I spent a good part of my twenties traveling around the world during what was the start of the digital nomad movement.
A recurring theme that I used to hear about was the possibility of optimizing taxes by being a digital nomad.
Just walk in any co-working space in South-East Asia, and a 20 y.o. white guy from the EU or Canada will swear that flying circles in Thailand, Bali, and Vietnam for all year means that nobody has the right to tax his income.
At the time I had decided to keep things simple by just paying tax in my home country where I had always paid as a self-employed person.
When I started to hear all the strategies others were using, however, I started to feel a bit stupid for not having optimized things. So I embarked on a journey to learn as much as possible about all the options available for legal tax optimization.
It turns out that the strategy I had opted was actually one of the safest ways to act as a digital nomad. The “clever” tactics many others were using were grey area legal schemes at best but mostly just plain old tax evasion that would most likely lead them into trouble later.
To this day, as the digital nomad revolution has grown, I still hear many of these strategies bandied around, so I thought I’d have a go at outlining how I think a digital nomad should pay his/her taxes.
See also: The best low tax structures in Europe
Let’s start with the basic principles.
Personal tax is based on residency or rather tax residency and each country has its own rules for defining whether a person is tax resident or not.
If you’re from the US, for example, you’re tax resident by merit of your citizenship so you can’t escape the tax net but you might be able to earn approx. $100k/year tax-free if you qualify for the foreign earned income exclusion provision in the tax law.
In other countries, like Canada, you can cease to be resident only if you become resident somewhere else (you aren’t allowed to be resident nowhere), however, there is an exit tax to take note of.
Other countries allow their citizens to move out of the country and renounce their fiscal residency quite easily. Malta is one such country.
The general rule for tax residency is that if you spend 183 days or more in a country then you are personally fiscally resident in that country. There are many additional provisions that you need to consider, however.
For example, if you’re married with kids and you move away for a whole year to another country while your spouse and kids remain in your country of origin, then you are probably going to still be resident in that country as your main interests haven’t moved. Along with this provision, there are several others, and that’s why I say that the 183 days rule is just the basic rule to follow if no other provisions are triggered.
Strategy 1 – Not being liable for tax anywhere
So this leads us to the first digital nomad clever tax strategy. The idea goes that since the nomads are traveling most of the time and not spending more than 183 days in any one country, then they don’t have to pay tax anywhere. This is fine in theory but is not so practical.
For example, if you run this strategy for a number of years then decide to settle somewhere, that country might require your previous tax returns and tax residency certificates to ascertain that you were not living there before you say that you started living there, and your previous country might also question whether you might have still been tax resident there all these years. It will be tough to prove your status as a nomad unless you keep a lot of documentation and are ready to go to court to prove things.
The easiest solution is to always be tax resident somewhere and have tax returns and tax residency certificates to prove it. That way, no country can complain and hassle you. In that case, it would be wise to pick a country with low taxes and an easy requirement for days spent in the country. Andorra and the UAE both have attractive tax laws in this respect.
Strategy 2 – Opening a company in a low tax jurisdiction
The general rule is that a company is a separate entity than its owner and is taxed separately. The logic then follows that while the owner might be resident in a high tax country, he can just open a company in a low tax jurisdiction and he would be all set.
Lately, I see a lot of digital nomads and expats using Estonia as a base for their company for this sole reason. Estonia only levies tax on the country when the owner withdraws dividends, and so you can keep growing your money within the Estonian company tax-free.
Again, there are provisions which in many cases invalidate this idea.
See, if you’re a freelancer or consultant and your company is practically a one-man business, or even if you’re very clearly the main asset of your business, then this setup will not necessarily work. Your country of residence might question why you opened up a company in Estonia when you are doing all the work elsewhere, and you are generating the revenue for that company. Given that there would be no other reason why you opened the company in Estonia, then your country of residence could decide to tax those revenues at the local rates and completely see-through your Estonian (or other similar jurisdiction) company.
The bottom line is that the tax residency of a company can be different from the place of incorporation. If you live in the UK and run your business through a Hong Kong company, then your Hong Kong company will be a UK tax resident and pay UK company taxes, unless you can prove that the HK company is set up there for a reason and has what’s called economic substance.
You need to make sure that the company is managed and controlled in the country in which you want to be resident, in this case Hong Kong. In practice, this would mean having local directors, having all company meetings held there, a few local employees, offices, etc. There are even more things that need to be taken care of, but hopefully the aforementioned ones make it clear enough that as a freelancer or lone consultant cannot really make this work.
Coming back to the Estonian option, if you want to explore whether such a setup makes sense for you, you can check out the Xolo service, which is one of the easiest options to get started with transacting as a business through Estonia. They also offer the possibility to use them as a registered company, so you wouldn’t even need to set up a business in Estonia in this case.
However, I should reiterate that I am really skeptical about this whole Estonian e-residency and tax scheme. The Estonian setup is usually marketed to solo freelancers when in many cases these types of workers would be liable to tax in their country of residence and can’t just open a company in Estonia and shift all their profits there to avoid taxes back home. So do your homework before, and think about how your needs might change in the future if your business grows.
Strategy 3 – Actually live in a low-tax jurisdication
There are plenty of tax havens with zero or very low tax and you can actually move there in order to save on your tax bill.
You need to be careful though, because while having to pay no taxes is definitely a joy to behold, it is only one aspect of a good life. If that’s the only reason to move to a country, then I would question your motives.
For example, I could easily move to Panama or Bulgaria and enjoy a much lower tax bill. But would I have the same quality of life that I have in Spain. The answer for me is definitely a big NO, so I don’t consider making this move. If I did, I would be living as a tax exile. And my aim in life is to optimize my health, wealth and happiness not just my wealth. Another thing to consider is that in many higher tax countries you get a lot of hidden benefits, like the ability to meet many other top entrepreneurs and get inspired, or the ability to attend local conferences and get knowledge before anyone else, or even the convenience of having a good airport to travel from. When you add things up, you might be paying more tax but due to the extra opportunities you were also able to increase your bottom line, resulting in a net gain despite the higher taxes.
In any case, if this is a strategy you want to consider, here are some countries that are popular with the tax-minimizing expat:
- Panama
- Dubai
- Thailand
- Andorra
- Portugal
- Cyprus
- Malta
- Bulgaria
- Paraguay
Out of all the above, I would only consider Portugal as a strong candidate for a long-term place for living.
So what’s your take on my ideas? Do you agree?
The key thing to remember is that almost everybody in the world has a tax residency or tax domicile, even 99% of the nomads. Even if you “don’t live anywhere”.
Tax residency is absolutely crucial, since it determines where you need to pay your taxes.
- You are a tax resident in the country where you spend more than 183 days in a year. (This is a hard rule.)
- If there’s no such country your tax residency is in the country “you have the strongest ties to” (this is called tax domicile).
- If you have no strong ties to any country your tax domicile will be the country of your passport — at least this is how most countries will interpret the rules.
So good luck escaping all three of those and living tax-free as a digital nomad. Hopefully, you can see why all those nomads who claim they left their country and are now free birds traveling the world have not really escaped their tax residence.
Most of these digital nomads will never get into big trouble simply because they never make much money while they are traveling anyway, and they eventually all settle somewhere within a year or two. Then there are hardcore vagabonds who might survive on little money in Asia paying no taxes anywhere but nobody is interested in going after them because it’s not worth it. But if you happen to be successful you are very likely to run into a whole load of trouble unless you took the time to structure things properly from the very start, so I would highly recommend you take advice and do things properly.
Also, as in all cases where finances and taxes are involved, don’t rely on the advice you get on the internet; neither mine nor anyone else’s.
Make an effort to find the very best tax lawyers you can afford in the countries you’re interested in and make sure they are able to analyse your particular case competently. If possible, get several opinions (3-4 is what I would recommend) and then make a decision based on that aggregate information.
I am not a digital nomad but I am semi-retired. I work online so I was curious about this question. American citizens may need to pay Social Security taxes on their income, even they you get to avoid regular income tax by being outside of the country. That is, unless they pay social security type taxes to another country with which the US has a tax treaty. I know an American guy living in Colombia who got hit with a $20,000 tax bill because he hadn’t been paying his Social Security taxes in the US. He was working as an independent contractor for a Chinese company. One advantage of paying SS taxes, by the way, is that you’ll benefit in the long term. Old age may seem like a long way off but it creeps up on you fast. If you’ve been paying into the system, you might get a sizable tax-free monthly income in the long run when you hit your late sixties. Just a thought.
Very useful article indeed!! What if I have 2 passports, Spain and Ukraine? I am registered tax payer in both countries, but I live mainly in Spain (though travelling around EU, so I hardly spend 2-3 months in total in Spain). And Im a freelancer… I wonder how I pay taxes in this case. I’d prefer to pay in Ukraine as the taxes are really low there…
Best to consult lawyers in both countries to determine where you would most likely be considered as having the closest ties and thus be liable for taxation.
Hello,
Very nice article , thanks. I am french and I was living in UK for 10 years and am now travelling since end of 2019. As my only incomes are from a flat I let in UK , if I well understood what is said in the article ( If there’s no such country your tax residency is in the country “you have the strongest ties to” (this is called tax domicile)if I am applying the strategy of not staying more than 183 days in any country in the same year I would then only have to pay taxes to UK? Could you confirm if that really works , like you would be UK tax payer without being a UK tax resident ? would it be ok for being tax resident nowhere as long you are paying taxes somewhere ?As my rental income in the uk goes under personal allowance and are then tax free I guess you agree with me that the ‘ less than 183 days spent in any country’ could be a good one ?
thanks for your comments
Jean, Nice article. One are you didn’t quite cover. If you work and pay tax say UK and live in another country say Portugal. Dos this as good as retried from Portugal taxperspective and there is no tax implication as UK and PT has dbl tax treaty?
There are some missing or garbled words in your comment, but I think I understand the gist of it. You should only be tax resident in one country. Usually that is the country where you are residing. It seems that you have a particular setup that is not so straightforward, so it’s best if you consult a Portuguese and British tax lawyer to make sure.
Hi Jean,
Very interesting article. More and more people will become digital nomads, especially because of the covid circumstances. So, I hope you keep adding to this.
I am also still looking for the best solution for my case. I have had a consultancy company in Belgium for 5 years. For my wife’s work we will now move every 2-3 years. We are now living in Norway. We don’t know were we will go next.
I paid (a lot) for fiscal advice (Crowe). However, he could not give me a clear answer toward the best solution. Taxes depend on the “State of residence” (the country where one is resident for tax purposes) and of the “Source state” (the country from which the income originates) and by any double tax treaty between the two states.
However, I do not want to have the hassle to start a new company in each country we go to, that would also be expensive I presume.
For now I will make my company dormant and continue on an independant base. I am looking for a fiscal expert with experience in global regulations, and specialized in digital nomads.
I read that besides Estonia, also Costa Rica, Mexico, Portugal and Czechia have such digital nomad regulation.
Somebody told me also that it is better to only turn out dividends and not a monthly salary, however, I guess that’s not feasible for people that do not make enough to pay out a sufficent amount in dividend.
Any thoughts on the above.
Hi Joris, read this article and if you need further help I can connect you with a consultant to help set things up.
Hi Jean! Great article.
I’m a freelance brand strategist/consultant based in Belgium, and I’m interested in the Malta + Portugal combo you suggested in your other article.
After incorporating, I will essentially be running a 1 man company (+maybe a salesperson/assistant), servicing EU + International clients.
Is your Portugal + Malta combo with Portugal’s NHR even possible/ advisable in my case?
I wouldn’t recommend such two-country setups if you’re a lone freelancer. Lots of people use Estonia as a base for their business activity in such cases, but I don’t think it’s advisable as it’s an obvious way of shifting profits to a lower tax jurisdiction with no justification for doing so.
Hi Jean,
Very interesting article, as I’m thinking of working this way in the future.
I am from the UK, but live in Spain, employed by a Spanish company. I am therefore, tax resident here.
I make some additional money working online in the UK, and will be liable to pay tax on that here. My question is, do I have to pay social security (around 28% I think) on these additional earnings?
Many thanks,
Jonathan
I don’t know about no taxes, but the UK tax rates seem pretty decent for low incomes. Has anyone tried the UK LTD as a digital nomad? An Accountant sent me this: https://owlaccounts.com/limited-company-taxes-for-digital-nomads/
Looked at the link, looks interesting. But not sure if that’s reliable info.
What an excellent blog post! This has been really helpful….thank you for putting it together.
Thanks Jean for the article, very insightful.
I’m a Spanish citizen but have been working for a multinational company for the last 10 years outside the country in Germany, Panama, Brazil, Colombia and Turkey (hence, having registered in the Spanish embassy accordingly in each of them).
In 2021, I’m planning to work as a freelance offering digital consultancy services for European/International clients.
I have been evaluating the e-residency program in Estonia and I’m planning to be effectively a digital nomad based in Spain and Brazil mainly (in any case, spending less than 183 days in each of the countries, as I will need to travel to third countries due to work or holidays).
I would like to optimize taxes, avoiding the high implications that Spain establishes for freelancers / high salaries, and I am happy to hold dividends of the company and defer them as salary in the coming years.
In theory, I am entitled to be non resident neither in Spain nor in Brazil, and I am currently owning a mortgage and an property in Spain (paying higher interest rates and rental income related taxes as per my status of non resident) that supports it for the coming years.
Is my case doable for the years to come to remain non resident and benefit from more favorable taxation or should I try to pay my Income taxes in Spain based on the salary gains? In any case, it is my intention to contribute to my pension in Spain.
Thanks!
Your plan sounds good, however I would speak to a Spanish tax advisor (I can put you in touch) to clarify whether there would be any Spanish implications, since you are Spanish, will be spending some time in Spain and also own property and presumably have some family ties too.
Things indeed can get very complicated, very quickly. I’m a dual US and French citizen, although resident of Singapore but not working there (practically retired, online trader paying US taxes). My spouse is Australian with the Singaporean work visa. We recently purchased an apartment in Spain, where we intend to spend less than 183 days a year once we leave Singapore in 4 years. We are also purchasing an apartment in Australia, where we also intend to spend less than 183 days a year. We will spend at least 2 months a year travelling and thus have a legitimate concern with residency recognition, for tax purposes certainly, but also for such things as vehicle registration, bank accounts, etc. Unfortunately, every time I talk with a tax advisor I feel like I know more than they do. Or I end up having to pay thousands for someone who would save me hundreds. It’s frustrating to say the least.
Hi Jean – whats your view on domicile and tax residence in Switzerland with internationally generated capital gains?
Good living standard and low taxes from what I hear. Why doesn’t Switz make your list?
Thanks!
Hi Dado, assuming you can pull off that setup, Switzerland obviously has some very good things going for it, however, I also hear that it is not that easy to integrate with the locals, and each canton has its own tax regime, which makes it a bit complicated. Having said that, I’m not an expert on Swiss tax law by any stretch, so maybe someone else who has made the move can comment on how good that setup can be.
Portugal only has a good tax scheme for self-employment income if you are in a high value profession. 🙁
And for those who obtain foreign dividends as their main source of income.
Hello Jean,
Interesting article. I am interested in Portugal’s NHR. Do you think any foreign sourced income is not taxed in Portugal, for example income from selling on Ebay UK while residing in Portugal?
“You are a tax resident in the country where you spend more than 183 days in a year. (This is a hard rule.)”
I believe the UAE is the exception to this rule. I am a tax resident of the UAE and believe the following
The United Arab Emirates work with the following regulation: your resident visa can only be declared invalid, if you have spent more than 6 months, in one stretch, outside the UAE.
Please read this article and let me know if your opinion has changed or if I am wrong
https://www.tax-residence.com/uae-183-day-rule/
What I mean is that if you spend more than 6 months in any country you will be automatically deemed tax resident.
This is not a hard and fast rule, and does not always hold true. International tax treaties between the countries involved will determine residency, and the 183-day “rule” is not always the determining factor.
Agreed, although it is probably fair to say it is the most commonly used one.
Regarding the 183-day rule to become a tax resident – it’s actually quite interesting and varies at a country’s discretion. I have looked at the “nomad visas” that several countries are now offering – and at least in Antigua & Barbuda you never become their tax resident, even if you live in the country without going abroad for 2 years!
Weird that you specifically mention registering in Estonia when Estonia has its own eresidency program specifically for location-independent people to register businesses. I’ve had several friends go through this process and it isn’t how you described.
In what way is it not how I described? Estonia has been promoting its e-residency program for a while and encouraging nomads to open companies there, but that has changed in recent months.
In my opinion, what Estonia did was self-serving and irresponsible, because there exists a real problem for such setups: effective place of management. If you just have the company nominally set up in Estonia but run the company yourself from elsewhere then your problem is with that other country, as they have the possibility of claiming that the revenue of the company should be taxed in that country rather than Estonia.
True digital nomads who travel perpetually might be able to pull it off until they settle somewhere, but it doesn’t work well for anyone else.
This is not only a problem with opening a company in Estonia, of course, but I feel that Estonia has been misleading people for a number of years.
Last time I checked Estonian authorities and financial service providers have changed their tune, and now refuse or recommend against opening a company there without having local directors, employees, etc and thus establish an effective place of management there.
Agreed. In addition, the managers and directors will need to demonstrate that they have the capacity to manage the company and its risks, that they have the power to do that, that they have been actively taking decisions about the business in the country. In addition to that, the company needs to be properly allotted with the necessary capital to assume any loses. Estonia regime will be unwinded as soon as it gets the attention of the EU commission.