Digital Nomads vs Remote Workers
Before delving into the topic, it is important to examine the distinction between Digital Nomads and Remote Workers, and whether this distinction affects how Digital Nomads handle their tax obligations.
- Digital Nomads are people who travel the world while working remotely; mostly Freelancers or Self-Employed, focus more on the traveling aspect rather than a particular destination and typically spend shorter periods of time per location, moving fairly often. Some would be Perpetual Travellers, not having any home base at all, others would be Slomads and spend longer periods of time per destination.
- Remote Workers are people who are able to perform their work remotely, most are Employees and work from their homes, but recently, there are more remote workers who would travel full time or move to an attractive destination and spend long periods of time per location.
It could be stated that a Remote Worker is essentially a Digital Nomad, and a Digital Nomad can also be a Remote Worker. In recent times, the distinction between Digital Nomads and Remote Workers has become increasingly ambiguous. Presently, there are Digital Nomads who work as remote employees, and Remote Workers who operate as contractors. Certain Digital Nomads choose to spend extended periods of time in specific destinations, whereas some Remote Workers commence traveling more frequently, not solely within their home country but internationally as well. Considering the indistinct differentiation between digital nomads and remote workers, it raises the question of how taxes are impacted by this.
Territorial or Residence-based Taxation
It is important to consider how the country of your tax residency taxes your income. Some countries tax income while others do not. Typically, countries use one of two systems: territorial or residence-based. In the territorial system, only income earned locally within the country is subject to taxation. Conversely, in the residence-based system, residents are taxed on their income from both local and foreign sources, while nonresidents are only taxed on their local income. Eritrea and the United States are the only two countries that tax their nonresident citizens on their worldwide income, although there may be some exceptions to this rule.
When a country uses a residence-based taxation system, they typically permit residents to deduct or receive credits for the tax they have already paid to other countries on their income earned abroad. In addition, numerous countries establish Double Taxation Agreements (DTAs) or tax treaties with one another to eliminate or decrease the issue of being taxed twice.
183 days rule is a myth
Many sources mistakenly argue that Digital Nomads, who supposedly spend only short periods of time per country, are exempt from paying taxes in the countries they visit. They claim that only remote workers, who stay longer at each location, have tax obligations. However, the reality is more complex than this.
There is a misconception that if you spend less than 183 days in a country in a year, you will not be considered a tax resident there. However, this belief is inaccurate in simplifying the complexities of tax residency.
In most countries, tax residency is determined by more than just the amount of time you live and work there. The 183-day rule is just one factor used to determine tax residency. Even if you stay for a short period, you may still be subject to taxes if you have significant ties to the country, such as economic or social connections, or if you frequently stay there. Various factors are considered, such as your bank accounts, travel companions, type of remote work, and whether your job duties are essential to your company or employer. It is also relevant whether you still have tax residency elsewhere or if you were a tax resident there in the past.
These indications suggest that working during short holidays or while visiting a country for a brief period may potentially be illegal (if you are on a tourist visa) and may lead to the imposition of tax obligations in that particular place.
Digital nomads and tax residency
When considering the two methods mentioned earlier for countries to determine tax residency, we may question whether these are relevant for digital nomads.
Days rule: not for digital nomads?
Due to the fact that many of us may not spend more than 183 consecutive days in one country during a one-year timeframe, this rule does not apply.
Center of vital interest: also not applicable?
Despite focusing on the center of vital interest, the majority of nomads do not have strong ties with the various countries they reside in. Their connections are limited to temporary memberships for coworking spaces, gyms, and other amenities as they do not own any real estate there.
Nevertheless, it is important to note that the second approach for determining tax residency is considerably more subjective and open to debate. Consequently, the local tax authorities possess the ability to scrutinize even the slightest connection you have with the country in order to argue that you are a tax resident there. The extent to which this occurs varies between countries and is contingent upon the level of stringency with which they enforce their regulations.
This leads us to the initial claim frequently heard from fellow digital nomads that they lack tax residency.
Tax residency: not applicable to digital nomads?
If fellow nomads claim they have no tax residency, it could be interpreted in two ways.
Your opinion on digital nomad tax residency
The first point to consider is that they do not identify themselves as a tax resident in any country, and as a result, they do not complete tax returns or pay taxes in any country. However, it is always important to determine whether this aligns with the local tax regulations of the countries they travel to.
The tax man’s opinion on digital nomad tax residency
Now we arrive at the alternative interpretation of this statement. In accordance with local laws, the tax authorities in the countries you have connections with do not regard you as a tax resident.
The difference between both statements is slight but extremely significant. To put it bluntly, your perception of your tax status is insignificant if the legislation allows for interpretation or discussion that favors the tax authorities.
What to look out for with digital nomad tax residency?
Once again, this leads us back to the examination conducted in the past and the focal point of crucial concerns.
As previously mentioned, the daily test is fairly straightforward: all you have to do is count the number of days you spend in the country. The inclusion of your arrival and departure days in the calculation may vary for each country, but aside from that, it is basic mathematics.
Determining whether you are considered a tax resident somewhere is much more difficult when it comes to the center of vital interests. In most cases, only when the local tax authorities are investigating you will you discover your tax residency status.
The solution: digital nomad tax residency
For these reasons, I always advise against relying solely on luck or the generosity of local tax authorities when it comes to your tax status in a country. The most effective method to prevent tax issues is to actively establish your tax residency as a digital nomad in a country, preferably one with a tax system that suits your situation.
It is preferable if the country has double tax treaties with numerous other countries as this helps establish regulations between countries in situations where they both seek to impose taxes on you, and also restricts their ability to tax you. These treaties are designed to prevent the occurrence of double taxation, as implied by their name, where the same income is taxed by multiple countries.
The one exemption
The only situation in which you might choose not to actively establish your tax residency somewhere is when you exclusively reside in places that provide digital nomad visas, which explicitly handle your tax status.
There are several digital nomad visas available that either exempt applicants from paying taxes in the country or offer favorable tax treatment while they are residing in the country on that visa.
If you choose to proceed in this manner, it is important to ensure that you follow all associated regulations, as they may restrict your flexibility.
In summary, it is my belief that having a digital nomad tax residency is crucial in safeguarding yourself proactively against potential tax claims from authorities across the globe. If you were to admit not paying taxes in any jurisdiction, it is highly likely that they would take a keen interest in your situation.
However, it is important to consider your personal circumstances and risk tolerance. If you are unconcerned about the possibility of tax authorities eventually demanding taxes from you, then that is acceptable. On the other hand, if you prefer to have control over where you establish tax residency, it may result in some tax expenses but could potentially yield long-term advantages.
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