According to the World Tourism Organization, the number of digital nomads has increased significantly since governments began issuing visas for digital nomads. These workers now have a structured environment to carry out their work while on the go. But what about tax considerations for digital nomads? How does living in multiple foreign countries affect your tax status?
Do digital nomads have a special status?
In its latest report published on November 8, 2023, the World Tourism Organization explores the connection between the increase in visas for digital nomads and the growing trend of digital nomadism. According to the study, 39% of the 54 countries studied provide tax exemptions for digital nomads. However, it is important to note that having a digital nomad visa does not automatically change someone’s tax residency; it simply allows legal entry to the issuing country. Meeting criteria such as demonstrating sufficient financial resources is crucial for the issuance of the visa. Foreigners must be able to support themselves without working locally, relying on foreign sources of income. In certain cases, digital nomads can even set up their own businesses, as seen in places like Estonia or Dubai.
Governments generally refrain from taxing digital nomads’ foreign-source income to attract international professionals. This is good news for self-employed digital nomads. However, if they continue to work for a company tax registered in another country, they will find themselves in breach of the host country’s legislation and face double taxation.
Understanding the tax status of digital nomads
There is no specific tax status for digital nomads. The term does not refer to a distinct legal or tax category, but rather to various legal and tax profiles. Among these, there are three main types: employees, microentrepreneurs and self-employed. Employees are tied to their employer, and the tax base is established where the company primarily operates. Similarly, entrepreneurs pay taxes in the country where they have established and run their business, known as their tax domicile.
An employee’s tax status depends on the regulations set out in their employment contract, which, in turn, is governed by the laws of the country where the employee works. If a companyauthorizes its employees to work remotely from another country, the employees remain affiliated with the company. In principle, taxes must be paid in the country where they work. However, complications may arise if the employee becomes a resident in the host country for an extended period. Similarly, challenges may arise for the employer, who often operates from a different country than the expatriate employee.
In general, self-employed people are subject to income tax, and the calculations vary depending on the nature of their business, whether it is liberal, commercial or artisanal. Vendors and artisans pay taxes on industrial and commercial profits (BIC), while self-employed people pay taxes on non-commercial profits (BNC). Calculation rules can be complex and vary from country to country.
Microentrepreneurs benefit from a simplified tax system, which includes a lower tax rate than that of independent entrepreneurs (IE). Distinctions between commercial and non-commercial activities still exist, but are adapted to the micro-enterprise regime (micro-BIC and micro-BNC). Again, these rules may differ from country to country.
It is worth mentioning that there are several legal structures for companies, including the single-member simplified joint-stock company (SASU) or the single-person limited liability company (EURL). Consequently, the tax situation of a digital nomad entrepreneur will also depend on his legal status. The term “freelance” does not designate a legal status, but rather refers to people who work independently. Freelancers can be self-employed, micro-entrepreneurs or work as EURL.
Who do digital nomads pay taxes to?
The research highlights that many countries consider digital nomads as tax residents after 183 days within their borders. However, it emphasizes the variability of tax regulations from state to state. This raises important questions about taxation: do digital nomads have to pay taxes and, if so, should it be in their home country or in the countries where their clients reside (in the case of freelancers)? In tax matters, each country is free to apply its own rules. Therefore, it is advisable to familiarize yourself with local tax regulations before considering an expat lifestyle.
Countries with tax exemptions for digital nomads
Countries such as the United Arab Emirates (UAE), Croatia, Mauritius, Malta, Portugal and Malaysia offer tax exemptions for digital nomads for an unspecified period. On the other hand, Antigua and Barbuda, Barbados and Latvia have defined the duration of their tax incentives, offering an exemption of 2 years for Antigua and Barbuda and 1 year for Barbados and Latvia.
Income tax rules
In cases where a state lacks a dedicated policy for digital nomads, tax regulations on income tax depend on several factors. These include general tax laws, tax residency criteria and measures related to the hiring of a foreign worker by a local company. In countries like Argentina or Norway, digital nomads are likely to be treated similarly to non-residents or residents, receiving equivalent tax treatment. In Germany, digital nomads who earn more than $10,703 annually must pay income taxes. Meanwhile, in the Czech Republic, they must pay an annual social tax of $135.
Avoid double taxation
A digital nomad’s situation could result in double taxation, requiring them to pay taxes in both their home country and the host country. To avoid this problem, many countries have signed tax treaties. These agreements generally stipulate that taxes are paid in the country where the person is employed. Many European countries that issue visas for digital nomads have established such double taxation agreements.
Tax optimization for digital nomads?
Tax optimization involves employing legal strategies to reduce taxes. Digital nomads might be tempted to move to countries or cities with favorable tax frameworks, such as Dubai, Bulgaria, Andorra or Estonia. To determine the most appropriate tax residence for your profile, it is advisable to consult with professionals in the sector both in your country of origin and in the host country. However, tax advantages alone should not be the only factor influencing the decision to change tax residence. Other factors include the cost of living, quality of life in the expatriation destination, economic and political stability, as well as administrative simplicity.