‘Perpetual travelers’ traveling the world continuously from country to country without having a permanent residence is a true concept, but you should keep in mind digital nomad taxation.
You might have read about the 183 days rule and tax residency rules on numerous internet forums and our blogs as well.
The Flag Theory has been around since the 60s. Accordingly, if you manage your legal jurisdictions between different favourable flags, you will be able to avoid the obligations that come with them.
Flag theory proposes to separate your citizenship, residency, business base, asset haven and playgrounds in such a way that you get the benefits of protection of laws favorable to you.
Curious to know more? Here’s a full guide about digital nomad taxation.
Table of Contents
- Digital Nomad Taxation – Overview
- Digital Nomad Taxation – The 183-Day Rule
- Digital Nomad Taxation – Domicile Test
- Digital Nomad Taxation at Source
- Tips For Digital Nomad Taxation Compliance
Digital Nomad Taxation – Overview
Let’s start this guide with some frequently asked questions I often receive about digital nomad taxes.
Do Digital Nomads Pay Tax?
Digital nomads do pay taxes, but how and where they pay depends on their residency status and the countries they work in.
Most countries tax individuals based on residency or source income. Digital nomads often maintain tax residency in their home country (unless they spend 183 days or more in another country).
Understanding local tax laws and international tax treaties is crucial to determine tax obligations.
Some digital nomads structure their work to benefit from countries with lower tax rates, but they must comply with the laws of both their home country and the countries where they earn income.
Are There Specific Tax Deductions Available to Digital Nomads?
Digital nomads may be eligible for various tax deductions related to their unique work situation. These can include expenses for travel, accommodation, co-working spaces, internet, and necessary equipment.
However, the eligibility for such deductions varies by country and tax jurisdiction. Digital nomads must keep detailed records and receipts of their expenses.
It’s important to consult a tax professional to understand specific deductions available in their home country or the countries they work in, and to ensure compliance with local tax laws.
Can Digital Nomads Benefit from Double Taxation Agreements?
Double Taxation Agreements (DTAs) can benefit digital nomads by preventing them from paying tax on the same income in two different countries.
These agreements, established between countries, ensure that income earned abroad is taxed either only in the country of residence or credited against tax payable in the country of citizenship.
For example: In the case of a U.S. citizen working and staying in Switzerland for 200 days a year, the Double Taxation Agreement (DTA) between the United States and Switzerland could be beneficial.
According to the DTA, the income earned in Switzerland may be subject to Swiss tax. However, the tax paid in Switzerland can typically be credited against the U.S. tax liability on the same income to avoid double taxation.
This means that you would not pay taxes twice on the same income.
What Are the Risks of Non-Compliance with Tax Laws for Digital Nomads?
Non-compliance with tax laws can lead to significant risks for digital nomads, including penalties, fines, and in severe cases, legal action.
Each country has its own tax regulations, and failure to report income or incorrectly filing taxes can result in hefty financial penalties.
In some cases, it can also lead to difficulties in renewing visas or even entry bans. Digital nomads need to be aware of their tax obligations in their home country and any country they work in.
For this reason, you should seek professional advice to ensure you are fully compliant.
Digital Nomad Taxation – The 183-Day Rule
Tax residence means the country or jurisdiction where you are required to pay tax on your income. For most people in the world, this will be the country they live in and are a citizen of.
However, tax residential status for individuals changes if they are not physically resident of a country. As per a general rule in many countries, if you don’t stay inside a country for more than 183 days, you are not a tax resident of the country.
Combining your non-residential status with other aspects of flag theory like sourcing your income from outside the country and using banking services outside the country, you are able to not pay any tax in the country.
The concept of ‘No tax residence’ works on extending these rules on a full-time basis.
What if you don’t stay for a long enough time in any country and keep on moving from one place to another regularly every few months or weeks?
A permanent traveler is an individual who does not reside in a single jurisdiction for a period that may trigger tax residency. They generally have a location independent business or earn passively via investments.
While this looks great theoretically and used to work very easily in the past, it is not such an easy thing to do these days.
Governments will not forgo their tax revenue that easily especially now when there are a lot of people trying to save tax this way. Just because you weren’t spending more than 182 days in your home country, you will not necessarily have a strong case against tax authorities.
Not all countries follow the residence-based taxation system. If you are a citizen of countries that follow citizenship-based taxation like the USA, you will most likely be a tax resident somewhere.
Digital Nomad Taxation – Domicile Test
Lots of countries also take the domicile test apart from the residency test. The residency test is only one of the conditions for determining tax residence and not an absolute one.
Domicile is different to residence; it is where you belong and not where you actually live. For perpetual travelers without a true residence, your domicile will become an important condition to determine your tax residence.
For instance, in Australia, apart from ‘the number of days’ test, there are 3 other tests to determine your tax residency.
If you don’t have a permanent place of living outside Australia, you will be considered as an Australian resident. The onus of proving that you have a place of residing where you intend to spend most of your time is on you.
You will have to show that you have a stronger connection elsewhere, which might be difficult as a perpetual traveller due to its temporary nature and not permanent nature of home. Your country of citizenship is also a strong candidate to be your domicile.
Where to Pay Digital Nomad Taxes?
People who are leaving their home country and traveling around without a base often have a misconception that they don’t need to pay taxes in the home country.
Many times it comes out as a bitter revelation to them in the form of huge back taxes, and that’s something to consider when it comes to digital nomad taxation.
Governments have become more stringent in applying tax laws.
Now with better information systems and transparent communication between financial authorities and financial institutions around the world, they are able to track the income of digital nomads with more ease.
Remember that your home country is really keen on taxing you and unless you have clear answers for why your country is no longer your home country, you always are on the lookout.
Digital Nomad Taxation at Source
Even if you are a tax resident of nowhere, it doesn’t mean that your income will not be taxed.
Incomes are not just taxed in the hands of recipients but also at their source. This mechanism is designed to help the authorities’ collect taxes without going through the hassle of identifying the recipient.
Especially, in the cases of tax of cross border payments and payments of a more passive nature like royalties or dividends, the payers are required to deduct a certain amount and deposit it to the tax authority.
If you are the recipient of the income, you will later have to prove that you are applicable to a different tax jurisdiction and not liable to pay tax at the source.
There are DTAs and tax treaties between nations to avoid double taxation which clarify which country will tax in what circumstances.
As a tax resident of nowhere, you will not be able to utilize the DTAs and the income will be fully taxed at the source at the rate of the withholding tax rate which are generally high in most countries.
Gone are the days when you could open an offshore bank account in a remote country and direct all your finances there without your home country knowing.
You cannot open an account without providing your residence address. Banks have a lot of reporting requirements in order to curtail financial crimes like money laundering, not only in their home country but also to external financial institutions.
With the introduction of FATCA for the US and Common Reporting Standards (CRS), financial institutions are required to exchange information about their clients to tax authorities of their home country.
As per CRS, it is mandatory for banks to determine the tax residencies of the account holders. They are also required to inform the tax authorities of the tax residency identified, about the transactions in the account.
Hence, now you will not be allowed to open a bank account without providing your tax residency information to banks.
Majority of countries around the world are participants of CRS rules. Hence, tax authorities will be tracing your accounts and taxing your income, no matter where you are located.
In practice, those that do not have a tax residency will actually put their country of citizenship as the tax residency country for CRS purposes without getting into trouble especially if you’ve successfully done all the steps to become a non-tax resident.
Tips For Digital Nomad Taxation Compliance
In general, it is advisable to establish a tax residency in a jurisdiction with favorable tax laws instead of trying to become a tax resident of nowhere. Knowing that your home country will tax you, it is better to establish a new place as your home.
Creating a domicile in a tax friendly country by getting a permanent residence status is an option many digital nomads choose. It is relatively easy to obtain permanent residence in zero or low tax countries like Panama, Cyprus, Malta, etc.
You may rent an apartment or buy a real-estate as investment for proving your domicile and tax residency in a low tax country.
You need to be certified by your previous residence country that you are no longer a tax resident there to avoid any future troubles with tax authorities. Obtaining a physical residency is increasingly necessary for this purpose.
This will help you to show tax authorities and banks that you have a permanent base and taxes of the different source locations are not applicable to you. It will also help you get the benefits of DTAs and tax treaties to get a refund of your withholding taxes.
It is more difficult day by day, especially for citizens of OECD countries to pay not tax nowhere. So if you have to pay taxes somewhere, why not pay where they are minimum or zero?
Although it is possible for some European residents and UK nationals to be tax resident of nowhere, we have come to find that most of the time people only chose this option for a short term solution.
Once they have to start dealing with bigger (financial) institutions they will usually chose to become a tax resident in a low tax country.
However, it is completely a personal choice whether or not you would like to become a tax resident of another country. You might want to ask yourself what your future will look like.
Are you wanting to purchase a house sometime soon and you might need a loan from the bank? If so, they’ll usually require a tax return from the last 2 years.
Who are your clients and will they ever ask you for a tax ID number? Are you transferring large sums of money in the traditional banking system – if so, it is not uncommon to receive a letter that asks for past tax returns to make sure that the money was actually taxed…
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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.