The lifestyle of a digital nomad is one many of us only dream of. The ability to work from anywhere in the world at a time of your choosing with a lifestyle that often simply can’t be achieved here in the UK.
One of the key drivers for the recent increase in the number of people choosing a digital nomad lifestyle is the ability to pay less tax and in general make your money go further by living in a country with a lower cost of living, but this can only be achieved with careful planning and execution.
In this article we are looking at 5 tax tips for digital nomads.
What Is A Digital Nomad?
Imagine that during the pandemic, your employer asked you to undertake some home working because the office had to close due to lockdowns and travel restrictions. You undertake all of your usual tasks from the comfort of your home office and even manage to get a little extra work done due to the fact you no longer waste time commuting to and from the office.
Now the restrictions are lifted but your employer has realised that not only are you more productive when home working but they have saved a bunch of money on heat, light, rent and general office expenditure when the office was closed.
So now your employer roles out home working on a permanent basis. You now have no fixed place of work and are free to enjoy the lifestyle you’ve grown accustom to.
But wait….here’s an idea!
Given that you will be home working from now on and you have no fixed place of work why don’t you do try a couple of weeks working from a beach bar in Spain and then a couple of weeks in the Swiss alps working from a ski lodge. Maybe after that you can get an airbnb in the states. The options are endless.
This is the basic concept of a digital nomad. Someone who has no fixed place of work so is free to bounce around and enjoy different locations around the world. Providing they have access to their laptop and a good internet connection they will be able to work from anywhere.
On top of an enviable lifestyle there can also be some huge tax benefits as well. A digital nomad can often influence where their income is taxed which can save the higher earning digital nomads a large amount of money.
Lets look at some tax tips for digital nomads.
1. Open A Bank Account In A Third Country
Despite a digital nomads ability to move around as they choose, it’s often the case that their income is tied primarily to one source country. For example a web developer who spends their time working from numerous different countries might have a few clients that’s are all located in the UK as that’s where they have built their client base and reputation.
In this situation, when choosing where to open a bank account most digital nomads will either open an account in the UK where their clients are based or in one of the countries that they are actually conducting the work from. When they should actually be basing the account in a “third” country or one other than where the income is sourced and where they conduct the work from.
There are a few different reasons for this which include:
- By avoiding the country where the income is sourced (UK) this will help to ensure that you do not maintain a taxable presence within the country and will therefore help you to avoid paying UK tax on the income
- By avoiding the countries you actually undertake the work from the above point also applies but may also help you to avoid the need for a work permit (depending on the work permit rules of that particular country)
- Gives you more control over where your money is kept. Some countries whilst very popular with digital nomads and overseas teleworkers do not benefit from a solid banking and political system. By using a “third” country to base the bank account you can keep your money safe in a more stable environment
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2. Count Your Days
Most countries will use some variation of the 183 day rule to determine if you are (or aren’t) considered tax resident.
By understanding the triggers for tax residency in the countries you work from and then paying close attention to the number of days you spend working from within a country a digital nomad can avoid inadvertently becoming a tax resident in the countries they work from.
It’s important to know that a digital nomad could be considered tax resident in multiple countries if they are not careful and where this is the case there will likely be multiple attempts to tax your income (often successful attempts).
There are many double taxation agreements that can help in the case of multiple residencies but the accounting is not simple and therefore not cheap. The outcome is also not very tax efficient and will still usually take a big chunk of your income.
It is much better for a digital nomad to research the local rules and stay on top of their days and avoid the issue of double taxation all together.
3. Obtain Tax Residency In A Tax Haven
Whilst a digital nomad who follows the advice from the previous point can technically avoid becoming tax resident in any country. A digital nomad with no tax residency might consider themselves a walking target! That’s because your income is essentially up for grabs and easy prey.
One way to remove that target is to obtain tax residency somewhere else. Although this doesn’t prevent you from picking up a second tax residency it would certainly boost the credibility of any claim for non resident status in other countries.
Assuming that you can obtain tax residency status in a tax haven where no income tax is suffered on your income then this can be a valuable investment.
Just note that although this may seem straightforward in reality many “tax havens” that offer a nil tax environment don’t actually use residency statuses as essentially they have no need for them. This means you will need to do some shopping around for the best compromise between low taxes and a location where tax residency status can be achieved.
4. Don’t create a taxable presence
Having a taxable presence is something all digital nomads should consider on a regular basis. Your tax residency is of course the main factor that determines where your income is taxed but even if you are non resident but deemed to have created a taxable presence in a country then you might well be taxed on your income anyway.
The rules on having a taxable presence will vary from country to country but often where the work is actually being carried out and if you have created a physical presence in a country (such as an office or warehouse) will be deciding factors.
The best way to avoid having a taxable presence as a digital presence is to:
- Keep your footprint small – If you hire an office space and laying substantial roots for your trade then the country you’re working from may consider that a taxable presence
- Use technology to minimise the time spent working in the source country – If you travel back to the UK to attend meetings and conduct work on site on a regular basis then you may inadvertently create a taxable presence. By minimising time spent on site via the use of technology you can minimise this risk
5. Spell it out with an overseas teleworking contract
The contract that a digital nomad has between themselves and their client is the single most important document they are likely to hold.
Not only will the contract detail important information such as the agreed price of work and the scope of the work to be undertaken but it will also potentially serve as a key piece of evidence for tax purposes.
The contract should lay out what work will be undertaken and exactly what work delivers the value i.e. if you are visiting the UK for quarterly meetings then it might be advisable to detail the value of that work in the contract. Remember spending time in the UK like this might create a taxable presence in the country in particular where that time is generating the lions shares of the income. So ideally the real value should be delivered by work that is undertaken outside of the UK
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Adam Hill
Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."
