Does your company offer a remote option? Do you have an affinity for travel? Would you like to embrace the nomadic lifestyle? Or maybe just move around a bit, try different things, see different places?
Believe it or not, around 5 million people in the US alone consider themselves digital nomads and additional 17 million aspire to one day become nomadic. And this data comes from before the pandemic!
With more and more companies embracing remote work beyond the temporary and worldwide restrictions for the number of people in office buildings, digital nomadism is a rising trend. And rightly so!
In this article we won’t discuss the basic steps for becoming a digital nomad since there’s plenty of publications already covering those. Instead, we’ll focus exactly on the one boring thing most articles on this topic miss. That is, your digital nomadic taxes! Let’s dive in.
Digital nomad taxes
Earnings of digital nomads most often come from one or a couple of these 3 sources:
- Employment in a company which allows for remote work
- Self-employment or entrepreneurship
- Freelance jobs
Now, in order to simplify further, we’ll introduce another two categories – you will either be paying taxes as an individual (most likely if your source of income is employment or freelance jobs) or as a business (if you’re self-employed or are an entrepreneur managing a company, also not uncommon among freelancers).
No matter which of the above is your primary source of income, you will have to pay taxes one way or the other – as an individual or as a business.
If you’re employed, it’s the easiest case since most likely your employer is responsible for calculating and paying your taxes. However, even if you’re employed but you tend to move often, there’s one question which is going to come up again and again, and that is the question of your tax residency.
What is tax residency? It is a set of rules outlining when, where and from each source of income an individual or a company should pay their taxes.
Most countries orchestrate their tax residency rules around the model convention set out by the OECD or the UN (that’s the same document), however some (like the US) set up their own, unique tax residency guidelines.
In this article, we’ll go by the OECD/UN model convention (since this will apply to most readers), according to which:
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.
All good. Now let’s look into what this actually means for individuals and for companies.
Tax residency of an individual
This applies to you if:
- You are employed by a company
- You are a freelancer
- You are self-employed, a sole trader or running a sole proprietorship (different names for the same thing)
An individual is resident for tax purposes (and liable to pay Personal Income Tax) in a given country if:
- They spend more than 183 days a year in the territory of that country,
- They have a permanent home in that country,
- They have a center of vital interests in that country,
- They have a habitual abode in that country,
- They are a national of that country.
The above list is given in a specific order, since when a person does not spend a greater part of the year in one country, authorities potentially investigating this individual’s case would move on down the list to establish which country is their place of tax residency.
If none of the above will determine it without question, then the states potentially investigating the individual for tax purposes would define their tax residency through a mutual agreement, however this is an extremely rare case.
Even though self-employment or sole proprietorship is often thought of as and has some characteristics of a business, its tax residency is completely dependent on the tax residency of the individual who’s running it.
Individuals will most likely pay all of their taxes in the country of their tax residency, so if you are employed, a freelancer or running a sole proprietorship and would like to continue doing so – just make sure to properly establish the country of your tax residency and look into its specific rules for taxation. Or better yet, consult a local accountant.
However, if you consider establishing a company, growing your business, or setting your own terms (such as a business-to-business relationship with your previous employer), the next section will explain just how the question of tax residency is settled for companies and what it means for their owners.
Tax residency of a company
A company is resident for tax purposes (and liable to pay Corporate Income Tax) in a given country if:
- It was registered in that country,
- Its place of effective management lies in that country.
The most common business structure chosen by freelancers or nomadic entrepreneurs is an LTD or LLC company – a Private Company Limited by Shares (limited company in short).
There are different forms of business to choose from, such as Limited Partnerships, Public Limited Companies or Corporations, however the LTD or LLC is the most popular choice due to its quick and easy incorporation and clear, easy-to-follow rules for how to run it and what to report on its tax returns.
Why would you want to have a limited company as a digital nomad?
Isn’t it easier to just calculate and pay taxes as an individual?
Well, often it is not. Determining your place of tax residency as an individual and a digital nomad might not be so straightforward as you can see above, plus most if not all of your expenses come after your taxes are paid and if you’re running a sole proprietorship – you are taking full personal responsibility for all of your liabilities, deals gone wrong and details missed.
A limited company gives you the assurance that only the capital you put into the company is at risk whenever something goes wrong. It can cover many of your (the director’s) expenses, which reduce the amount of tax to be paid calculated usually at the end of the year. Additionally, and this is far more important, it is much easier to determine the tax residency of a limited company owned by and run by you, a digital nomad, than you, the nomad as an individual.
What’s more, the OECD/UN convention we mentioned above serves as a template for most Double Taxation Agreements (DTAs) between most countries. That means that whenever there is a doubt or a dispute as to your or your company’s place of tax residency it will be settled by the guidelines of the DTA. And most of the DTAs have an article dealing with “Directors’ fees”, that is the income of the company’s managers. As an example, here is Article 16. in the DTA between 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.
Why is this important? Because if you run a company, and it’s fairly easy to determine your company’s place of tax residency, and you are running that company, then your director’s fees (tour income from the company) will be taxed in the country of your company’s tax residency, regardless of where you live or travel as an individual.
Wonderful isn’t it?! It is! Because armed with this knowledge, you can venture safely into the world of digital nomadism to the tune of this beautiful Beatles’ song actually enjoying the music and not subconsciously dreading the lyrics and their implications.
Also, not dreading the actual implications of your potentially unfulfilled and hardly quantifiable tax liabilities, potentially in multiple countries.
Where to register your limited company as a digital nomad?
Most recommendations for where digital nomads or remote workers should register their businesses focus on these few countries:
- Hong Kong
- United Arab Emirates
- US (Delaware)
- United Kingdom
Some of the above offer taxes significantly lower than average, Delaware is the go-to destination for startup founders, aspiring tech moguls, and Estonia has even deployed their own program targeted especially at digital nomads, namely the e-Residency.
But tax discounts are paradoxically costly, so if you don’t already have significant (in the US$ millions) assets or are not building a world-encompassing technological empire to put you in possession of such assets and more, what you care about most is probably comfort, clarity and safety. This leaves two choices:
- Estonia with its e-Residency and widely publicised 0% Corporate Tax rate
- United Kingdom
Unfortunately, Estonia – a tiny country bordered by Russia and the Baltic Sea – comes with a twist. It places a mandatory Social Tax of 33% as well as 20% of Personal Income Tax on all directors’ fees. What’s more, its 0% Corporate Tax rate doesn’t cover dividends and their tax residency rules make it practically impossible for the limited company to actually be resident in Estonia and run without a permanent establishment by an actual, traveling digital nomad at the same time.
And here comes the UK, the country which invented limited liability companies. The UK has an average Corporate Tax rate of 19% and boasts one of the highest personal allowances in the world, set currently at 12 500 GBP of tax-free income per year. This can be your directors’ fee, taxed in the UK, where your company will be resident. Additionally, your company will be able to cover many of your (the company director’s) business-related travel expenses as well as reimburse some of your personal costs through mechanisms such as mileage or scale rate payments for travel and subsistence.
Since it has the longest history of dealing with limited companies it also has some of the most stable and transparent legal guidelines for how these companies can be established and should be run. Registering an LTD company in the UK happens online and it takes only 2-3 working days to set it up.
Most of this knowledge is available online, and the government representatives are open and helpful to whomever might ask them questions if the need arises.
You can run a company in the UK if until now you were a freelancer traveling the world, you can do this when you renegotiate with your employer to become a contractor instead of an employee (and possibly earn more due to lower liabilities on their side), and you can run a company in the UK if you’re an entrepreneur, building a business to last.
Accounting for digital nomads
Of course, every situation, every business and every entrepreneur is unique. We wouldn’t want to approach it any other way. In order to make sure this process and the taxation rules apply to you as described above, we would need to look into your particular situation a bit more deeply. And in the meantime, look into the HMRC’s (Her Majesty’s Revenue and Customs) list of UK’s tax treaties and see for yourself whether the Article regarding Directors’ fees is there, in a similar form.
Message us or schedule a free consultation with one of our advisors – we’ve worked with hundreds of digital nomads from numerous countries, and will happily help you make the right choice, whatever it might entail in your individual case.
If you choose to take the next step and register your company in the UK, we will help you set up, make sure the structure is right, explain the basics, consult and guide you through the journey to make sure the process is running smoothly for you, the company director. We will then take care of all of your accounting needs, providing quick and direct responses to all of your questions as well as occasional consultations whenever the need arises. All you’ll have left to do from the accounting perspective is file and archive the invoices going out and coming in to your business.
Best of luck on your journey, and if you have any questions regarding the article, don’t hesitate to message us using the form below
Please note that this article serves as a guide and does not constitute legal advice. We highly advise that in order to have full clarity over your tax liabilities you should consult your lawyer. If you’re unsure about what legal expert to approach for council, message us or schedule a free consultation with one of our advisors – we’ll do our best to help you find a way!