One of the most frequent questions about digital nomads from aspiring digital nomads to people who are trying to get a grasp on the lifestyle is how the taxes work.
Some people believe that digital nomads are slipping through the cracks. This is also one of the most frightening topics for digital nomads who are just starting out so we thought we’d write a complete guide to paying (and avoiding in some cases) taxes as a digital nomad..
Now we hate to start with bad news, but.. here’s a little secret for you: there are plenty of digital nomads and location independent entrepreneurs that are not in tax compliance back home.
Leaving your country doesn’t mean you stop paying tax there!
If you’re thinking of becoming a digital nomad, you’ll need to read this.. Some people think that just by leaving your home country and going to another one, as a tourist (read digital nomad), is enough to keep you from paying your taxes in your home country. Unfortunately, if you’re someone who’s in that boat, the penalties and fines could be huge for you.
Whichever country you’re a citizen of, you still need to pay your taxes no matter how much you’re earning. And until you choose to give up your citizenship, you have to play by that country’s rules, or else you risk the penalties of non-compliance. And, as always, being ignorant of the laws is not a defense to the tax authorities.
Tax for digital nomads explained
To avoid going through all the trouble of breaking national and international laws, here are some basics to help you get started on your taxes as a digital nomad..
Residency vs Citizenship: What’s the difference?
While your citizenship is established either when you’re born or when you become an adult, it’s different from a residency. A citizenship rarely, if ever changes. It can be changed under special circumstances, such as your parents being from two different countries, or if you deliberately change it. In a way, your citizenship defines your home country.
And traveling or moving to a different one will have no effect on it. Comparatively, your residency is defined by the country where you are living or spending most of your time. And under certain circumstances, you could become a resident of a different country. But changing your residency is a lot easier to changing your citizenship. Both of them have different rights and duties, and they both affect your taxes differently.
Types of tax regulations
Different countries apply different laws and regulations to how their CITIZENS pay their taxes. Most countries apply a residence-based tax regulation.
That means that you pay taxes in your country of residence!
That may not be the SAME to your home country. All the European countries follow this regulation system. And under most circumstances, you are going to be considered a resident of the country where you spend more than six months.
But other countries apply a citizenship-based tax regulation. That means that these countries tax their citizens no matter where they are located. And generally speaking, citizenship-based taxed countries also tax their non-resident citizens on a worldwide income.
There are other interesting cases of tax regulations. There are territorial tax regulation systems that tax their individual citizens only on their local income. That means if any of your earnings are overseas, you’re not taxed on that income. And then there are countries that don’t impose any taxes on individuals, like Qatar or the Cayman Islands. These types of countries are referred to as ‘tax heavens’.
Furthermore, there are no international rules that clearly state how the people who work or spend time abroad should be taxed on their income. And there are cases where both countries can consider you a tax-resident at the same time, so you will have to pay taxes to both countries. But luckily, most countries have double tax agreements, which provide the rules that you should follow when it comes to taxes.
You are NOT your company
This is an important distinction when it comes to paying taxes. When your company generates a revenue, the money belongs to the company. And you can’t use that money for personal affairs. And the company will have to pay taxes depending on the country of incorporation.
And then, you will eventually transfer money from your company’s bank account into your personal one, either by assigning yourself a salary or by paying dividends. And then, the moment you earn money as an individual, you are responsible for declaring it for tax purposes.
The Digital Nomad Tax Trap!
Unfortunately, the world isn’t quite ready for digital nomads. Although we are slowly moving in that direction, we are not there yet. The entire concept of not ‘belonging’ to a location or even not having a steady residence completely clashes with most of the current tax regulations.
And to make matters worse, there are no international laws regarding taxes strictly intended for digital nomads. The current laws were all written during times when everyone usually stayed and worked in their home countries.
Furthermore, there are also plenty of other things that are still tied to either your citizenship or to your permanent residency. And some of those things include health insurance, work regulations, contracts, marriage rights, etc.
Rule of thumb
Of course, you’ll need to do your research whenever you travel to a new country, but there’s another easy and basic way to know where to pay your taxes.
You are only considered a resident of the country where you spend 189 days or more per year. That includes holidays, prolonged stays and business and pleasure trips.
But that doesn’t mean you’ll automatically become a resident by spending a certain amount of time in a different country. Unless you, yourself explicitly state it, your home country is going to continue considering you as a resident there. And depending on the laws and regulations of that country, you will need to communicate that your tax residency is in another location. Once you do this, you have to make sure to make this tax residence effective by having an income.
While all of this is quite complicated, and you’re going to have to do extensive research based on your home country and the country you’re located/going to be located in, these are some of the basics that you need to know and consider. And always remember the general rule of thumb that spending more than six months per year in a single country can mean becoming a resident there.