Where Should Digital Nomads Pay Their Taxes?

Just a few years ago, all freelancers who did not live in their own country, but who traveled around the world in search of a better place to live were called digital nomads. Who were they? They were primarily representatives of all professions that did not depend on an office workplace. Accordingly, most of them were information technology professionals. For example, developers, designers, content and SMM managers, startup founders, this whole lot of online workers who could safely work from anywhere on earth, as long as there was a steady internet connection. They were joined by all the quality photo hunters, a large number of bloggers, as well as online coaches and market specialists.

What is interesting is that previously it used to be a fairly rare phenomenon, but now countries like the UK, Germany, Thailand, Bali, Portugal, Singapore or Panama are full of digital nomads from all over the world. Here you can find inexpensive accommodations. There’s excellent Internet connection and every opportunity to learn a foreign language. 

The COVID-19 has shown that people of many occupations don’t actually need any office space to do their jobs: they can work from anywhere! Many companies are also adapting to remote hiring, and we are witnessing the number of digital nomads grow rapidly around the world. M other professions will probably join those listed above. For example, project and product managers, psychologists, teachers and lecturers, doctors of some specialties, and other professions that can be practiced online.

In the past, most of these people were leaving their cities for places where it was more comfortable and convenient to work. On the one hand, there was freedom and independence, but on the other hand, there was responsibility for one’s own earnings, because one could easily be left without a roof over one’s head. For this reason, certain potential digital nomads stayed at home and did not go anywhere. But all those who had some knowledge of foreign languages were trying to speak and improve them directly in the countries where they are spoken.

However, all digital nomads have always been facing an important single issue: how should I calculate and pay the taxes? Because, as a rule, taxes are not paid by the employers of digital nomads. In this sense, all of them are entrepreneurs of a sort. 

Therefore, readers of our portal are often asking us the following questions: Could you tell me where digital nomads should pay taxes? In the country of their permanent residence or in the country where they receive this income?

These questions are important because if you do something wrong in this field, it can lead to very tangible financial losses, as the case of Oleg Tinkoff’s arrest in the UK demonstrates. But let us try to understand the big picture without going too much into individual cases.

From the government’s perspective, your profession, for tax purposes, doesn’t really matter. Whether you are a digital nomad, a freelancer living on the go all the time, a consultant who has clients around the world, or an entrepreneur with a global e-commerce store, you may find it difficult to properly report your income to the tax authorities. But, the exact same problem is faced by tens of thousands of digital nomads around the world, so you are not alone.

The point is that tax laws were passed before the time when it became possible to generate income from anywhere in the world. This opportunity emerged no more than some ten years ago. Therefore, as of 2023, there is no uniform international tax law regarding taxes for digital nomads. The idea of “not having a home,” or a permanent residence, is simply not in the tax rules of the world. 

The laws in force were written at the time when people were usually spending their whole life in their home countries, and even a special diplomatic tax immunity was invented for nomadic diplomats. There is a feeling that countries are not yet ready for the nomadic lifestyle of their citizens. So, you should clearly understand that traveling around the world regularly involves many tax issues for which there are no answers today. In addition, there are many things and procedures that are still associated with your citizenship, or your permanent residency. These are things like health insurance, certain types of contracts, work rules, rights to marry, to buy real estate or to open a bank account, and so on.

Besides, most countries, such as the country you were born in, and any other place you spend enough time at, will want to see your income for tax purposes. Therefore, many digital nomads believe that since they are always traveling on a tourist visa and moving from one country to another, they do not need to file tax returns and pay taxes anywhere. 

However, this is a huge misconception that can cost them large financial losses from fines and penalties which will draw up with them sooner or later. As practice shows, digital nomads, in any case, have to be tax residents somewhere and pay taxes. In most cases, the truth is that they will have to file tax returns in their home countries, unless they establish another tax residency for themselves somewhere else. 

In case digital nomads are unable to file tax returns in their home country, they may face claims from the tax authorities of their country. Especially nowadays, filing tax returns in many countries of the world can be done remotely and in a digital format.

Digital Nomads General Tax Practice

As a rule, you are considered a tax resident in the country where you spend more than 183 days in a calendar year. However, if you simply reside in a country for more than the above-mentioned period, you will not automatically become a tax resident of that country. 

In practice, this means that in order for your country of citizenship to stop considering you a tax resident, you must notify the authorities and keep a note of this notification, with the date and details of the government official who accepted it. 

Once you notify your country of residence that you have another tax residence, you must make your new tax residence valid. To do this, it will be enough to register at the tax office of your new permanent residence and get an individual tax number. You will need this number for many things and procedures. For example, to open a bank account in your new country of residence. 

In addition, you will need to show economic activity consistent with your activities in the country of new tax residency. This could be receiving a small salary to a newly opened bank account, buying stocks or registering a new company, buying or renting real estate, or engaging in other economic activity that may be taxable or reported to the local tax authorities. If you do not take any action to enhance your tax residency status, your new country may not even know that you exist and your former country of residence may keep regarding you as its tax resident.

What could the consequences be? All those issues mentioned above. For example, you may have issues with founding companies, opening accounts and registering real estate and property in your name, because these actions may require you to file your latest tax return. Only if you are going to live somewhere in Tibet traveling between China, India, and Nepal, you probably will not have to worry about that at all. 

If you intend to carry out proactive business operations in different countries of the world, you will have to become a tax resident somewhere. It is most advantageous to do this depending on your occupation. If you like to travel, it is best to do it in one of the countries where it will then be easy to obtain citizenship granting the right of visa-free entry to most countries of the world. If you do not want to pay taxes on your international income, it is best done in a country with zero taxes on income earned outside its territory.

Examples of such countries are Panama with its territorial system of taxation and visa-free entry to more than 140 countries and Portugal with its special tax regime for foreign nationals, non-habitual residents.

You should also remember that despite giving up your tax residency in the country of your first citizenship, in case you still have real estate there, the tax authorities can claim your income considering that you have the center of vital interests there. Therefore, if you do become a digital nomad, it would be better for you to sell your real estate in the country of your first citizenship and withdraw all funds transferring them to reliable banks, so that you can access them from anywhere in the world using your plastic cards.

Countries issuing digital nomad visas and those offering tax benefits to digital nomads

If you are a digital nomad, you can acquire a visa to one of the countries listed below and pay little (or even nothing) in taxes there:

• Anguilla;
• Antigua and Barbuda;
• Aruba;
• Bahamas (no income tax for residents);
• Barbados;
• Bermuda;
• Cape Verde;
• Cayman Islands;
• Costa Rica;
• Croatia;
• Curaçao;
• Dominica;
• Iceland (stay up to 183 days without paying local taxes);
• Indonesia (Bali);
• Montserrat;
• Romania;
• Seychelles;
• UAE (Dubai).

Digital nomad visa programs are available in many countries in 2023. These programs are aimed at attracting qualified specialists from foreign states and therefore, digital nomads can find some serious tax incentives in these countries. The most popular destinations for digital nomads are listed below:  

• Panama – taxes are payable only on the income made in Panama.
• Albania administers a digital nomad visa program. Taxes in Albania:
  • The income tax is progressive and it can reach 23%;
  • Corporate tax – 15%;
  • Dividend tax – 8%.
• You can also acquire a digital nomad visa to Portugal. The country offers tax benefits to digital nomads that include the following ones:
  • No tax on income made outside Portugal;
  • Tax on income made in Portugal is 20% (the standard income tax can be as high as 48% in Portugal);
  • Contribution to the pension fund is 10%, which is also considerable lower than the standard contribution.
• Taxes payable by digital nomads in Spain:
  • 24% if the annual income does not exceed 600,000 euros;
  • 47% if the annual income exceeds 600,000 euros;
  • 15% tax on non-residents’ income if certain conditions are met (the tax cut is available for five fiscal years).
• Malta is one more country that does not tax its residents’ incomes made abroad.

International Tax Terms

Tax Residency

Many people confuse tax residency with citizenship. Citizenship is determined, in most cases, by where you were born, which can be defined as your country of birth. Traveling or moving to another country will have no effect on your citizenship status, and you will always be a citizen of your own country unless you decide to acquire a new citizenship or change your current one.

On the contrary, your residency determines where you conduct your business, spend most of your time and have to pay taxes accordingly. Is it possible to be a citizen of one country and a tax resident of another? Absolutely, because these are two different statuses of the same person. Yet both of them can affect where and what taxes you have to pay.

Since a change of residence is much easier than a change of citizenship, you will have different rights and obligations to pay taxes.

Different Types of Tax Laws

The procedure of how citizens pay taxes in their countries is regulated differently in each country.

However, most countries apply tax systems based on residency. This means that people pay taxes in the country where they spend most of their time, not necessarily in their country of birth or citizenship (of which, incidentally, there may be several).

In most cases, you are considered a resident of the country where you spend more than six months.

Some other countries, however, apply tax systems based on citizenship. These countries tax their citizens no matter where they live and where they make money. This means that if you are a citizen of the country where taxation is based on citizenship, even if you move and live somewhere else, you still have to pay taxes in your country. For example, this is the tax system applied in the United States, Eritrea, and the Philippines.  

There are other tax systems, such as territorial tax systems that are used in Panama, Portugal, partly in the UK and some other countries, whereby individual citizens are taxed only on their local income that is acquired on their territories. This is what gives, for the most part, most digital nomads the ability to earn money abroad and not have it taxed in the place where they permanently reside.

Double Taxation Agreements

In certain cases, two countries may consider an individual a tax resident at the same time, and both countries may want him/ her to pay taxes to their national budgets. This sounds unfair and to resolve this problem, many countries have entered into double taxation agreements. Such agreements help people avoid being taxed by two national governments at a time.

Should you have any questions regarding tax residency, permanent residency or citizenship in any specific country and you do not know how to proceed, then please do not hesitate to email us and we will do our best to clarify everything for you.

Please send a request for a personal consultation to info@offshore-pro.info, contact our experts in any way listed on this page. We will be happy to provide professional assistance to you in a confidential manner