With the surprising news that 62% of employees now work remotely, being a digital nomad isn’t just an aspiration—it’s many people’s reality. While most are working from home or at a coffee shop rather than globetrotting, the increasing capabilities of mobile devices and more millennials in the workplace point to an even greater autonomy in the future. Flights and visas are fairly straightforward, but there’s one issue that continues to trip up travellers: how do you pay taxes?
Tax is a thorny issue at the best of times, but paying tax while you’re abroad introduces hurdles that current tax systems often don’t seem equipped to handle. If you write an ebook in three different countries, where did the work take place? Do you pay tax to all of them, only one, or to your country of origin? Then there’s the tricky issue of whether a book continuing to sell copies counts as an ‘active’ stream of revenue, an extra step in some definitions of foreign income.
The good, the bad and the ugly
Globally, there are four variants of income tax: residential, territorial, citizenship, and hybrid.
- Residential tax comes into force when you live in a country for a certain amount of time, thereby qualifying you as a resident rather than a visitor.
- Territorial tax states that you should pay tax on income generated from within that country. This can range from just local contracts to all of the work you do while you’re there, depending on how liberal the country’s interpretation is.
- The rarest system is that of citizenship, which is only deployed by Eritrea and the United States. A citizenship tax means that wherever you travel, even if you’ve never lived in or even visited that country, you’re required to submit your tax returns to them as a citizen.
- Though it’s not often mentioned, there are also hybrid systems, which (as the name implies) are a combination of any of the above.
For most, the simplest and safest way to pay tax is to register yourself as self-employed in your domicile, the country in which you have citizenship. This way you’re subject to all of the usual taxes, but reap all of the usual rewards (a state pension, healthcare, etc.) with none of the risks of the other options. As long as your country has a double taxation agreement with the territory you’re staying in, you should only need to pay one lot of any single tax.
Another similar option is to set up a corporation in your home country and funnel your earnings through the business. This opens up different possibilities in terms of how the money is taxed. In the UK, for example, a limited company can pay out £9,000 in tax-free income a year. This can be a tricky area, however, and it’s best navigated by an accountant who specialises in international tax laws.
Some nomads claim to have avoided income tax altogether, although this is something we wholeheartedly advise against. By setting up an offshore account in a country with no income tax, and making brief stopovers in countries with residential tax systems or avoiding any domestic transactions in territorial ones, a few bloggers claim that their only tax obligations would be to the country with no income tax. Similarly, some people wishing to travel home regularly claim to pay personal taxes in their domicile while incorporating in a tax-free jurisdiction.
In theory, this would mean that only the money you take out of your business would be taxed, while the remaining income would be safe. Yet, this is an extremely grey area and a legal minefield. Many countries with zero income tax have stipulations about the business having a ‘permanent establishment’, i.e. being actively staffed and operated from the country. If you’re running the business in its entirety while hopping across continents, it’s likely that the local authorities in those countries will deem you tax liable.
Residency is also a complicated issue: different countries test it in different ways. While the hard and fast rule is that you shouldn’t stay in any one location for more than 180 days, investments in a country can be used as leverage against your claims of a temporary visit.
Renting a property and even keeping storage in countries, including the UK, can be held as proof that you’re settling in for the long haul. And depending on where you are, online work bears little difference to real-world work. Nomad-haven Thailand can punish those without a work permit with jail time, which would put a considerable dampener on your notions of a seaside retreat. Whether these laws are actively applied is one thing, but the potential costs definitely seem to outweigh the benefits.
Navigating tax in…
The United States
While the US system seems limiting, it’s perhaps the simplest to negotiate thanks to the FEIE, or foreign earned income exclusion scheme. By reporting yourself as self-employed, or turning your existing LLC or other corporate entity into an offshore company, you can take a ‘physical presence’ test—spending no more than 35 days in or travelling to the US—to negate all income tax on up to $100,800 of foreign revenue. Alternatively, if you have become a resident of another country, but don’t intend to relinquish your US citizenship, you can pass a separate residency test and garner more than a month’s visiting time.
Perhaps the greatest benefit of this is that you can maintain property in America, allowing you to sign up for services, receive mail ,and even bank in the country. This avoids having to fill in extra paperwork, like the Foreign Bank Account Report for the IRS, and looks more trustworthy than an obscure foreign bank to many global clients, while remaining in compliance with the foreign income stipulation of the FEIE. Residents of California and Virginia should be cautious, however. These authorities are notably hawkish in their pursuit of native taxpayers, while California doesn’t even recognise the FEIE. It might be prudent in this instance to have a domicile of a more forgiving state before moving abroad, but this requires a further investment of time and research.
The European Union
Rules across the European Union tend to be more consistent, with double taxation agreements in most countries (i.e you only pay in your home territory). Similarly, members of EU countries don’t have to worry about work visas within the Union, meaning you don’t have to fret over whether being a nomad counts as local work in the traditional sense. This only applies if you don’t intend to start a business in a country, however, and you should always check with the local authority in your domicile for specific tax arrangements.
For UK residents the process of tax registration is notably simple. By visiting the HMRC website you can opt to register yourself as a sole trader and receive a self-assessment account and Class 2 National Insurance, whereby you send a tax return with your calculated budget and liabilities at the end of each tax year. The account system requires that you’re sent a verification code by post, however, which can take as much as 21 days if you’re living abroad.
If you want to operate as a fully-fledged business rather than a freelancer, you might consider starting a limited company. This has numerous steps and requirements, and will require more paperwork and higher accountancy fees. However, many people feel it legitimises your business to potential clients. And depending on your circumstances, it could be tax beneficial. You’ll have to pay corporation tax, but £10,000 of your income can be withdrawn tax-free as a personal allowance, and there are deductions and means such as dividends to withdraw funds.
In Germany more than 90% of companies are an Einzelfirma, or sole proprietorships, with the limited liability GmbH ranking a distant second. One of the factors that does differ significantly between countries is the speed of formation. Germany’s notorious bureaucracy requires some form of contact with eight government offices, so it’s best to seek some professional assistance if you intend to formally set up a business in the country. Thankfully for most nomads, the law is very clear on work conducted ad-hoc in the country. Germany has double taxation agreements with most territories, and you’re only liable to pay income tax if the work is closely tied to the country.
In Spain, a self-employed worker, or autónomo, must submit an IEA income declaration, regardless of whether they’re liable to pay any tax, as well as officially declaring their intent to start a business. Opening a limited company (i.e. S.L.) requires mediation with six government bodies and a notary, as well as registering for an NIE tax ID if you’re a foreign resident.
The process in France requires a few administrative fees and finding the right Chambre de Commerce et d’Industrie for your job classification. There are, however, many different kinds of business classification. The difference between an entreprise individuelle and a micro-entreprise, for instance, might not be immediately apparent. As changing business classifications can be difficult, it’s vital to seek specialist advice for any company formation.
For most nomads, the most palatable and flexible option is to continue paying tax in your home country. For those who wish to relocate more permanently or settle a business abroad, there are a myriad of different options to consider in terms of business formation and the requisite tax arrangements. A truly nomadic, world-wandering lifestyle is currently difficult to navigate within the realm of global tax laws. However, as jobs become ever less location specific, international authorities will hopefully work to remedy this and provide a true digital nomad’s tax.
About the author: A former journalist and scriptwriter, Katya Puyraud is the co-owner of Euro Start Enterprises, providing advice to location independent entrepreneurs on how to become a digital nomad. Since 2007 Katya has helped budding digital nomads, entrepreneurs, and expanding SMEs to open their companies in over 30 countries worldwide.