With the increasing number of companies adopting fully remote work setups, one can contemplate the possibility of working from a different country. Given the flexibility to work from any location, it makes sense to seize the opportunity of enjoying preferable climate and reduced living expenses in another region.
Foreign remote workers can typically stay and work remotely in most countries for a maximum of 183 days per year without being subject to tax obligations. Once this timeframe is surpassed, individuals become tax residents and are required to pay taxes on their global income. However, US citizens, regardless of the circumstances, are always accountable for paying taxes in the United States.
The flexibility that working from home provides is appreciated by numerous employees. They may even be enticed to work from exotic locations like Mexico or Columbia. Nevertheless, there are various consequences that both employers and employees must take into account when working remotely, such as tax and social security liabilities. Additionally, the matter of obtaining an appropriate visa and work permit may also come up.
What You Should Consider
Remote work offers the significant benefit of being able to work from any location worldwide. As a result, numerous companies have welcomed remote staff, leading to cost reduction and improved flexibility. Nonetheless, it is crucial for both employees and employers to be aware of specific factors.
If an employee works remotely from a home office in a different country from their official work location, it can affect their income tax and social security. It is crucial to navigate these regulations diligently to guarantee a lawful and seamless remote work setup.
Where Do Digital Nomads Pay Taxes?
Can digital nomads avoid paying taxes?
Without a doubt, digital nomads do pay taxes; however, it presents one of the most significant challenges they face throughout their journey.
Digital nomads often pay taxes in their home country or the country where they spend most of their time, with the possibility of paying taxes in multiple countries not being unusual.
There is a small proportion of digital nomads who do not pay taxes. This can occur for several reasons like having income below the taxable income threshold, living in countries with tax-friendly policies, or, unfortunately, engaging in tax evasion.
It’s Not That Simple: The Complexities of Taxes for Digital Nomads
When it comes to taxation for digital nomads, the situation is not simple. In reality, it is a complex issue where digital nomads often have to deal with outdated laws and regulations that are not fully adapted to the current nature of remote work.
A hypothetical scenario involves John, a digital nomad from the UK, who makes the decision to deregister as a resident in his home country and relocate to Bali for living and working purposes. He believes that by doing so, he will no longer be obliged to pay taxes in the UK. However, it is crucial to note that this belief is largely incorrect and a commonly misunderstood notion.
In fact, many developed countries, including the UK, have a tax residency fallback law. This law states that if you are not a tax resident in another country, you are automatically considered a tax resident in the country of your citizenship or your previous residency. Therefore, in John’s situation, unless he becomes a tax resident of Indonesia or another country, he would still be regarded as a UK tax resident for tax purposes.
The text below illustrates one of the various intricate tax laws that digital nomads must deal with. Each country has its own tax laws and treaties, which can be overwhelming to comprehend. However, there is no need to fret, as we will attempt to elucidate them in the subsequent paragraphs.
It is crucial to grasp the concept that various countries have diverse tax systems before delving into the intricacies. Typically, there exist three types of tax systems: residential, citizenship-based, and territorial.
- Residential Tax System: Countries with a residential tax system, tax residents on their worldwide income. The criteria for determining residency can vary, but it’s often based on the amount of time spent in the country.
- Citizenship-Based Tax System: Only two countries, the U.S. and Eritrea, tax based on citizenship. This means that citizens are required to file taxes on their worldwide income, regardless of where they live.
- Territorial Tax System: Countries with a territorial tax system only tax income earned within their borders. This can be advantageous for digital nomads who earn income from foreign sources.
What Does a Home Office from Abroad Mean for Employers?
When an employee lives or stays temporarily in a different country, the professional activities they engage in often lead to obligations for the employer. These obligations can include things like paying payroll taxes and contributing to social security in the foreign country.
Companies must register (or have registered) with the local tax and social security authorities abroad in order to fulfill tax obligations in many countries.
Doing a monthly payroll in the respective country abroad, in addition to the actual payroll in the company’s home country, becomes a complication. Furthermore, the company will also need to pay income taxes and social contributions abroad.
Taxes Abroad for US citizens
It should be noted that US citizens are subject to US taxation on their income, regardless of whether they spend time outside the country. The 183-day tax rule in Europe does not exempt Americans from their tax obligations in the US.
US citizens are generally obligated to follow US tax laws no matter where they live or how long they reside there. If they spend more than 183 days in a certain location, the double taxation agreement will come into effect to prevent them from being taxed twice.
US citizens are required to pay taxes in an EU country if they become liable, and they can then claim a tax credit in the US for the amount of taxes paid in Europe. However, it is important to note that taxpayers usually have to file tax returns in both countries.
Can you not pay taxes at all?
Yes and no. While avoiding paying taxes can have negative consequences, there are still numerous remote workers and digital nomads who are able to achieve this feat.
If you deregister from your original country according to the general taxation law and if you do not spend over 180 days in any other country, you will be exempt from taxes.
Is it even possible as an option, considering that in most cases, you will already have a base or at least an employment agreement in some country that would make you responsible for paying taxes there?
If you are not sure about what to do next in a specific situation, it can be helpful to break down the problem into smaller steps and think through each step carefully before taking action.
- self-employed in some country with low taxes
- have no base, meaning you have deregistered yourself from the state, don’t have an apartment there, or any of your belongings or assets
- manage to spend under 180 days in any other country
By following each step carefully, it is highly probable that you will successfully evade paying income taxes. However, it is crucial to note that you must still fulfill your tax obligations for self-employment or business purposes.
When employed by a company, the company is required to pay payroll taxes in a specific country, either in the country where the employer is situated or in the country where the employee spends the majority of their time.
Leave a Reply