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.
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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.
Read more: 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.
Read more: How to hire remote workers legally
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.
If you need consultancy on digital nomad taxation, please contact me and I’ll put you in touch with a good tax lawyer who can help you out.
This is the most insightful article I’ve read on this topic, thanks Jean.
This article left me wondering: as you mentioned, some freelancers who travel often without staying anywhere for at least 6 months might be trying to not be taxable anywhere, for awhile at least. But many clients require an address, tax ID and VAT number in invoices freelancers send them. Wouldn’t such address be construed as ones address for tax purposes, perhaps exposing the freelancer? Or are these invoices just documents for accounting purposes without much power to expose freelancers in this way?
Isn’t the Portuguese NHR also a dodgy tax scheme that has attracted the criticism of Finland and Sweden, which have revoked the bilateral tax agreements with Portugal to prevent the NHR… I think that there is a risk that other countries may follow the scadinavian lead. If in the end you have to pay income tax like any other portuguese, you will be subject to a very high income tax.
That’s a pessimistic way of looking at it. The opportunity is there for those who want to take advantage of it and many are doing so.
This is always an interesting debate.
I am not a tax expert but I have done my share of intensive research given that they do not teach personal finance in school. Some important points to note:
1) According to the ‘international understanding of tax’ a person can NOT be not taxable in any country. There has to be one country always….
2) Whenever there is doubt or a grey area about where a person is taxable, the country of citizenship tends to be the fall-upon country;
3) The length of time in a country is not the only determining factor. Social economic ties are also a determining factor, and if these cannot be proven then the country of citizenship is comes to play.
4) Tax evasion and tax avoidance are two separate acts. The first is illegal and the other is not.
Now, as an unlicensed tax advisor, this would be my advise to you:
If you describe yourself as being on an extended tourist trip then the default conclusion is you are taxable in your home country and your internet-based income will be taxable there if your home country taxes its citizens on world-wide income and not only on locally sourced income.
If you see yourself and describe yourself as a person with no home, then if push come to shove and someone reports you, you will still be taxable in your home country. Of course your home country would have to prove your income so if you are using an offshore bank account and / or company that is discreet, then effectively there will not be any tax to pay but in my opinion this verges – in the eyes of most country’s laws – as tax evasion. I personally disagree with this because if you’re not living in your home country and not benfitting in any way from its economy and infrastructure, you should not pay taxes. Some laws are not fair to certain minorities and this is one of them, in my opinion. So I would not feel guilty at all retaining income offshore if you are not living in your home country.
Now, if you are spending say one year in Portugal and another year somewhere else, if you want to abide to the law precisely then you need to see the laws of these countries. For example some countries expect you to pay taxes if you live more than six months in a year, whilst others have more requirements (like also having spent x days over the last 5 years). So before you say you are not taxable anywhere, remember it depends first and foremost on the laws of the country where you stay more than six months in a calander year.
In your situation, you are a minority and the laws sadly do not apply well to such minority cases. Most likely you are taxable in your home country regardless of the fact that you dont spend time there and you have no social and economic ties. So the best thing to do really is the following:
1) Before spending more than six months in any country, check out its laws regarding taxes and try not to overstay if you become taxable.
2) Retain your earnings in an offshore jurisdiction that does not share information with other countries in line with the Common Reporting Standard implement by the OECD some years ago. If the bank’s jusrisdiction is a CRS signatory then genuinely set up a home and domicile in a country that does not tax you on worldwide income and have that as your home address. One day you will want to stop travelling and its good to have a country that is tax friendly. Obviously choose a country that you can also love to live in.
3) Be discreet about your situation because people can be jealous and can report you and nowadays many corrupt countries are tax hungry as they face lots of debts. They will apply the law even on innocent persons like you, rather than on the real corrupt politicans or big criminals.
4) Its ok to visit your home country but never be there for more than six months in total in a year and do not start any social or economic ties there.
Excellent advice Malcolm, thanks for your input. As a digital nomad, in most cases, the most sensible thing to do (if you already have a certain degree of success with your business) is to continue paying tax in your home country or the one that you’ve lived in for at least a couple of years before becoming a digital nomad. That way you’re safe.
Be aware that countries are becoming more and more aggressive in this regard. Some countries are laxer than others, but I have also seen regions enter into legal battles with citizens about taxes. A classic one in Spain is Catalonia going after people who spend a lot of time between Madrid and Barcelona, due to Madrid not levying wealth tax while Catalonia does. Thus if there is a suspicion that a person (typically well-known as a high-income earner, such as TV personalities) might have spent a few more days in Catalonia than in Madrid they will go after him with full force.
Very detailed and educated overview, thank you. However, if I do lead a true nomad lifestyle, I do not understand how any one country can catch up with or enforce dues. Say, I live one year in Portugal and the next year in Croatia. There is no way Portugal will claim taxes within that year, especially if I do not very actively make them aware of myself. At a later date, I will be three jumped countries away, and how do they expect to notify me and claim anything? At the same time, I never set foot in my passport country, I truly have no ties to any one place. As my intention is to explore the world on an extended-tourist approach (work is entirely internet based) I really cannot see how any Country can levy tax on my work, unless I go the extra mile to notify them about my intentions and movements.
That analysis is correct probability-wise. That is, unless you are a big fish that has a very public profile and is known to make a lot of money.
One doesn’t travel the world to avoid paying taxes but to explore it. One jurisdiction or another will eventually catch up to you, either because you own property or because you have a trackable bank account. Yes, you could live in a country, extend your stay beyond the 183 days threshold, skip over to another and repeat, but you’d be overextending your tourist visa and find you can no longer re-enter the country in the future either because of failing to pay past taxes or failing to abide by the stay limits of your previous visa. Nowadays most everything is interconnected and recorded. It’s easier to find jurisdictions that allow work/stay flexibility and stay within the law.
Agreed. Perfectly put.
That is not entirely true.
– You have a default obligation to pay taxes in the country your passport belongs to.
If you live abroad and pay taxes elsewhere, you have to prove the country you’re originally from that you don’t need to also pay taxes there. There’re double taxation agreements for this, so you don’t need to pay in both countries.
If you don’t pay in any country taxes because you’re travelling a lot, it’s all fine and dandy, but the original country you came from may audit your tax state, which could very well happen when you return to your home country and use the system there (go to hospital, take vaccine, buy a car, a house).
So while it’s technically possible, it’s
A – illegal
B – not risk free
In theory you’re correct. You work with your laptop and move from country to country yearly on a tourist visa and avoid the taxman every time. It will work for a while, maybe years, but one day it will catch up to you, particularly if you return to a country with a sophisticated enough tax tracking system. You will enter the country and customs will arrest you right there on tax evasion, and from there all other countries you failed to pay taxes to will pile on.
The challenge isn’t the moving around but the banking ties. Even online banking requires an anchor to a country of residence to which they are accountable to for tax reporting purposes and, while it’s possible to find ways around that, it’s fraud. Nations don’t need to conform to your lifestyle; you have to abide by their rules. The more exotic you are, the more complicated it is for you. Believe me, I’ve lived in 14 different countries and know a bit about that.
I’m in Tenerife right now and my intention was to set up shop here, but the tax situation for “autonomos” seems like a total nightmare.
Maybe I should look into the non lucrative visa? The income threshold is not an issue.
Any experience with this?
Maybe look into Portugal, I’m not a fan of the Spanish system.
Thanks. Do you have ant resources on Portugal tax residency and incorporation?
Contact me and I’ll put you in touch with a competent lawyer.
Hi, great article. Very helpful. Thank you. Here is my take. Estonia seems like a good place to setup a company if you’re a real digital nomad, not primarily tax resident in Europe (due to Europe’s test of substance on companies). If you were to be tax resident in Thailand for instance, spending 190 days there and the rest in Europe. Current Thai legislation says you pay tax as a resident on income derived in Thailand. So for 6 months pay yourself 1.250€ a month and that’s taxable at 10%. If you spend the next 6 months in Europe, pay yourself whatever (remaining profit), keep it there, and DO NOT transfer it to Thailand until the NEXT year, it’s tax free. No income tax.
Agreed.
Hey Iano, why do you say “DO NOT transfer it to Thailand until the NEXT year, it’s tax free”? Isn’t any money brought into the country going to be taxable if you stay 180 days or more in Thailand in the year your bringing in the money?
I’m also in Thailand, going to start working as a contractor for an American company. So, I want to learn about ways of reducing the amount of taxes I’ll be paying as much as possible while living in Thailand full time.
What about the option that you are a tax resident in a high income country and you receive wages in a low income country, so basically what you earn in the low income country is minimal and therefore not taxable but with that you live a comfortable life in a the low income country?
That’s what all governments define as tax evasion and what they are looking out for. It is possible to do things in a similar fashion for big companies, but for the individual freelancer this is not a possibility and doesn’t make sense. You are taxable in the country where you have the closest ties and spend most of your year in, as that’s where you produce your economic output.
This is some serious legal malpractice here. You are completely wrong, but of course, you would join other gang members to extort the hard-earned money from naive travellers.
This is so disingenuous. Literally, I could take your writing to a grand jury and have you indicted based on false misrepresentations for money laundering. The money you make from a crime (a fraud across state lines) is subject to money laundering rules.
Please stop taking advantage of kids.
I’m not sure what you’re talking about here, can you state clearly what’s wrong with the article? What I write here is not tax advice, I just share what I learnt from my own research so that it can benefit others, and I’m not selling anything.
I don’t understand that comment either Jean. You are advocating against tax evasion and malpractice.
Correct. I am saying that you need to be very careful and always play by the law if you want to sleep serenely and avoid risks.
Please do send the tax consultant details of Portugal. Thanks!
This is my favorite topic and I find your advice very sound and realistic. It is the most sensible article on this topic that I have found on the internet in a long while.
Everyone should keep in mind that what was possible years ago does not stand today. The Common Reporting Standard (CRS) introduced a few years ago and that most countries signed for means that if you own a company in Estonia but do not live there for real (or are great at faking your residency there by buying a property for example…) then the bank for your company will report you (as the ultimate beneficial owner) to your home country or country of citizenship if your tax residency country is not clear. Of course you can appoint nominee shareholders and directors of the company but do you really want to trust your wealth in other people’s hands and anyway increasing diligence rules in most countries require these nominees to report you anyway, as the ultimate beneficial owner. You might react to this by saying “Estonian banks are not that strict in their diligence” but do you really want to guessing each year whether they will become more strict or not. In my opinion, setting up these sort of structures to lower your tax is not worth the risk and sleepless nights, assuming you do worry about stuff like this.
I agree that out of all low tax options in Europe Portugal has the better lifestyle, if you seek sea (although not warm) and good weather. However dont be fooled into thinking it’s income tax-free as some sites purport. You still have to pay tax there but there are however rules that can keep your tax low for income sourced from abroad. I have yet to find one site that provides all the latest and accurate info. Do you have one by any chance?
Malta is another option because its a very livable place and that keeps things simple. Tax is low to moderate and if your business income is high (say over 30 or 50k) I would set up a company and give myself dividends which in Malta are not taxed twice and the tax paid by the company can be offset by the personal tax due (to a certain limit each year).
You might want to consider living and working in Romania where for micro businesses your tax is around 1 or 2% and I believe 3% if your don’t employ anyone. This is tax on turnover not profit. If you dish out a dividend so you can separate certain personal costs from business costs, then the company pays 5% tax when dishing out this dividend and I believe as an individual you must also pay 5% so that becomes a total 10% tax on the dividends issued, plus remember the 3% turnover tax. Still a total 13% tax is low. Of course you would need to live in Romania OR have strong social and economic ties in Romania to pay dividend tax there as a local tax resident. If your company income is huge then I would make sure to live there or have a good argument to be tax resident there because indeed another country (your citizenship country for example), if discovering your business there, might argue that there is no logical reason to have the company there except for tax evasion.
So I find that the safest way is to be true to the facts presented. If you want to consider yourself a Romanian resident in this example, for tax purposes, then severe social and economic ties with your country of citizenship or any other country that you lived in and might claim taxes to be paid.
Yes this is a very complex matter and i totally agree that getting more than one professional advice is crucial, but especially if you are not very savvy with tax laws.
It is worth noting that UAE is an interesting option if you can embrace the culture and modern ‘fake’ city as some will put it. You can still network and make important contacts there, but you obviously cannot compare with the charm of living in Spain or Portugal. Abu Dhabi is due to release a creative license that gives you a 5 year visa and provided you spend 6 months each year in the country you will be issued with a tax certificate.
Of course nothing stops you from opening a bank account say in London (or even Dubai) and listing your residence in Dubai even if you spend only 5 months in Dubai and the rest of the year is spread around different countries. If push come to shove you will need to prove (yes the onus is on you usually) that you either spent 6 months in the country where you claim you are tax residency, or you have strong social and economic ties there. The country investigating you must not be able to prove that you have social and economic ties in its country, or else it has a right to tax you anyway and if this fact is unclear and the country investigating you happens to be your country of citizenship then they can use this fact (your passport) as a means to decide to collect taxes from you.
So long story short, choose a low tax country that you can enjoy living in for a substantial amount of time each year (more than any other country) and create indisputable social and economic ties with that country in case you dont clock up 183 days. And cut off social and economic ties from any other country.
Well said Malc, I agree with you on all points. Portugal is a very tax-friendly jurisdiction, especially when compared to its neighbor Spain. And when we speak of it being a low tax country, we are always assuming one would be on the NHR programme. There are plenty of sites that offer information about NHR – I don’t have one to recommend in particular. On the other hand, I have some very good contacts (tax lawyers) in Portugal that can answer any question you have about the system.
Yes please do forward their contacts
Contact me privately with the link at the bottom of the article.
Being on the Portugal NHR is only beneficial for retired persons or persons who receive passive income. If you are a digital nomad running a one-man-show and thinking partaking in the NHR will give you a low tax rate, you are getting yourself into a deep mess.
Yes, that’s pretty clear.
Joe what if … as a digital nomad your income is passive and comes from outside of Spain? Any suggestions on an approach to take in Spain, one that avoids becoming an Autonimo?
Danielle Gardner Business Guide @thequietmarketer
Thanks for the great article! Would you be able to point me to tax attorneys that could help me analyze my personal case where I am moving around a couple of times a year around Europe, please?
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.
The figures are accurate except times have changed and the U.K. has just announced Corp Tax will rise to 25% in. 2023.
The link your UK accountant forwarded covers only the salary income cases. I find it not a good explanation but it’s a personal opinion.
What most freelance Ltds do (like me) is,
pay yourself the minimum salary of GBP 8760 below the social security and payroll tax payment threshold.
the rest most companies pay out as dividend.
The dividend is taxing as such:
0-2000: 0% (which works as an allowance)
2001- (low tax income band limit): 7.5%
(low tax income band limit+1) – 100,000: 32.5%
The effective tax bands are:
0 – 37,700: low tax band
37,701 – 100,000: higher tax band
100,001 – : additional tax band (taxing at 45%? I don’t know).
The point is that everyone’s taxable income is deducted by 12,500 a year.
Then you can see in which tax band you are falling into, based on your Total income (salary+ dividend).
So if you don’t earn much in the uk, you may end up paying almost no taxes (a few hundreds).
Corporate tax is at 19% and it looks steady for the years to come (Pandemic).
VAT is 20% (which applies in Ltds), and compulsory tax element if your income is above 82,500.
There are flat rate schemes you can experiment with (please check on internet), but not sure it is always the best option.
I am not sure why the capital gain tax is mentioned in the link as you pay it only when you have an asset to sell, so in a freelancer’s income life in general it is not applicable by default.
For the records, an accountant recommended to me to ditch Ltd and go back to self trading as my income is below 50K a year. I still keep my ltd as it sounds better than a self-employed.
Hope this helps.
I am not a UK accountant but worked in accounting and doing my accounts at the moment myself. (not worth it btw).
Hi Mark,/ all,
not sure the link explains it properly. I am a UK ltd though freelancing.
So what I am supposed to is:
1. Pay myself salary below the threshold: 8,760 gbp. This does not attract any taxes or social security contribution (deductible cost in the company and I don’t pay personal tax either).
2. I pay the rest in Dividends. Dividend tax is paid at personal level of course.
How much, depends on 2 things:
a) in which tax band your total personal income falls within
b) the amount of dividend you pay yourself
Let’s assume you earn 65,000 taxable corporate income (after having paid salary to yourself, this is the profit you earned)
YOUR CORPORATE TAXES:
corporate earning after expenses: 65,000
Corporate tax = 65,000 *19% = 12,350
Distributable income = 65,000 – 12,350 = 52,650 (max amount you can pay yourself as dividends)
Corporate tax will increase by 2023 though (23%?)
YOUR PERSONAL TAXES:
Your total taxable income = Salary + Dividend = 8,760 + 52,650 = 61,410
You are in the higher tax band according to this.
Your adjusted taxable income is: 61,410 – 12,570 = 48,840
(the adjustment item of 12,570 is a national allowance, everyone gets it (ask an accountant about the proportionate calculation)
a) salary received from your Ltd: 8,760
your salary taxes = 0%
your social contribution = 0%
b) dividend received from your Ltd: 52,650
your adjusted dividend income: 52,650 – 12,570 = 40,080
your dividend tax payable:
0-2,000: 0%
2,001 – 37,700 (*): 7.5% (35,699 * 7.5% = 2,677)
37,701 – 40,080: 32.5% (2,379 * 32.5% = 773)
Total dividend tax = 2,677 + 773 = 3,450
3,450 : 52,650 = 6.% tax paid on your cash dividend income. I think this is not bad.
Your total personal income:
salary 8,760
cash dividend 52,650
Total 61,410
3,450 : 61,410 = 5.6% total taxes paid on your total cash income.
Others paying in the UK, please kindly correct/ comment on this.
Please note the VAT obligations if your corporate income is above 82K a year. There are schemes for this is not.
An accountant told me if my income is below 50K I am better off going back to self-employed, but I keep the ltd as it looks better than a self-trading person.
Anybody agrees/disagrees?
thanks,
Thanks Kristina, very interesting. Seems like the UK is very good for earners within the bracket you used in your example. Of course, once you start earning beyond 100k you start to get punished more heavily via taxation.
I am quite sure that that is incorrect. I am not from the UK, but I see a few mistakes:
– You deduct the 12570 gbp 2 times (since you mention 0% tax on the 8760 wage, and you deduct it from the dividend amount). You can only deduct it once from your total income (61410 in your example).
– you make the same mistake in the tax brackets. You start counting in the lowest bracket for your wage, and start counting from 0 again for your dividend. The dividend comes on top on your wage, it doesn’t reset the tax bracket.
The website from the gov is not very clear with its example (since they stay in the lowest tax bracket), but this calculator might help: https://www.which.co.uk/money/tax/income-tax/income-tax-on-savings-and-investments/dividend-tax-calculator-201920-a30cd5g61pvk
I didn’t look at social security etc. I also don’t know if you have to pay a minimum amount in salary for example (as is the case in many countries, otherwise you get sanctions/don’t receive certain deductions etc).
It still doesn’t look too bad in the UK however 🙂
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.
Agreed, Victor.
Sometimes you pay more to an advice than saving.
I am guessing you foremost pay for your good night sleep.
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.