitous.
I hope you are now better positioned to figure out your personal tax situation. It’s always best to do your own homework because this is in your best interest. Most governments make their laws, treaties, etc. available online for free.
If you have questions or comments, please feel free to ask below!
Good to see digital nomads posting about these issues. Education is important and tax advice from a professional is equally important. Both are critical so that you can speak intelligently to your advisor and make sure you are in compliance.
Have you looked into Estonian E-Citizenship ? It could well be a solution for a few Digital Nomads at least.
Awesome post. Tax is one of the things you not only cannot but should not avoid. Compliance is critical to avoid any unpleasantness whether from your home country or the country you are working in. Homework is always a great idea no matter how well versed you believe you are
You cleared my mind about double taxation treaties! Now I know I don’t need to bother about these since I plan to be tax resident in only one country. I wonder what you would advise about getting a 2nd citizenship. I’m Dutch and I could quicky acquire the German citizenship as well. I’m planning to retire in Thailand or Peru. I’m thinking “if the Dutch start taxing their citizens abroad like the US, I drop the Dutch citizenship and keep the German one”. But this could cut both ways. I wonder if two passports = two sources of trouble, or if two passports = more options and more ways of muddying the waters. I realise there’s no clear-cut answer for this.
Great info. Question is, what do you do? Where do you spend most of your time, where is your residency, where do you de late taxes?
I am trying to get a definitive answer to this question , I have even written to the OECD ,but heard nothing ,is there an international tax advisor out there who can clariffy it.I
Take for example three separate situations:
A retired German couple who have been residing in Spain , and have now decided to sell their house and to be permanently travelling having a Pension paid to them from Germany.
A French web designer who works freelance and invoices his customers from a company formed offshore
A retired British businessman who has been travelling for ten years and lives off investments and savings
If any of these European Nationals , who have been travelling for the last ten years and are not actually based in any one country for longer than say a period of ten weeks but spends time in 5 or more separate countries and continents, how and what is their tax position.They are under the 183 day rule for most countries requirements as a taxpayer.
They all clearly can prove they are genuinely constantly travelling.
There many more clear examples of people who are not resident in any one location and many retirees who are wishing to travel extensively that would welcome a clear answer.
How do they meet the new requirements
i’m living in country X as a tourist, their tax department doesn’t know me and doesn’t care. Citizenship in country Y and residency in country Z. I think Y and Z should be different countries to make stuff easier for you and harder for the bloodhound gang called tax department.
(I can’t get residency in country X because I don’t fulfill the requirements, so I can’t be a tax resident either. I wanted to pay them taxes, but they refused..)
I pay taxes in country Z, that doesn’t check if I am actually there. And what if they find out? Maybe they will pay back my taxes :) They won’t inform country Y anyway, they don’t even know I’m here -
What I want to say is, be smart guys, think about what they know. And enjoy tequilas!
I like the article, BUT I don’t agree with the part about the tax treaties. You can benefit from them (maybe not ALL of them, but from many, it depends on their content) also if you’re a tax resident only in one country. The purpose of the treaties is to avoid double taxation and not (only) to clarify in which country you’re a tax resident. For example, many (if not most of) tax treaties reduce or exempt the tax rate you need to pay in one of the countries (either the source country or the country of residence) from income such as dividends, intrest or immovable property. As their aim is to avoid double taxation, they either exempt or reduce the tax rate not making you pay, say, 20% in the source country (the country you get your income from, you don’t need to be a tax resident there) plus additional 20% income tax in your country of residence. Let’s say, you receive dividend from country X, but you’re not a resident there and country X impose a wittholding tax on income earned in country X. The entity that pays your dividend ‘keeps’ that 20% and pays it to country X tax authorities. Then, your country of residence (Y) recognizes this income as an income that should be taxed there, because it taxes its residents on their worldwide income, so you need to pay that 20% in country Y on an income that have already been taxed in country X. The purpose if income tax treaties is to avoid such situation.
You are right. In the context of this article I should have specified that DTAAs aren’t a concern if you’re not tax resident in any country. They are fairly useful to avoid withholding taxes for tax residence in a country and receiving dividends or income from a treaty country. Of course they are much more important when two tax residencies get triggered but that situation is usually uncommon.
Ashray, you’re right. It’s a very interesting topic, what happens if you’re not a tax resident in any country and if there are any situations when it’s actually not beneficial for you. I think I’m going explore this topic in depth the next week and write a blog post on Hurrao blog (hurrao.com/blog, if anyone is interested).
Thoroughly interesting article with some great info. I think this article is worth a read too, if only for the fact that most people will never have heard of Anguilla! https://www.anguilla-beaches.com/offshore-companies.html