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This is not a guide on how to avoid taxes as a digital nomad. If you’re looking for a way to evade taxes while traveling the world, you can stop reading here. The goal of this article is to shed some light on the most common digital nomad tax misconceptions.
I’ve been working remotely or abroad for almost 6 years now and I have learnt a thing or two about this. Mostly from personal experiences, but also from talking to other nomads, tax experts and lawyers.
The way I am going to break this article down is by trying to answer some of the (in my opinion) biggest mistakes early-stage digital nomads make when making the switch from full-time residents to travelers.
Below are some comments I have heard/read either in person or in online forums for digital nomads, which show some of the most common digital nomad tax misconceptions:
“If I leave my home country, I don’t have to pay taxes there anymore.”
Errr. Not really.
Although this varies from one country to another, it’s true that if you don’t live in your home country, you might not be tax liable there (not for US citizens though). You can go to your local tax agency and say “hey, I am not living here anymore so I don’t want to pay taxes here”. They will probably say, “okay, are you a legal resident somewhere else?”. And that’s when the problem starts.
Most digital nomads don’t apply for residency visas at they countries they visit. The majority of them are border hopping because either local authorities are okay with it or they don’t have the resources to enforce their own immigration laws.
Therefore, if you don’t have a second legal residence where you are tax liable, the tax agency from your home country will assume you’re still under their jurisdiction. And to make things worse, the burden of proof is on you. Just saying “oh I just live somewhere else” does not count.
When I lived in Chile for two years, I paid taxes there. I was a legal resident, with two 1-year visas in my passport and a valid national ID (RUT). I also had a local bank account and had to fill my taxes every month and got my tax refund once a year like every other Chilean resident.
I also had a certificate from the Chilean tax agency that I could show to the tax agency in my home country so they knew I was paying my taxes in what it was my new “home”. If I had been in Chile on a tourist visa, I would have been liable for taxes in my home country.
“My home country’s tax agency can’t force me to pay taxes if I don’t live there”
Oh you bet they can.
In my opinion, one of the biggest digital nomad tax misconceptions is focusing too much on physical presence. Unfortunately, tax liability isn’t a switch you can turn off as soon as your plane to Bali takes off. There’s a little bit more than that.
Keeping ties to your home country while abroad (and not having a second legal residence) is something that can also tie you to your local tax agency even if you haven’t been physically present in your country. The most common example? Bank accounts.
How are you getting paid? Are you using your home country’s bank system to receive payments from your employer/clients? That’s the entry point that your local tax agency can go through to see what you’re up to. The process would be something like this: Who is this individual who hasn’t filed taxes in years but it’s consistently getting paid every month, and has a bank account balance of $XX,XXX?.
Remember: the the burden of proof is on you, so you must be able to prove that you have a second residency somewhere else where you are effectively tax liable.
What happens if you can’t prove this? Well, your income could be retro-actively taxed for as many years as you were gone . Fines can be quite hefty so –sorry for the boring advice– paying your taxes is always a safe bet.
“I don’t spend more than 90 days on any country so I don’t have to pay taxes anywhere.”
This tends to be a follow-up thought from the previous example:
“If I am not in my country long enough I don’t have to pay taxes there… but if I am not anywhere long enough, I don’t have pay taxes anywhere”
As a rule of thumb, you have to assume that you will always be tax liable for some country. A country. Any country. And as I have said earlier, you will most likely be tax liable in your country unless you move permanently to another country. Hopping around borders, with no specific ties to another country does not count.
What happens if you just take off and spend several years traveling the world while working, not paying taxes anywhere? Well, the countries you visit likely won’t care about your taxes (they could! although they’re usually fine with you buying stuff and paying VAT) but your home country will.
Another example from the book of digital nomad tax misconceptions is to assume that you are some sort of global citizen who doesn’t belong anywhere. Although that might work for your Instagram bio, that does not apply to the real world.
“I created an Estonian company using their E-Residency program which has 0% corporate tax. “
Ah, Estonia. A classic one.
Stay away from shiny objects and easy tax hacks. Nothing about international tax law is easy and hacking the system could make you face huge penalties that could easily bankrupt you.
There’s a great article from Nomad Capitalist –by the way, if you want to keep reading about digital nomad taxes from a real expert,go check out their blog– which provides in-depth explanation about the Estonian E-Residency program, and debunks some of the most common digital nomad tax misconceptions about this initiative.
The TL:DR version of this is: The E-Residency program does not grant you resident status in Estonia. Which also means that you would still have to pay taxes in your home country if you don’t have a second residence somewhere else.
If you want to stop paying taxes in your home country, talk to a tax adviser who understands about international tax and (hopefully) is also a digital nomad themselves. Keep in mind that tax agencies are leviathan-like entities, with vasts amount of power but also no clue about current mobility trends. Do your research and learn more about these digital nomad tax misconceptions we mentioned in this article because they can turn into real problems if you don’t fix them early enough. And, unless you are making some serious money, you are better off paying taxes in your home country as you were doing before going nomad.