A question we often get asked is whether it is possible to be Digital Nomad tax free anywhere?
The assumption that a lot of digital nomads make is that if they leave their home country, keep constantly moving and don’t spend enough time to qualify for tax residency in any country they visit, they must be legally free from paying any taxes.
Unfortunately, it isn’t as simple as that. In fact, the answer is much more complicated than that.
Further, in this day and age with the digitalization of tax administration and information sharing between banks and tax authorities, it is very hard to live without a tax residency and not pay taxes anywhere.
Whether you need to pay tax or not depends on a couple of crucial factors:
- Your home country’s tax policy
- Your new home country’s tax policy
- Common Reporting Standard
Let’s dive into it below.
Table of Contents
- Digital Nomad Tax Free – Overview
- Digital Nomad Tax Free – Home Country VS New Country
- Common Reporting Standard for a Digital Nomad Tax Free Life
- Conclusion – Digital Nomad Tax Free
Digital Nomad Tax Free – Overview
Let’s start this tax guide with a few common questions that I always receive, such as the taxes as a digital nomad and more.
How can Digital Nomads Legally Avoid their Tax Liability?
Digital nomads can legally can reduce their tax liabilities by establishing residency in countries with favorable tax laws or no income tax. They often set up businesses in low-tax jurisdictions and utilize international tax treaties to their advantage.
Careful planning and understanding of various countries’ tax systems are crucial to avoid penalties, and we highly recommend checking with a lawyer or international tax specialist.
Can U.S. Citizens Avoid Taxes While Living Abroad?
U.S. citizens living abroad can’t completely avoid U.S. taxes due to citizenship-based taxation.
However, they can reduce their tax liability using mechanisms like the Foreign Earned Income Exclusion, which allows excluding a certain amount of foreign income from U.S. taxes, or the Foreign Tax Credit, to offset taxes paid in other countries.
Proper tax planning and compliance with both U.S. and host country tax laws are essential to maximize these benefits while legally minimizing tax obligations.
How do Tax Treaties Affect Digital Nomads?
Tax treaties play a significant role in a digital nomad’s financial planning. These treaties between countries prevent double taxation on income earned abroad.
They define which country has the right to tax certain income and often provide reduced tax rates or specific exemptions.
As a digital nomad, you must understand the details of these agreements to plan your income sources and residency strategically.
Digital Nomad Tax Free – Home Country VS New Country
Now that you have a better idea of taxes as a digital nomad, let’s see the differences with your home country and a new home country.
Your Home Country’s Tax Policy
Your home country’s tax policy is usually where you grew up, where you spent most of your adult life, or simply where you were last registered for tax.
Depending on where that might be different obligations might apply to you.
For example, if you are a US citizen, your tax obligations do not stop because you reside outside of the US. Even if you qualify for the Foreign Earned Income Exclusion you might still have to file US tax returns. The US is a bit unique in that sense.
But if you are from Australia and are residing outside of Australia without any intention to ever return you most likely will have to prove that you have established a permanent place of abode outside Australia. Only then will you qualify as a non-tax resident of Australia.
Most Nordic countries impose an exit tax upon leaving the country and you’ll most likely remain a tax resident for up to three years after moving abroad.
Other countries apply the 183-days rule meaning that as long as you don’t stay in the country for longer than 183 you won’t be considered a tax resident anymore.
You see how it’s quickly getting complicated and there is no general rule of when you become a non-tax resident in your home country.
Your New Home Country’s Tax Policy
Your new home country’s tax policy will determine how and when you will become a tax resident there.
A similar concept as above applies. Every country has its own rules that will establish your tax residency.
In some countries such as Malaysia, you get tax residency only if you stay in the country for longer than 182 days during a tax year.
In other places in Europe, such as the Netherlands, you become a tax resident from the day you move there and if you intend to live and work there.
In Cyprus, you can become a tax resident on the basis of spending only 60 days during the tax year.
For all of the above-mentioned countries, there are more rules and conditions that have to be met in order to obtain tax residency however, the day count is one of the most important conditions that need to be met in each case.
Common Reporting Standard for a Digital Nomad Tax Free Life
CRS is a global reporting standard that allows tax authorities from multiple countries to access information about their citizens’ finances.
In practice, it means that banks and other financial institutions are legally required to identify the tax residency of account holders.
CRS then forces banks and financial institutions to provide tax authorities with information and account activity about their customers.
Account holders who refuse to comply with the information requested from the banks risk having their accounts shut down. More than 100 jurisdictions have adopted CRS.
So, unless you plan on banking in one of the very few non-CRS countries you will have to disclose your tax residency.
Conclusion – Digital Nomad Tax Free
With this system in place, I highly recommend you make sure that your current tax strategy is legal and transparent. That’s why being a perpetual traveller or a resident of nowhere is becoming extremely difficult these days.
That’s why we often suggest you establish tax residency somewhere even if you are constantly travelling around.
There are several options that allow you to obtain tax residency in exchange for some investment and a few of those options only require you to visit 1-3 times a year to maintain your tax residency. If you want to explore these options then don’t hesitate to contact us today!
In the long run, making a small investment and establishing tax residency in a country with low, no taxes at all or in a territorial tax country will give you much-needed peace of mind.
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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.