For digital nomads who travel a lot, get to know how double taxation treaties work to avoid paying double tax
For digital nomads who live in multiple countries each year, it's challenging to figure out where to pay tax. And when considering the complex nature of cross-border taxation, even more challenging is how to avoid paying double tax.
The bottom line is that you do owe tax somewhere. In order to stay legal and avoid penalties, you’ll need to figure out your tax jurisdiction issues as a nomad. This is the case for your own personal income taxes, and for taxes for your business.
You may require some legal assistance to assess where you owe tax. And, believe it or not, there could be two or more countries that both claim you owe them tax. That’s where double taxation treaties can help - they can resolve the issue so you don’t end up paying double tax.
Many countries around the world have entered into tax treaties to help people avoid paying double taxation, but not all.
That’s why it’s wise to decide where to travel and work not only on where you’d enjoy living. It's also good to think practically about where it would make sense from a tax perspective. After all, who wants to pay tax twice?
There are many resources that can help you figure out where you need to pay tax as a digital nomad. But the first place to look is a country's tax legislation.
Every country has their own unique tax laws and legal requirements which you will need to abide by.
Essentially, where you pay taxes will depend on where you spend most of your time, which citizenship you have, which countries you travel to and for how long and how often, how much you earn and where you have permanent residence. Figuring out where you owe taxes can therefore be complicated and require specialist knowledge. It’s thus advisable to contact a professional tax expert to get advice on your unique circumstances.
If you are an e-resident of Estonia or considering e-Residency, please note that it is not a tax residency for you or your company. Consider whether you have foreign tax liabilities in another country (e.g. where you live) due to permanent establishment or dual tax residency. Learn more about taxation for your business.
For most countries, you owe personal taxes where you are tax resident, usually where you spend the most time. In other countries, if you’re a citizen then you’re expected to pay tax there no matter where you live. These types of countries use a territorial tax system. This means you may even owe taxes there if you have worked in that country but are a tax resident elsewhere.
Different countries have varying tax rates. So, some savvy digital nomads opt to work in countries where they can pay lower taxes.
It’s important to bear in mind that if you’re a digital nomad and travelling a lot, you may trigger a situation where two or more countries claim that you owe them taxes. In that scenario, if those countries have double taxation agreements with each other you may be able to avoid paying double tax. But if they don’t, you could end up paying the price.
Of course, if you operate a business, then you will also need to pay corporate tax. Where a company has tax obligations will depend on where the company is registered or incorporated, is effectively managed, or carries out most of its activities. Luckily, treaties are also in place between countries to avoid double taxation of companies. For e-residents of Estonia, you can read more about this topic in this blog post on cross-border taxes:
Double tax treaties are legal agreements between countries that aim to encourage investment and ensure equal treatment of persons. To do this, they agree on conventions to eliminate double taxation that may result from the combined effect of the domestic laws of the two countries.
Each tax treaty establishes rules around the types of earnings that qualify to be excluded from paying double tax. In some cases, they also provide exemptions for certain types of income.
Estonia has signed 65+ treaties to avoid double taxation, including all EU and most OECD countries.
Digital nomads should look closely at countries you intend to live and work in, to understand the extent of their treaty network. Or you could hire a tax professional to provide you with advice. This will help you avoid paying tax on the same income in multiple countries.
In addition to the complex web of bilateral treaties covered above, there are numerous multilateral, regional and global tax conventions and standards also in existence. In some cases, these instruments have implications for double taxation as well. For example, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) was adopted in 2018 to tackle treaty abuse and counter tax avoidance or evasion. As at 10 November 2022, 89 countries have ratified the agreement. The convention enables countries to more quickly modify their bilateral tax treaties and to implement strengthening measures on a multilateral scale.
It’s important to do thorough research into the countries you’ll be working and travelling in. Even if it's just for a short period, you may be tax liable as an individual or business owner. There are online resources to help you with this. But once again, the best way to prepare yourself is to speak to an international tax expert.
If you’ve done your tax research and are prepared, you can avoid countries that don’t have double taxation agreements - thereby avoiding whittling down your income significantly.
Many nomads set out on exciting journeys, travelling the world as they work. But, if you haven’t considered the tax implications of where in the world you choose to work, you could be in for a nasty surprise.
That’s because tax systems around the world can be very different. Just by living and working for a short time in a country, you may be liable to pay tax there. And, if another country also has a claim for your tax - you could end up in the unenviable position of paying double tax! Luckily many countries have signed double tax agreements, to help prevent this scenario.
It’s also relevant to look for competitive tax rates in your preferred country of tax residency. Some jurisdictions have very high or very low rates of tax, and tax compliance costs also vary wildly.
And you’ll need to do your homework to figure out the plethora of different tax laws around the world, to assess whether you owe tax, how much you owe, and whether there are opportunities to be more strategic about where you live and work from a tax perspective. For many people, that involves hiring a tax professional, which can also help you ensure that you’re legally compliant.
E-residents looking for a tax expert need not look any further than the e-Residency Marketplace. Here, you'll find a curated business directory of tax professionals ready to help.
This article was written by guest contributor Andy Stofferis (www.andysto.com). Andy is not a tax expert, and the article is not intended to give any legal or tax advice. Tax laws and regulations vary greatly from country to country, and this information is a general guide only. You are advised to contact a professional tax advisor for any legal or tax advice, and not to rely on this article as gospel.
