a complete digital nomad tax guide
Digital nomad tax - what is it and where to pay? For digital nomads who work independently of any given location, the question of where to pay taxes regularly surfaces.
Unfortunately, the answer is rather complex, as there is no universal tax law that applies to digital nomads and their worldwide income.
It’s imperative to ensure you pay your taxes correctly as there can be significant legal and financial ramifications for getting it wrong. That’s why it's critical to get professional advice as a digital nomad on where you are a tax resident.
This digital nomad tax guide is meant to be helpful and to give a general overview of taxes for nomads. But you should nonetheless ensure that you seek professional tax advice services to assess your particular circumstances.
Where digital nomads will owe tax typically depends on which country they are from and which citizenship they hold, how often they travel, how much they earn, and whether or not they have a permanent residence. There are also different requirements for paying personal tax as a digital nomad and paying corporate taxes, which we look at in more detail below.
Each country has its own set of tax rules and laws, with different tax rates that apply, and different legal and financial obligations and procedures to follow when you file tax returns.
Different types of digital nomad tax
Digital nomads are required to pay personal income tax - and if they operate, or are involved in running any companies, they may also need to pay corporate taxes.
There are usually different rules that apply to these two distinct forms of tax, and because personal tax is typically paid where a nomad is a tax resident, it means that corporate tax could be paid in a different jurisdiction. This is particularly the case where the corporation is multinational and operates across various countries.
Below we take a deeper look at personal tax and corporate tax for digital nomads.
Personal taxes for digital nomads
Every country has its own detailed tax laws and regulations. Most countries require people to pay personal income tax based on where they are resident, which may be different from their country of citizenship.
To be considered a resident of a country for tax purposes, there are varying rules that apply (which are different around the world), but quite often this is where you spend most of your time (i.e. more than 6 months of the year). That in itself can be challenging for digital nomads.
There are some countries that apply their tax rules to a person’s worldwide income based on citizenship, no matter where their citizens live or reside. And other countries apply a territorial tax system whereby any locally earned income is taxed in that country - but any income earned outside that country is not taxed there. And there are also a few countries that don’t impose personal income taxes.
For digital nomads who may not reside in one place for long enough to call it a tax residence, this can make tax requirements even more complicated. Sometimes two countries may both claim tax from an individual. If there’s a double taxation agreement in place between those countries, then this can help the individual avoid a hefty double tax fee.
Given the myriad of international tax laws around the world and the fact that different countries have different tax rates (some of which can be significantly higher than others), some digital nomads are opting for tax residency (and often citizenship too) in places with lower tax rates.
Company tax for digital nomads
As with personal income tax, companies are subject to different tax laws around the world. Where the company pays tax depends on which country the company operates in and where it is registered/incorporated or effectively managed. There’s also an international tax law principle of ‘permanent establishment’, that allows countries to tax company profits of non-resident entities if company activities are carried out in that country.
Knowing which tax laws apply in the countries where your business plans to operate in, is an essential part of responsible business management and can have significant impacts on the successful running of any company.
In addition to corporate taxes, companies typically are also liable for paying social taxes, which are paid in the country where the employees are located as a general rule. And in many parts of the world, companies also pay VAT and may be obliged to register their companies for VAT, and submit annual VAT returns.
For anyone wanting to operate a company in a foreign jurisdiction without having citizenship there, it can be a real challenge. But thanks to new programs, like our Estonian e-residency program, companies can now be incorporated and managed by non-residents and non-citizens, remotely. Below we explore this option in more detail, as it’s becoming increasingly popular among digital nomads.
E-Residency: a business solution for digital nomads
In recent times, certain countries have created digital residency programs which can make it easy to establish a company in a foreign jurisdiction and trade there. Estonia pioneered this initiative with it's flagship e-Residency program. This is particularly attractive to digital nomads and people wanting to remotely run a location-independent, fully digital business with ease.
Estonia is considered one of the most advanced digital societies in the world. E-Residency provides digital access to the country’s e-services and online systems to foreigners. The main motivation being to establish and manage an EU-based company from anywhere in the world. In the 8 years since the program launched, digital nomads, entrepreneurs, consultants and freelancers have become e-residents and taken the first step to running a business without borders.
With an e-Residency digital ID, all of the company administration can be done easily online - from using a secure digital signature, to accessing business banking, and digitally submitting your annual company report.
And the procedure to apply for and establish a business in Estonia as an e-resident is also very easy and affordable. Plus you won’t have to appoint a local director or any representative to manage your business. All that is required is that you have a local contact person and legal address in Estonia to act as your company’s ‘messenger’ and ‘mailbox’.
There are different options for company ownership to choose from in Estonia. The most popular and suitable for e-residents is a private limited company (OÜ), which has a minimum share capital requirement of EUR 2,500, making it quite affordable.
According to the Estonian tax system, if your company is taxed in Estonia, then any profits that are distributed get taxed at 20% (calculated as 20/80 of net distributed profits), whereas dividends that are paid regularly over 3 years require the payment of 14% tax (or 14/86 of net distributed profits). This makes Estonia’s tax system one of the most competitive in the world. In fact, it’s even been ranked number 1 in the International Tax Competitiveness Index for 8 years running.
And because Estonia has established double taxation treaties with more than 60 countries around the world, there’s a good chance that you won’t be double taxed. Note that due to the international tax laws already discussed above, you will most likely pay corporate taxes where your company is considered permanently established.
Depending on the nature of your corporate activities, which countries you sell your products in, and the amount of your annual turnover, your business may also be liable to submit annual VAT returns and pay VAT in Estonia. Here, the threshold for VAT registration is if your company earns at least €40,000 in revenue per year.
In terms of social taxes for employees of your company, your company will be exempt from paying these in Estonia if you’re already paying them in another EU country or a country with a double taxation agreement with Estonia.
Final thoughts on international tax for digital nomads
One of the most challenging aspects of being a digital nomad is figuring out the plethora of domestic and international tax laws that apply to worldwide income and corporate profits. As breaching tax laws can have grave implications, both legally and financially, it’s imperative that you get professional advice before you embark on your travels.
With proper planning and examination of various country tax systems, it is possible to geoarbitrage your personal residency situation and corporate set-up and pay less tax (in some instances). As a bonus, you may also find that you can operate your business in parts of the world that you had never even thought of - thanks to programs like e-Residency of Estonia.
IMPORTANT NOTE:
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.