Do digital nomads have a special status?
In its latest report released on November 8, 2023, the World Tourism Organization explores the connection between the rise in digital nomad visas 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's noteworthy that holding a digital nomad visa doesn't automatically change one's tax residence; it simply allows legal entry into the issuing country. Meeting criteria such as demonstrating sufficient financial resources is crucial for visa issuance. Foreigners must be able to sustain themselves without working locally, relying on income sources from abroad. In certain cases, digital nomads can even establish their own businesses, as seen in places like Estonia or Dubai.
Governments usually 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 that is tax-registered in another country, they find themselves in breach of the legislation of the host country and face double taxation.
Understanding digital nomads' tax status
There isn't a specific tax status for digital nomads. The term doesn't refer to a distinct tax or legal category but to various legal and tax profiles. Among these are three main types: employees, micro-entrepreneurs, and sole traders. Employees are linked 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.
Employees
An employee's tax status depends on the regulations outlined in their employment contract, which, in turn, is governed by the laws of the country where the employee works. If a company authorizes its employees to work remotely from another country, the employees remain affiliated with the company. In principle, taxes should 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 occur for the employer, who typically operates from a different country than that of the expatriate employee.
Individual contractors
In general, sole traders are subject to income tax, and the calculations vary based on the nature of their business – whether it's in a liberal, commercial, or artisanal field. Salespeople and craftspeople are taxed on industrial and commercial profits (BIC), while self-employed individuals are taxed on non-commercial profits (BNC). The calculation rules can be complex and vary from one country to another.
Micro-entrepreneurs
Micro-entrepreneurs benefit from a simplified tax system, including a lower tax rate than independent entrepreneurs (IEs). The distinctions between commercial and non-commercial activities still exist but are tailored to the microenterprise regime (micro-BIC and micro-BNC). Once again, these rules may differ from one country to another.
It's worth mentioning that various legal structures are available for companies, including the single-member simplified joint stock company (SASU) or the single-member limited liability company (EURL). Consequently, the tax situation of a digital nomad entrepreneur will also depend on their legal status. The term "freelance" doesn't designate a legal status but rather refers to individuals working independently. Freelancers can be individual entrepreneurs, micro-entrepreneurs, or operate as EURLs.
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 one state to another. This raises important questions regarding taxation: Do digital nomads have to pay taxes, and if so, should it be in their home country or the countries where their clients reside (in the case of self-employed individuals)? In tax matters, each country is free to apply its own rules. Therefore, it is advisable to familiarize oneself with the local tax regulations before considering an expatriate lifestyle.
Countries with tax exemptions for digital nomads
Countries such as the United Arab Emirates (UAE), Croatia, Mauritius, Malta, Portugal, and Malaysia provide 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 a 2-year exemption for Antigua and Barbuda and 1 year for both Barbados and Latvia.
Income tax rules
In cases where a state lacks a dedicated policy for digital nomads, income tax regulations depend on various factors. These include general taxation laws, tax residency criteria, and measures related to the employment of a foreign worker by a local company. In countries like Argentina or Norway, digital nomads will likely be treated similarly to non-residents or residents, receiving equivalent tax treatment. In Germany, digital nomads earning over $10,703 annually are required to pay income tax. Meanwhile, in the Czech Republic, they need to settle a yearly social tax of $135.
Double taxation avoidance
The situation of a digital nomad might result in double taxation, requiring them to pay taxes in both their home and host countries. To avoid this issue, many countries have entered into tax treaties. These agreements typically stipulate that taxes are paid in the country where the individual is employed. Many European countries that issue digital nomad visas 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 relocate to countries or cities with favorable tax frameworks, such as Dubai, Bulgaria, Andorra, or Estonia. To determine the most suitable tax residence for your profile, it's advisable to consult with professionals in the sector both in your home country and in the host country. However, tax advantages alone should not be the sole factor influencing a 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.
