One of the most disturbing and frightening topics for aspiring digital nomads is how to pay their taxes. In this post, I try to demystify digital nomad taxes, where and how to pay them and offer some insights on the topic.

Currently, my partner and I live as digital nomads, managing our Estonian companies thanks to the e-Residency program. Furthermore, we are living in Latvia, and even though we will be spending some time there, we plan on moving regularly. We are from Spain, so originally we were paying our taxes there as freelancers.

Sounds complicated, right?

When I decided to become a digital nomad, the question that kept me awake for so many nights was paying my taxes. I wanted to do this right. I pictured myself in jail, accused of violating hundreds of tax laws and international regulations I couldn’t even understand, and fined for an amount I wouldn’t be able to pay in my whole life…

Turns out, it’s a complex topic, but you can certainly do it right once you understand some basic rules.

Disclaimer: I am not a lawyer. This post is merely based on my research and experience. However, this article should never replace legal advice from a professional applied to your specific situation.

Digital Nomad Taxes: The basics

Before getting started, you need to have some concepts clear, namely the difference between residency and citizenship, and the different types of tax regulations.

Residency VS Citizenship

Your citizenship is usually established when you are born, or you become an adult. It rarely changes, unless you are under special circumstances -like if your parents are from different countries- or you deliberately change it.

In a way, it defines your home country. Traveling or moving to a different country, even permanently, won’t have any effect on it, you will still be a citizen of your home country.

There are ways of acquiring a new citizenship or changing your current one. However, it’s not something that happens just by traveling or visiting other countries.

Conversely, your residency defines where you are living or spending most of your time. Under certain circumstances, you can become a resident of another country. For example, if you are European, and move to another country, maybe to work, for a year, you can certainly become a resident there. As we will see later, this has implications in where you should pay your taxes.

All in all, changing your residency is way easier than changing your citizenship.

Citizenship and residency give you different rights and duties. Let’s see how this affects how you should pay taxes, depending on the tax regulation you are under.

Types of Tax Regulations

Different countries apply different regulations to how their citizens pay taxes.

Most countries apply a Residence-based Tax Regulation. This means that you, as an individual, pay taxes in your country of residence, not necessarily your home country. All European countries adhere to this regulation system.

Under most circumstances, you are considered resident of the country where you spend more than half of the year. We’ll talk about this later in detail.

Other countries, like the US and Eritrea, apply a Citizenship-based Tax Regulation. These countries tax their citizens no matter where they are. This implies that if you are a US citizen, even if you go to France to live and work there for a French company for 3 years, you will still have to pay your taxes in America.

The US tax system is very complex and there are lots of patches and exceptions to this rule, but generally speaking, citizenship-based tax countries will tax their nonresident citizens on worldwide income.

There are other more interesting tax regulations. Territorial tax regulation systems -like Panama- tax their individual citizens only on their local income.This means that if you earn money overseas, that’s not taxed. Finally, there are a few countries that impose no taxes on individuals, like Qatar or the Cayman Islands. These countries are usually considered tax heavens, and the implications of being a resident or citizen of those countries are too complex to explore in this article.

Of course, there are lots of exceptions and special cases on every concrete legislation. For example, if you are a British student owing student loans, the UK will impose a global income tax on them, no matter where you live. To better understand your particular case, you should ask a professional.

Double Taxation Treaties

There are no international rules that say how those who work or spend time outside their home countries are to be taxed on their income.

In some cases, two countries could consider you a tax-resident at the same time, and both could require you to pay taxes on your total worldwide income.

Luckily, most countries have double tax agreements, that usually provide the rules that determine which country should treat you as a resident and, consequently, tax you as an individual.

In the European Union, for instance, there’s a list of double-taxation treaties with other countries. If you are a European citizen, it’s worth checking it out.

You are NOT Your Company

One of the most confusing aspects of running a company is the distinction between you and your company regarding taxes. Thus, there’s one thing that needs to be clear in your mind.

You are not your company.

This distinction is especially important when it comes to taxes. Indeed, when your company generates revenue, this money belongs to the company. You cannot simply use this money for your personal affairs. The company will, depending on the country of incorporation, need to pay or not taxes related to that income.

Then, eventually, you get some money out of your company bank account and into your personal one. There are many ways of doing that, like assigning yourself a salary or paying dividends. Whatever the case, at that very moment, you earn some money as an individual, and are responsible for declaring it for tax purposes. Additionally, in this process, the company may be liable for paying some extra taxes when it gives money to an employee, founder or service provider.

Note that your company may pay taxes in a completely different jurisdiction than you. As an example, imagine you are a micropreneur with an Estonian company. Now and again, you pay yourself a salary from your own company, transferring the money from your Estonian account to your German personal one. Then, your Estonian company must pay some taxes for this salary, of course, to the Estonian authorities. On the other hand, when you do your yearly tax return in Germany, you will need to pay the corresponding amount of taxes for the money you (as an employee) earned to the German authorities.

For a more concrete example, have a look at the salary example from this post.

The problem with Current Tax Regulations and Digital Nomads

The world is not ready yet for digital nomads.

We are slowly getting there, in my opinion. However, right now, the concept of “not belonging” to a place or not having a steady residence completely clashes with most tax regulations. Countries are not ready for this kind of lifestyle, and obviously, your home country and any other place where you spend enough time will want to get money from you in form of taxes.

To make things worse, there’s no international law regarding taxes for digital nomads. Current laws were written in the times when people usually stayed in their home countries. Traveling the world on a regular basis presents many challenges that have no answer as of today.

Additionally, there are many things that are still tied to either your citizenship or your permanent residency. Some of these things include health insurance, contracts, work regulations, marriage rights, etc.

My hope is that, as the world evolves and the digital nomad lifestyle becomes more popular and understood, things will change. Some kind of international regulation will be needed for the citizens of the XXI century.

Demystifying Digital Nomad Taxes.

Digital Nomad Taxes: Rule Of Thumb

Unless you are a US citizen or are subject to a non-residence tax regulation, there’s an easy way to know where you should pay your taxes. You are considered resident of the country where you spend 183 days or more a year. This includes holidays, business and pleasure trips, and prolonged stays.

However, you don’t become a resident automatically by just living 183 days a year in a different country. Unless you explicitly say so, your home country would like to keep on considering you a resident there. Obviously. They want your money.

Depending on the legislation in your home country, you will need to communicate that your tax residency is somewhere else.

In the case of Spain, for example, once you travel to your destination country to stay there for more than 6 months, you need to fill a form (the 030 form) to indicate that you no longer are a Spanish resident. In this form, you give details about where you plan on becoming a tax resident.

Once you do that, you have to make sure to actually make this tax residence effective. There are many ways of doing that. One of them is earning a salary. Nevertheless, there are many other ways of paying a small amount of taxes, enough to justify your residency. Some of them include owning stocks, buying or renting properties, opening a company or performing other economic activity that might be subject to taxation.

If you don’t perform any of these actions, it’s still possible that your home country may want to consider you a tax resident there. Make sure to do your homework when traveling abroad.

Thus, the rule of thumb: you are resident of the country where you spend most of your time yearly, but it’s not an automatic process.

Taxes For Estonian e-Residents Owning A Company In Estonia

In this post, I explain in detail how to pay your VAT and taxes if you own a company in Estonia. Being one of my main concerns before opening mine, I know it’s certainly an interesting topic.

Digital Nomad Taxes: Avoiding Taxes?

A very common question related to digital nomads and paying taxes is:

If you travel the world regularly, never staying for more than six months in the same place, is it possible to become a no-tax resident for any country, thus avoiding taxes?

The answer is: yes, in theory. The 183 days rule specifies that you become a resident of the country where you spend 183 days or more on a year. As a result, you could spend up to three months on a place before traveling somewhere else, avoiding becoming a resident of any country.

While this is true, becoming a non-resident is not an easy process, and has many caveats. Unless you become a non-resident in your home country first, you will be considered a de-facto resident there. I talk about this rule and how to avoid taxes legally in this article.

Conclusion

In this article, I tried to demystify digital nomad taxes, and explain how to pay your taxes if you are working remotely while traveling the world on a regular basis.

While this is not an easy subject, once you have some concepts clear, it’s not that hard to figure out where and how to pay your taxes. Two main concepts to have in mind is the type of tax regulation you are under and the rule of the 183 days. I hope I helped you avoid some headaches.

Do you have a concrete question about where to pay your taxes, or about the different tax regulations or the difference between you (as a company) and you (as an employee)? Don’t hesitate to share it with us in the comments below.

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Years ago, I quit my 9 to 5 job and became a freelancer first, then a solopreneur, and finally a digital nomad. Managing my company back in Spain was a nightmare until I discovered the e-Residency program and opened my company in Estonia. That changed my life.

After some years managing my business, I know the tricks of the trade. I can offer you advice on how to become location independent, found an European company you can manage online while traveling, and avoid unnecessary costs. If you are ready to take the leap, but have some doubts or don't know where to start, let's get in touch.

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15 Comments

  1. Daniel S Andrade November 4, 2017 at 3:52 pm

    Great post! This is exactly what I was looking for. Maybe for some it’s pretty straightforward, but if you’ve only been an employee your entire life, it can be a bit confusing in the beginning. Keep posting about your nomad business journey! Thanks 😉

    Reply
    1. nacho November 4, 2017 at 3:54 pm

      Thanks, Daniel. To be honest, this is an obscure topic, even for seasoned freelancers or entrepreneurs, not just employees, so glad to know you found it useful.

      Reply
  2. Pingback: VAT And Taxes for e-Residents Owning A Company in Estonia

  3. David Bailey-Lauring December 21, 2017 at 2:17 pm

    Does paying a management board salary from an Estonian company subject to local income taxes or must this be only be paid to the Estonian state? At present, I am resident in Estonia so pay this to Estonia but am not so sure once I move and become a resident elsewhere.

    Reply
    1. nacho December 21, 2017 at 8:01 pm

      Hi there David, thanks for your question!

      Your employee salary is not taxed at all (in Estonia, anyways), as long as you are working outside of Estonia. However, for the board member salary, you are supposed to pay two taxes: the Income Tax (20% of the gross amount) and the Social Tax (33%) of the salary plus the income tax. This is independent on whether you work in Estonia or any other country.

      Thus, when you become a resident outside of Estonia, you will pay your board member salary taxes in Estonia, and your employee taxes in your country of residence. That’s my case for example.

      There’s a concrete example here : https://micropreneur.life/eresident-taxes-vat/

      Reply
  4. Jay January 19, 2018 at 11:37 am

    Great article!

    The only thing I’d add is that I think that it’s worth distinguishing residency as a status you obtain for administrative reasons and tax residency which is a status you get for tax purposes and which is independent from the first kind of residency. I mean that you’re not automatically a tax resident of a country when you obtain its residence, you need to qualify for its tax residency as well, and make sure you ‘lost’ your tax residency of your home country. Many DNs mix these two.

    Reply
    1. nacho January 19, 2018 at 11:41 am

      Thanks Jay. Of course, you are right 100%, and I talk about that precisely in this post, in “Make Effective Your New Tax Residency”. Thanks for commenting! 🙂

      Reply
  5. E J January 31, 2018 at 8:07 am

    What if you are a US citizen, earning a salary from a US company online, traveling for most of the year in different European countries, but never staying in one country longer than 183 days? I assume that I will pay US federal and state tax based on my residency in the US. Would there be any foreign tax obligations if the US citizen is not in any one European country longer than 183 days? What tax regulations could I show my employer to support that it is not required to involve an international tax lawyer/accountant because I am filing and paying US taxes as I did when I was physically in the US? I’m not trying to get out of paying my taxes — I plan to file and pay as always. I don’t even know yet if I will be out of the US for 330 days in a given year.

    Reply
    1. nacho January 31, 2018 at 8:26 am

      Hello there E J. As far as I know, being a US citizen, you are under a citizenship tax system. That means that even if you stay on an European country for more than 183 days, you are still subject to US taxes. You mention that you work for a US company online. In that case, your employer is from the US, so their accountant certainly knows that you are paying your taxes legally there. All you need to show them is your last tax statement. I don’t think you should face any problem there, especially if you don’t live more than 6 months in any given country. Hope it helps!

      Reply
  6. Graham February 14, 2018 at 4:13 am

    Although you are not your company, an aggressive tax department will say that you are ‘The mind and body’ of it, and therefore liable. I got hit that way.

    Reply
    1. nacho February 14, 2018 at 11:17 am

      Hi there Graham!
      Precisely, “You are not your company” means that you and your company are separate taxable entities and must pay taxes individually. Of course, being the owner of your company, you may be liable depending on what things you do incorrectly or illegally. Thus, it’s better to always act according to law 😉

      Reply
  7. Susan October 5, 2018 at 10:48 pm

    I like the article but I’m still a bit stuck. We are British, living in Cayman for the last 11 years and certainly no longer resident in the UK. But from next year we will be moving to Europe and leading a nomadic lifestyle, while not staying in any one place. Our earnings are online, paid into accounts in the UK and US.
    When we submit our UK tax return each year we have to list the countries in which we are resident for tax purposes but we won’t be registered in any country for tax. We don’t have a company, we’ve just been sole traders, or self employed.
    Won’t the UK tax authorities be suspicious if we aren’t registered anywhere for tax?

    Reply
  8. Ermint October 12, 2018 at 2:09 am

    Susan, you only have to list your contact/residential address at the time. Id suggest a serviced mailbox or similar. These can be contracted.
    I have been UK ex pat, but submitting tax returns as per your comment for a few years.
    You dont have to detail days here and there, just declare yourself non resident and provide a non resident service address. End of 🙂

    Reply
  9. Tob January 18, 2019 at 11:08 pm

    As far as I understood your company, even it’s Estonian, would be taxed like a German gmbh if you, the company director are living in Germany. Same in Portugal. Isn’t that true for every country?

    Reply
    1. nacho January 20, 2019 at 12:46 pm

      Not for every country. That applies mainly to European countries, especially those that have double taxation treaties with Estonia. If you live in Thailand, Indonesia or Brazil, for example, you don’t have to worry about that.

      Reply

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