Here’s the latest trend. The Nomadic lifestyle in the digital space. Did you know that around 5 million people in the US alone consider themselves to be digital nomads? In addition to that, another 17 million are hoping to enter the digital nomadic lifestyle as well.
If you have a liking to travel, you should probably embrace the nomadic lifestyle. With the digital nomadic lifestyle, you will be more productive and you will also be able to do the things that you love. With the pandemic going on, you should probably know all about how to become a digital nomad. But I’m quite sure that you do not know what kind of taxes you would have to pay if you are earning your living as a digital nomad.
Though there are many articles hosted on websites explaining all about becoming a digital nomad, they lack this important aspect of the relevant lifestyle.
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Digital Nomad Taxes
Earnings of a digital nomad come mainly in three different ways.
- Freelancing
- Individual Company of your own
- Employers that allow remote working
Digital nomads earn through the above main ways, but even these can be divided into two categories as Individual and Business. That is to say that you have to pay your taxes as an individual if you are an individual freelancer or an employee working for a company that allows remote working. But, if you are an entrepreneur managing your own company or if you are self-employed, you will have to pay your taxes as a business.
From the above 3 methods, paying taxes as an employee of a remote working company is the most convenient. That is because your employer is responsible for your tax payments. On that occasion, you will not have to worry about taxes. Your employer will surely handle it. But even if you are employed, there is one thing that may not be clear. That is your tax residency.
Tax residency is a set of rules used to outline the tax payment of an individual or a business. It should give a proper identification of when, where, and from which source of income an individual or a business pays taxes.
The country itself should engineer the tax residency rules. Most of the countries follow the model convention set out by the OECD or the UN. But we can see that some countries like the US have formed their own tax residency rules.
Here we will be following the OECD/UN model convention since it will be relatable to most of the readers. According to that,
“For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.”
So, let’s delve deep to find what this means to individuals and companies in means of taxes.
Tax Residency of an Individual
Read on if you are:
- An employee of a company (remote working)
- A freelancer
- Self-employed, a sole trader, or if you are running a sole proprietorship
There is a specific list to determine the tax residency of an individual. If an individual fulfils these criteria, he or she is a resident for tax purposes in the given country.
- Spend more than 183 days of a year in the territory of that country,
- Have a permanent home in that country,
- Have a centre of vital interests in that country,
- Have a habitual abode in that country,
- A national of that country.
The list is given in a specific order. That is to say, the officials investigating the tax case of an individual will first investigate whether he was in the territory of the given country for the greater part of the year. If yes, no problem, that individual is a tax resident of the given country. But if that is not the case, they will go down the list to determine the tax residency of the individual.
If none of the above criteria determines the tax residency of the investigated individual, his or her tax residency is determined through a mutual agreement. This is an extremely rare occurrence though.
As I mentioned, even if you are self-employed, a sole trader, or if you are running a sole proprietorship, you will be categorized in this section, which is the tax residency of an individual. But many out there mistakenly categorize this to be business taxes. It is true that sole proprietorships also have characteristics of businesses, taxes are dependent on the tax residency of the individual who’s running it.
Therefore, if you are a freelancer, or if you are running a sole proprietorship, and if you are planning to keep doing it further, it is advisable to properly identify your country of tax residency. Take a clear understanding of all the tax rules therein. If you find it hard to understand these things or find out the facts, just hire a local accountant. They will do it quite fine.
Apart from that, you may be planning to develop your business, setting your connections and terms (business to business communication, etc.) If this is your plan, read the next part that is about tax residencies of companies and businesses.
Tax Residency of a Company
The tax residency of a company is decided according to the following two criteria:
- Company’s registration
- The place of effective management of the company
The most widely recognized business structure picked by freelancers or nomadic business people is an LTD or LLC company – a Private Company Limited by Shares (a limited company in short).
There are various types of business to browse, for example, Limited Partnerships, Public Limited Companies or Corporations, notwithstanding, the LTD or LLC is the most famous decision because of its speedy and simple joining and clear, simple to-adhere to rules for how to run it and what to cover its expense forms.
Reasons for having a limited company as a digital nomad
Isn’t it simpler to simply compute and pay taxes as an individual?
All things considered, regularly it isn’t. Deciding your place of tax residency as an individual and a digital nomad probably won’t be so clear as you can see above, in addition to most if not the entirety of your costs come after your taxes are paid and in case you’re running sole ownership – you are assuming full close to home liability for the entirety of your liabilities, bargains turned out badly and subtleties missed.
A limited company gives you the confirmation that lone the capital you put into the company is in danger at whatever point something turns out badly. It can cover large numbers of your (the director’s) costs, which decreases the measure of tax to be paid determined as a rule toward the year’s end. Also, and this is undeniably more significant, it is a lot simpler to decide the tax residency of a limited company claimed by and run by you, a digital nomad, than you, the nomad as an individual.
Also, the OECD/UN show we referenced above fills in as a format for most Double Taxation Agreements (DTAs) between most nations. That implies that at whatever point there is uncertainty or a debate regarding your or your company’s place of tax residency it will be settled by the rules of the DTA. Furthermore, the vast majority of the DTAs have an article managing “Chiefs’ expenses”, which is the pay of the company’s administrators. For instance, here is Article 16. in the DTA among France and the UK:
“Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.”
You might be wondering about the importance of this piece of knowledge. According to this, if you run a company, it is fairly easy to determine the place of its tax residency. And if you, the director of that company is touring all around the world, your expenses will be taxed according to the place of tax residency of your company, if the income for the tour comes from the company. When this tax is calculated, the place where you stay or travel is not of importance.
It is quite profitable and easy to follow up in that manner. Isn’t it? You will not want to worry about all the potentially unfulfilled and hardly quantifiable tax liabilities, potentially in multiple countries.
There are few countries where you would love to hold up a business due to their benefits regarding the tax payments. Here is a list of some countries that I have personally liked because of their tax policies.
Kadriorg Palace in Tallinn, Estonia
- Estonia
- Hong Kong
- US (Delaware)
- United Arab Emirates
- Singapore
- United Kingdom
Some of the countries mentioned above have tax rates significantly lower than the others. For example, Delaware is the perfect choice for startup founders and developing tech moguls. Estonia has even developed a program, especially targeting the digital nomads called the e-residency.
Even amongst them, there are two options I personally like. Other choices are not ineffective, but the United Kingdom and Estonia are far greater.
Tragically, Estonia – a little nation lined by Russia and the Baltic Sea – accompanies a twist. It puts a compulsory Social Tax of 33% just as 20% of Personal Income Tax on the entirety of Directors’ charges. In addition, its 0% Corporate Tax rate doesn’t cover profits and its tax residency rules make it for all intents and purposes outlandish for the restricted organization to really be an occupant in Estonia and run without a lasting foundation by a genuine, voyaging advanced wanderer simultaneously.
Then comes the UK. The United Kingdom has a corporate tax rate of 19%. Also, it has very high personal income allowances in the whole world. That is about a tax-free income of 12,500GBP per year. With this, you can very well be free with tax. This can be your directors’ fee and you will be able to cover up expenses for your travels with this too.
Because of all the experiences and the history of registering businesses in the UK, it has very transparent legal guidelines on the process of registering or establishing the company and about running the company. An LTD company can be established in the UK in 2-3 business days.
There is much knowledge on that specific subject hosted online and the government representatives will be very attentive to your needs and inquiries about these matters.
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