Immigration. Travel. Living.

Where should digital nomads pay taxes?

Just a few years ago, digital nomads were considered all freelancers who did not live in their own country, but traveled around the world in search of a better place to live. Who were they? These are, first of all, all professions that are minimally dependent on a stationary workplace. Accordingly, most of them are information technology specialists.

General taxation practice digital nomads

Usually, you are considered a tax resident of the country where you spend more than 183 days in a calendar year. However, if you simply reside in a country for more than this period, you will not automatically become a tax resident there.

Once you notify your country of residence that you have a different tax residence, you must validate your new tax residence. To do this, it will be enough to register with the tax authority at the place of your new permanent residence and receive an individual tax number. This number will be useful to you later for many things. For example, to open a bank account in the country of your new stay.

Also, you will need to show economic activity following your activities in the country of the new tax residence. This can be receiving a small salary in a newly opened account, buying shares or registering a new company, buying or renting real estate, or carrying out other economic activities that may be taxed or reported to local tax authorities. If you do not take any action to upgrade your tax residency status, it may turn out that your new country will not know about the fact of your existence, and your country of the previous residence may declare that you are its tax resident.

It is very important that, until you give up your tax residency, you must play under the tax laws of your country, or you will risk penalties for non-compliance with tax laws.

Tax residence

If you intend to conduct an active economic activity in different countries of the world, then you will have to become a tax resident somewhere. It is most beneficial to do this depending on your occupation. If you like to travel, then it is best to do this in one of the countries, where it will then be easy to obtain citizenship with visa-free entry to most countries of the world. If you do not want to pay taxes on your international income, then it is better to do this in a country with zero taxes on income earned outside its territory.

An example of such countries is Panama with its territorial taxation system and visa-free travel to more than 140 countries of the world and Portugal with its special tax regime for foreign citizens NHR.

Remember, even if you renounce your tax residency in your country of first citizenship, the tax authorities may still claim your income if you own real estate there, considering it a center of your vital interests

International tax concepts

Many people mistakenly confuse tax residency with citizenship. In most cases, the place of your birth, which can be defined as your country of birth, determines your citizenship. Traveling or moving to another country will not have any impact on it, and you will always be a citizen of your country unless you decide to acquire new citizenship or change your current one.

On the contrary, your place of residence determines where you do your business, spend most of your time, and must pay taxes accordingly. Is it possible to be a citizen of one country and a tax resident of another? Of course, because these are two different statuses of the same person. But, both of that and another can affect where and what taxes you have to pay.

Different types of tax laws

Different countries regulate how citizens pay taxes in their home countries differently. However, most countries have a residence-based tax system. This means that people pay taxes in the country where they spend most of their time, and not necessarily in the country of their birth or citizenship (of which, by the way, there may be several).

Mostly, the country where you spend more than six months considers you a resident.

The tax system is based on citizenship in different countries. These countries tax their citizens no matter where they are. This means that if you are a citizen of a tax country based on citizenship, then even if you move and live somewhere else, you still have to pay taxes in your country. 

Other tax systems, like the territorial tax systems in Panama, Portugal, parts of the UK, and some other countries, tax individual citizens only on the income they generate locally within their territory. This method lets most digital nomads work abroad without paying taxes in their home country.

Double Tax Treaties

Sometimes two countries treat an individual as a tax resident and force you to pay income taxes in both countries. However, to avoid this for digital nomads, most countries have entered into double taxation treaties. These papers spell out how a government should treat you as a resident and tax your income.

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