Remote work has been solidifying its place in many digital companies, especially after the pandemic. This trend has been further propelled by many legislators who are beginning to recognize and facilitate the concept of the digital nomad.
What is a digital nomad?
In general terms, a digital nomad is an individual who doesn’t need a specific geographic location to perform their job and relies on telecommunications and technology to carry out their professional activities.
They are often referred to as “nomads” because they travel extensively throughout the year without having a fixed residence or specific time zone. The term “digital” is used because they don’t need to be physically present at a particular location and conduct their work through telecommunication means.
From our experience, digital nomads are typically employees or self-employed individuals with roles such as Software Developers, Data Engineers, Content Creators, Technology Consultants, etc.
Where does he pay taxes?
A common misconception among digital nomads is considering themselves as fiscal nomads, claiming that since they travel a lot, they don’t need to pay taxes (a sentiment often echoed on social media).
This couldn’t be further from the truth. Common mistakes like not deregistering from your country’s tax authority, not having a tax residency certificate from any country, or merely having a house available often result in the digital nomad paying taxes in high-tax countries, even when invoicing through an LLC or unconventional solutions like Estonia’s e-residency.
Therefore, if a digital nomad wants to avoid paying taxes or pay taxes in a low-tax country, they should consider the following scenarios:
- Obtain a digital nomad visa or any other type of visa that allows them to be a tax resident in a country.
- Secure a tax residency certificate issued by a country’s tax authorities to defend against any potential tax claims.
- Establish a residence or have a “home” available in a country (a place to go during the months when they are not traveling).
How can a digital nomad reduce his taxes?
While LLCs or e-residencies might seem like a good idea, they often don’t hold up against inspections from OECD countries with strong tax authorities.
Hence, we always recommend having tax residencies in countries where the digital nomad spends part of their time.
The only way to achieve this is through a genuine change in tax residency.
Does a digital nomad need to live more than 183 days in their tax residence?
A digital nomad doesn’t necessarily have to live in a country for more than 183 days to qualify as a tax resident.
Criteria such as sporadic absences or the center of economic or vital interests (i.e., where you have businesses, assets, or where your family resides) allow a digital nomad to travel extensively without having to reside in a specific country for an extended period.
However, it’s advisable to spend more days in their tax residency country than any other and have a company, business, assets, and income in the tax residency country.
Does he need to rent an apartment all year in his tax residency country?
While many promote the digital nomad lifestyle as idyllic without a home or ties, to have tax residency recognized in a country, we always recommend having an apartment available all year in the country you consider your tax residence. This way, a nomad can secure the necessary “shield”: the tax residency certificate.
Countries with lower taxes for digital nomads and their requirements
Based on our extensive experience working with digital nomads, the following countries combine low taxation with a robust tax residency against foreign tax authorities:
- Cyprus: corporate tax rate of 12.5%, tax residency certificate with just 60 days of stay.
- Dubai: 0% tax rate through an FTZ, tax residency certificate with 90-120 days of stay.
- Estonia: approximately 20% depending on the business type.
- Andorra: 10% tax rate through the digital nomad visa, minimum stay for the certificate is 90 days.
- Portugal: 20% tax rate, minimum stay for the certificate is 120 days (strengthened).
- Malta: various tax schemes at 15%. Tax residency certificate with reinforced stay in the country.
All these countries have a very beneficial tax system and a strong reputation, which is why more highly qualified digital nomads are moving to many of these jurisdictions.
In fact, we only mention these and not usual destinations like Thailand, Indonesia, Mexico, etc., due to the international recognition of these jurisdictions and the facilities they offer to digital nomads.
Relocate&Save is a network of law firms specializing in residency changes and tax planning. If you wish to change your tax residency or restructure your business organization, you can contact us at [email protected] or through the contact form.
If you’re still unsure about your ideal destination, we recommend reading the report “The three best tax destinations at the moment,” available for free below.