Last Updated on 27 November 2023 by Brittany
Working remotely and gallivanting across the globe as a digital nomad inherently goes against the grain of society. We run into unique issues, such as where to pay taxes as a digital nomad.
It’s a complicated and often very personal situation to handle. There are a lot of legal factors, such as your physical presence in a country, whether you’re employed by a company, own a business, or are a resident in a foreign country.
Just because digital nomad taxes can be complicated doesn’t mean they’re impossible!
While we recommend contacting a professional tax accountant or lawyer to advise you on your situation, this article will provide some general information about where to pay taxes as a digital nomad.
Digital Nomads and Taxes
Let’s face it: taxes are a painful and often confusing part of life – no matter if you live in the same country all your life or travel the world working remotely.
Aside from visas, digital nomads find the most complicated aspect of their remote lifestyle to be where to pay taxes.
Living a fully nomadic lifestyle could mean not having a residence anywhere in the world, just citizenship. Or it could mean keeping a residence somewhere and traveling on and off.
These different types of remote lifestyles can determine where to pay taxes as a digital nomad.
Do Digital Nomads Have to Pay Taxes?
Yes and no.
Yes, digital nomads have to pay taxes, BUT there are ways to decrease or not be legally liable to pay taxes as a digital nomad.
Again, taxes are extremely personal, and there are many factors determining how much and where to pay taxes as a digital nomad.
In general, yes, digital nomads have to pay taxes somewhere. However, there are some places where you will not owe taxes – we will get into that later on, though.
Understanding the Different Tax Systems
Taxes aren’t as straightforward as we would like them to be.
To help you understand where to pay taxes as a digital nomad, we must first understand the different tax systems. These systems are methods and justifications for taxing an individual.
Residential Tax System
When you are a resident of a country, even if it is not your country of origin, you will likely owe taxes. Since you live in this country, you must contribute to the overall function.
Having a residency in a country means living there, and creating it is your main point of reference. You probably own or lease a home there. It’s also where you conduct most of your lifestyle, such as visiting doctors and being part of the community.
For example, when you apply for a digital nomad visa, you become a resident of the country where you hold the visa.
Citizenship-Based Tax System
There are only two countries in the world that have citizenship-based taxation: the United States of America and Eritrea.
Citizenship-based taxation means that if you are a citizen of either of those two countries, you will be taxed on your personal income, no matter where you live in the world.
So, every year, you must file your taxes if you are a citizen of the US or Eritrea.
The only way to avoid citizenship-based taxation is to renounce your citizenship and obtain another one.
For digital nomads, it is possible to obtain a second residency by applying for a digital nomad visa that leads to citizenship.
Territorial Tax System
The territorial tax system is when a country only taxes income earned within its borders.
This is an ideal tax system for digital nomads because if they work remotely for clients or a company abroad but live in a country with a territorial tax, they will not owe local income tax.
So, residents living in a country with a territorial tax system will only owe taxes if they are employed by a local company.
Where to Pay Taxes as a Digital Nomad
Now that we understand the three main personal income tax systems let’s dive into the different scenarios to decide where to pay taxes as a digital nomad.
Country of Residence
If a digital nomad applies for a visa and is granted residence in a foreign country, such as with a digital nomad visa, they will most likely owe taxes there.
This is a form of the residency tax system.
However, as we mentioned previously, there are some instances where a digital nomad visa eliminates the requirement for remote workers to pay local taxes, even if they are residents.
We understand that digital nomads like to move around. Not many of them want to settle down and apply for residency in a country abroad.
So, if you don’t have residency and are always on the move, you’ll wonder where you’ll pay taxes as a digital nomad.
This is where the physical presence tax rule comes into effect.
If you spend 183 days in a foreign country, they can claim you as a tax resident, even if you do not have habitual residency there.
For example, there are 95 countries that can stay in Georgia visa-free for 365 days. So, if a digital nomad spends 183 days there, they will become a tax resident of Georgia.
If you own a digital business and have it established in a different country from where you are a citizen or reside, you may be subject to profit or income tax there.
However, the financially savvy digital nomad will consider tax-friendly countries to open their business.
Additionally, the United States makes it very easy to open an LLC, especially when you consider opening in tax-friendly states such as Florida and Delaware. You can open your US-based LLC in just minutes with ZenBusiness.
Again, we must express that if you are a digital nomad with US or Eritrean citizenship, then you must file and pay taxes in these countries, even if you no longer live there.
What Taxes Do Digital Nomads Owe?
Okay, so we’ve covered where to pay tax as a digital nomad, but what type of taxes do digital nomads owe?
Again, this is a highly specific and personal situation, so we’re giving as much general information for you to consider when figuring out where to pay taxes as a digital nomad.
Personal Income Tax
The main thing you will be taxed on as a digital nomad is your personal income.
This is how much money you earn working remotely, whether you’re employed, freelancing, or own a business.
Personal income tax rates can vary by country and which tax bracket you fall under.
Some digital nomad visas, such as Spain’s digital nomad visa, offer a discounted tax rate on personal income tax.
Capital Gains Tax
If you earn capital gains from selling assets such as stocks, government bonds, cars, real estate, or jewelry, you can be taxed on those earnings.
This is important for digital nomads who are big on investing and live off of their returns.
Social Security Tax
Digital nomads who are residents abroad will owe local social security tax. This usually contributes to social programs, such as healthcare, social security, and other universal programs in the country.
It’s important to note that this is different from personal income tax, but the rate and amount may be based on how much you earned the previous year.
Can Digital Nomads Optimize Tax Rates with a Remote Lifestyle?
The beauty of being a digital nomad is the opportunity to optimize tax rates and take advantage of more favorable tax systems around the world.
It’s important to note that finding a tax-friendly country is not tax evasion and is 100% legal when done the right way.
For example, the UAE’s new tax laws allow digital nomads to become tax residents when they stay in the country for three months out of the year. They can take advantage of 0% income tax.
Digital nomads can also find a better personal income tax rate by applying for a digital nomad visa.
How Digital Nomad Visas Can Help Decrease Tax Rates for Digital Nomads
There are some digital nomad visas with no tax liability for remote workers living in the country.
In the case where you apply for a digital nomad visa that does not have tax benefits, the overall income tax rate may be more favorable than your current country of residence.
Get Assistance Applying for a Digital Nomad Visa with Favorable Tax Rates
Now that you have a better idea of where to pay taxes as a digital nomad and know the secret to optimize your tax rates, applying for a digital nomad visa sounds pretty enticing.
You could experience living in a new, beautiful, digital nomad-friendly country while also saving thousands of dollars in taxes with a digital nomad visa.
As we mentioned earlier, taxes and visas are the most complicated parts of a digital nomad lifestyle.
That’s why Nomads Embassy: The World’s First Embassy for Digital Nomads, makes it easier to legally move abroad!
We’ve partnered with hand-selected local immigration lawyers and tax advisors to assist our digital nomads with relocating to a foreign country.
Our Done-for-You Digital Nomad Visa service takes the stress out of applying for a visa on your own. Simply collect your documents, fill out the visa application, and attend a visa interview. The lawyer handles the rest!
Are you ready to take advantage of more favorable tax rates while living abroad as a digital nomad?
Request our free eligibility check to see which digital nomad visas you qualify for today!