Digital Nomadery and the 183 Day Rule
As the darkness and fetters from Covid lift, restrictions on travel have eased tremendously, giving way to a global renaissance: digital nomadery. Digital nomads have redefined work-life balance, traveling the world while working from anywhere, moving often. Their brethren, remote workers, also enjoy much of the same flexible lifestyle, but typically spend longer periods of time in a specific location. There is much overlap between these groups, and no strict definition. What they have in common is wanderlust, a taste for adventure, the luxury of mobility, and … some tax headaches.
Plan Ahead for Tax Implications
The tax implications that come with being a globetrotter can vary. Many Digital Nomads mistakenly believe that their short stays won’t trigger tax obligations. They blindly cite the “183 Day Rule,” referring to tax verbiage that many have adopted which - in some cases we will get into later - defines residency by whether or not you’ve spent 183 days there. Unfortunately this isn’t a universal rule and the laws, and their interpretation, are subject to change. People can trigger tax obligations in many other ways, such as: if you stay for short periods of time but have your “center of vital interests” (your economic, social, family ties) there; if you have a “habitual abode” (a place where you stay most frequently); the location of your bank accounts; if your duties are vital to running your company or the company of your employer; and if you still have a tax residency somewhere else or not.
Your designated tax residency in turn dictates to whom you owe taxes. A great way to start understanding where you’ve created tax obligations is to know exactly where you’ve been, when you were there, and how much time you spent there - that’s where Chrono can help, but more on that here.
How can you avoid the tax mistakes of other Digital Nomads? Let’s look at 5 different ways in which digital nomads pay taxes: paying taxes only back home, paying taxes back home and locally, not paying taxes anywhere, moving one’s tax residency to somewhere with a more desirable tax rate, and/or applying for a Digital Nomad Visa.
1. Pay Taxes Back Home
(ie. keep your tax residency back home and only pay taxes there; ignore local taxes).
This is very popular because it’s one of the easiest solutions. The main problem with this approach is that you are potentially ignoring places where you might be creating tax obligations. If you are also also working while on a tourist visa, there is the risk of some legal issues. Many countries are responding to this challenge by adjusting their laws, however.
2. Pay Taxes Back Home & Locally
(ie. become non-tax residents back home & move your personal and/or professional tax residency to a low-tax country).
Traditionally, this has been an approach taken by global companies who needed to send their employees abroad. They would set them up in the new location as International Assignees, get them a local visa, and often, cover all their taxes in the country of assignment. That doesn’t necessarily mean they end up paying taxes in two places - it’s usually solved with Double Taxation Agreements (DTAs) between countries that dictate where and how much tax must be paid.
3. Be A Tax Nomad And Don't Pay Taxes Anywhere
(ie. become non-tax residents back home, don’t pay any tax in countries they visit, and hope to avoid paying taxes anywhere.)
While this is an approach to save a lot of money on taxes back home or elsewhere, getting rid of your home tax residency can be difficult, especially if you are not moving it to somewhere else. If you can’t declare a center of vital interest or habitual abode elsewhere, you might end up paying taxes based on your nationality by default. This strategy requires a fair bit of planning to get right.
4. Move Residency To Somewhere With A More Desirable Tax Rate
No explanation needed, but keep in mind that you should track your time when making this sort of transition.
5. Apply For A Digital Nomad Visa/Permit
(ie. get Digital Nomad Visas in order to ideally only pay tax only in the host country).
Sorry to burst your bubble, but with most Digital Nomad Visas you need to provide proof that you are also paying taxes back home. Sometimes you might be able to get a tax credit or become a non-resident back home but make sure that your Digital Nomad Visa would still be valid if you do that.
Bottom line?
It pays to do your homework on what the tax implications of your nomadic lifestyle might be.
As always, this is not to be relied on as tax advice. Please consult your tax advisor for recommendations on your unique situation.
