Introductory Guide to Income Tax for Digital Nomads

About Author: Hi, I’m Jessica Suess, an Aussie who moved to the UK for studies and ended up on a global journey as a freelancing digital nomad. I’m recently settled in Brazil, navigating finances and sharing what I have learned. See My Full Bio.

Is it true that digital nomads don’t have to pay income tax? No.

Some digital nomads manage to avoid paying income tax, but the truth is that everyone is liable to pay tax somewhere. Digital nomads may even face the unpleasant predicament of paying duplicate taxes on the same income in more than one country.

Becoming a digital nomad can make your tax situation complicated. It is not always clear where you should be paying income tax and on what income. Some digital nomads also talk about how their international status can minimize their tax bill, but it is not always clear how.

In this article, I will answer some of the fundamental questions about digital nomad income tax. Bear in mind that the details depend on the specific countries. Also, I am not a tax specialist, and this guide is not meant as financial advice. I’m just sharing what I have learned about digital nomad taxes over the years to give you a grounding to investigate your situation.

Where Should You Pay Income Tax?

Where you should pay income tax depends on where you are considered a resident for tax purposes. Being a tax resident is not the same as being a resident (temporary or permanent) or a citizen. It is about where you have a significant financial and/or physical presence and should therefore be contributing via taxes.

Determining where you are a tax resident depends on several factors.

Establishing a New Tax Residency: The 183-Day Rule

While this is not universal, the general rule is that once you stay in a country for 183 days, you become a resident for tax purposes and are liable to pay tax there on your international income. This is why most visitor visas are capped at six months, but new digital nomad visas now let remote workers stay for longer.

However, you can be considered a tax resident sooner if you have a substantial investment in the country. If you own property, invest in local businesses, and pay into the local social security scheme, the authorities may consider you a tax resident sooner.

Some digital nomad visas – for example, Croatia, Portugal, and Albania – specifically exempt visa holders from tax residency, even when they stay for longer than six months. This prevents double taxation; more on this below.

Existing Tax Residency: Domicile Tax Obligations

Just because you become a tax resident in a new country does not automatically mean that you are no longer a tax resident in another country. Most countries continue to consider you a tax resident until you have been out of the country for at least one full tax year.

However, being away for more than a year does not necessarily negate your tax obligations. The same kind of substance residency exists. If you maintain a strong connection with your home country or previous country of residence through things such as owning property and continuing to pay into a retirement account, you may still be considered a tax resident there. Continuing to work for a company or operate a business in your home country could certainly count toward substance residency.

This means that you can be considered a tax resident in more than one country at the same time.

Additional Rules for U.S. Citizens

The United States considers all citizens tax residents and you must lodge a tax return every year regardless of your circumstances. The U.S. does have a Foreign Earned Income Exclusion and a Foreign Tax Credit Scheme that can help alleviate double taxation.

Automatic Tax Residency: Can You Have No Tax Residency?

Based on the information above, it might appear that some digital nomads could find themselves in tax limbo, with no tax residency. They haven’t lived in their home country for more than a full tax year and don’t maintain significant ties there. They also haven’t spent more than 183 days or established a significant financial presence in any other country.

This situation does put digital nomads in a legal gray area. There probably isn’t any country’s inland revenue service banging on the door. But is it legal to not have a tax residency? No.

These digital nomads are probably still tax residents in the last country where they qualified for tax residency. If you don’t register for a new tax residency, in most cases, you retain your previous one. For example, if you are a tax resident in Italy and travel around Asia for two years but do not become a tax resident in any country, you are still a tax resident in Italy.

While the Italian government probably isn’t chasing you for your taxes, this is tax evasion. It can become a problem when you want to re-establish tax residency, or if your taxes are investigated for any reason.

The Verdict on Tax Residency?

So, what’s the verdict? Where are you a tax resident? As is so often the case, it depends on your specific circumstances. But you are a tax resident somewhere.

Bear in mind that the above discussion focuses on your tax residency for personal income. It does not consider whether you own your own business. If you do, it is entirely possible that you could be liable to pay personal income tax in one country, while your company is paying corporate tax in a different country where it is registered.

If you are a freelancer, there are other things to consider. While you may not need to pay tax on your international income in the country where you are living as a non-tax resident, if you have local clients, you probably will still need to pay tax on anything they pay you, as it is considered local source income.

How Do You Pay Income Tax As A Digital Nomad?

How you go about managing and paying your taxes as a digital nomad depends on where you are in the world. But there are three important things to consider.

End Old Tax Residencies

If you no longer want to be a tax resident in a certain country and are no longer legally required to be a tax resident, there is usually a system in place for you to notify authorities of your intentions.

Don’t assume that you are no longer a tax resident in a previous country just because you have been away for a while. If the withdrawal is granted, keep the paperwork as proof that you are no longer required to pay taxes there.

Establish New Tax Residencies

When you move to a new country in which you will become a tax resident, you should register for a tax ID number. This is usually a simple process that is free or only has a nominal fee. If your circumstances make you a tax resident in a country and you don’t file for a tax ID number, this would be considered tax evasion and fraud.

Avoid Double Taxation

If you find that you are liable to pay tax in more than one country, you should determine whether there is a double taxation agreement in place between the countries where you are liable. These treaties lay down rules for where taxes should be paid when an entity is considered liable in both countries to help avoid duplicate taxation.

While the terms and conditions depend on the individual treaty and there are often rules for different types of taxable income (e.g. dividends, capital gains, etc.), usually relief is provided by the country of residence agreeing not to income already taxed elsewhere.

The only way to discover if there is a treaty for your situation and what it contains is to do your research. The PWC World Tax Summaries Website is a good place to start your investigation.

If you are using a double taxation agreement to manage taxation between two countries, there will be a specific form that you need to submit as part of your tax return to request the taxation relief. An example from the UK can be seen here.

How Do You Optimize Your Taxes As A Digital Nomad?

Not paying the taxes that you owe is called tax evasion and is a crime. In the worst-case scenario, the consequences can be large fines and prison time. It is also an ethical question. Taxes fund services in the community, and if you are part of that community and benefit from those services, is it fair that you don’t contribute?

In contrast, optimizing your tax situation to minimize the amount that you need to pay is legal when done in good faith. It is something that people do all the time through deductions, credits, and contributions.

As a digital nomad, you may have additional legal ways to optimize your tax liability. The following are two examples of what you could do, though neither is straightforward.

Example One
If you are from a country with a high-income tax rate, such as Finland (56.95%) or Denmark (56%), you can choose to become a tax resident in a country with a lower income tax rate. For example, Romania has a digital nomad visa and a flat tax rate of 10%. Some countries, such as the Bahamas, United Arab Emirates, and Monaco, don’t charge income tax at all.

This is not always a simple process as you must actively withdraw from tax residency in your home country. As already discussed, this can be challenging if you have substantial investments there.

Example Two
You can also establish residency in a country that has a territorial tax system. This means that they only charge tax on income earned in that country. Therefore, in theory, if you can become an exclusive tax resident, you may not need to pay tax on the majority of that income.

However, what accounts for territorial income is not always clear. For example, for active income in the country of Georgia, it does not matter if you have an international client and they pay into a foreign account, if you completed the service from within Georgia, it is still considered territorial income.

Follow Your Conscience

The complexity of digital nomad taxes can make the endeavor seem daunting. But don’t let it hold you back. As long as you are making a good-faith effort to pay your taxes appropriately, you shouldn’t run into serious trouble. Of course, if you are in a complicated tax situation, seek professional help.