On my previous post, Demystifying Digital Nomad Taxes, I mentioned that there’s actually a way to avoid taxes legally if you are a digital nomad, by adhering to the 183 days rule.
Now, I know this is a very polemic subject, but I really want to propose an open, mature discussion on the subject. We will talk not just about the process, but its consequences, and legal and ethical implications.
Let’s start by refreshing some basic concepts: residence based taxation and the 183 days rule.
Residence Based Taxation Systems And The 183 Days Rule
As I discussed in my previous post about taxes, there are different types of taxation systems.
Most countries apply a Residence-based Tax Regulation. This means that you, as an individual, pay taxes in the country where you have your residence, not necessarily your home country.
All European countries adhere to this regulation system. Most civilized countries -with the exception of the US- do, in fact.
Then, how do you determine your country of residence?
Easy. It’s the country where you spend most of the year, concretely, at least 183 days a year. This rule is a de-facto standard in all countries that apply residence-based taxes.
What If You Don’t Have a Steady Residence?
As a result, if you travel regularly, never spending more than six months a year in the same country, you have no official residence. Thus, you shouldn’t pay taxes, right?
Yes, if you are a citizen of a residence-based tax country, that’s right.
Take into account that this applies to your personal taxes, not the taxes of your company. If you, like me, are an e-Resident with a company in Estonia, your company will still pay taxes there. And rightly so.
However, there are some important caveats and details that you need to have into account. Additionally, there are some legal and ethical considerations.
Let’s talk about them.
How To Avoid Taxes Legally
If you want to stop paying personal taxes, it’s not as simple as moving to a new country and start traveling the world. You need to do it right.
If you simply embrace a nomadic life, your home country can still consider you a de-facto tax resident there, even if you don’t spend a single day within its frontiers.
These are the steps you should be following if you want to confidently say goodbye to taxes while sleeping well at night. However, I am no accountant or lawyer, so if in doubt, ask for professional advice.
Stop Being a Tax Resident At Your Home Country
First, you need to spend some time in a second country and, optionally, become a tax resident there. In order to do that, you need to inform your home country that you are going to move to another country.
So the first step is going to a country where you can stay for some months.
When you get to your second country, go to the embassy of your home country and inform that you are going to be a long-term resident there (more than 90 days).
Then, you also need to inform the Tax Office of your home country that you no longer are going to be a tax resident there. This varies from country to country. In some countries, you can do it as soon as you get to this second country. Others require you to wait for some months. Also, the method varies between jurisdictions. In my case, as a Spaniard, I had to fill the 030 form and send it to the tax office. Expect to have to explain your reasons and requiring some extra information or even a call or two. They need those delicious taxpayers.
Make Effective Your New Tax Residency
Then, you need to spend at least six months and a day in this other country and make sure to pay some taxes there.
Ideally, you should spend a whole year in a country and make something that will require you to pay taxes.
Earning a salary is the most usual way of doing this. However, there are other ways, like owning stocks, investing in real estate, opening a business or co-founding a company.
You don’t even need to actually pay a big amount of taxes. It’s enough if you just do a tax statement.
Be Careful Not To Choose A Tax Heaven
Most residence-based tax countries are wary of tax heavens and impose severe restrictions if you move your residency to such places.
Thus, for this initial country, don’t choose a tax heaven. Choose a country with a good fiscal reputation, like a European country.
Take into account that these restrictions sometimes last for three or more years. In most European countries, you will still be considered a tax resident in your home country if you don’t spend at least the first three years outside of a tax heaven.
Avoid Having “Important Economic Interests” In Any Country
Most legislations discussing tax residency specify as a requisite for being considered a tax resident, apart from the 183 days rule, having “important economic interests” in the country.
What does this mean?
Basically, if the majority of your wealth, businesses or money sources are bound to a country, you are supposed to have a strong link to that country.
Similarly, if your husband, wife or underage children are tax residents in a country, that country can decide that you are a tax resident there too.
Thus, make sure to sever all ties to your home country.
If you have a partner, this is an important decision that you must make together.
Also, if you have dependent children they will probably have to join you too.
Although not mandatory, it’s also recommended not having real estate or other important properties in your home country either. Nothing that could be used against you by your tax office.
Travel The World For Fun And Profit!
Once you have spent a year in your second country, and have made your tax residency effective, you are ready to go. Stop being a tax resident in this country too, and move to any other country.
From that moment on, you won’t need to pay personal taxes as long as you spend less than six months a year on a concrete country. Enjoy!
However, not everything is a bed of roses when you are a permanent wanderer. Let’s talk about some of the caveats you need to consider.
Some days after I handed over the 030 form to my tax office, I received an email from my Spanish bank, ING Direct. The tone of the email was very aggressive, and urged me to update my personal information, tax residence and send them a proof of address, such as a utility bill.
It did cost me a lot of time and effort to be sure that they won’t be closing my account or blocking my funds.
You will have to get used to the fact that banks expect you to live in a country. They are mostly obsolete institutions from times when people rarely if at all left their homes or traveled regularly.
Fortunately, thanks to the digital revolution, there are many alternatives to traditional banking for digital nomads, like the Revolut card.
actually am in the process of getting rid have managed to get rid of all my traditional banking accounts and I’m operating on digital banking solutions only for my personal finances.
Social Security And Other Benefits
If you live in a civilized country -with the exception of the US-, you are used to some social benefits, like free social security and health insurance.
Unfortunately, most of those social benefits are residence-based. Thus, if you are no longer a tax resident on any country, it can be difficult for you to access free health services or social security.
The European website for the Social Security Cover Abroad fails to address the situation of digital nomads without residence doing freelancing job or owning a company themselves.
Interestingly enough, if you own a company in Estonia as an e-Resident, you could adhere to this situation:
If you are employed but have no substantial activity in your country of residence, you are covered where your employer’s head office or business is located.
I have talked previously about how e-Residents owning a company in Estonia assigned themselves a salary. In the salary calculations, your employee salary was not taxed if you lived outside of Estonia. Conversely, under this scenario, you might wonder if paying taxes for your full salary gives you then Estonian social security benefits in Europa.
I will discuss this in depth in a future post.
Nevertheless, generally speaking, you will lose your social security benefits. If you are European, you may opt-in for the European social security card, but
it will cover you for just two years. After that, you will need to sign a private medical insurance contract.
Edit: a fellow member of TechHub from Portugal corrected me. Apparently, in some countries of the European Union (like Portugal) you can still have the European sanitary card if your parents pay taxes or social security in your home country.
Now, this is actually no big deal. I had private medical insurance back in Spain, and the benefits of not paying personal taxes clearly outweigh the costs.
This is something important to consider. If you don’t pay taxes, you are not contributing to your pension. Hence, you will have to contribute to a pension scheme on your own.
Most millennials I’ve spoken with affirm that they don’t expect to have a pension when they become old. I don’t either.
Thus, if you are Ok with the idea of contributing to a private pension scheme, this is no big deal.
Legal And Ethical Considerations
When talking about how to avoid taxes, there is always some dispute over the legal or ethical aspects. As I think it’s important to consider everything before making such an important choice, I would like to talk about them here.
Is It Legal?
Yes, it is. Ask any lawyer or tax office representative. They, of course, will warn you of the do’s and don’t like I am trying to do here, but the law is clear.
You are a tax resident of the country where you spend more 183 days or more a year.
Nevertheless, as I affirmed previously, the world is not ready yet for digital nomads.
Most of the things you do today requiring the intervention of a big corporation or governmental institution require you to have a residence.
This includes important stuff such as getting married, having a child, applying for a mortgage or loan, some job offers, or even paying a traffic ticket sometimes.
There’s no legal or fiscal jurisdiction as of now that fully recognizes and understands digital nomads. Even seasoned accountants have a hard time when faced with someone without a fixed residence doing business and earning money while traveling.
However, I hope this situation will change. The nomadic lifestyle is being adopted by an increasing number of people every year. Initiatives like the Estonian digital nation are starting to create awareness of the fact that a lot of people are not tied to a country anymore.
I am optimistic about the future.
Is It Ethical?
This is a more subjective question. Personally, I think it’s perfectly ethical.
Let me explain why.
Why do we pay taxes? In most modern societies, its citizens pay taxes to enjoy some benefits in exchange. These benefits usually work on a solidarity basis.
This means that you pay taxes so that your neighbor’s children can have a quality education for free. Conversely, your neighbor pays taxes so that when you are ill, you can have quality medical assistance for free -unless you live in the US, of course-.
However, if you are a digital nomad, and you spend less than six months in any given country, you are not making use of these benefits. You actually pay to private companies to enjoy those benefits.
Your children don’t go to public schools.
If you are not a resident, you need private medical insurance, so you are not abusing social security. Additionally, you will not have access to a pension for that time you haven’t contributed.
Also, you probably don’t have a car, so you are not using the public infrastructures and when you do -at a taxi or bus-, you pay for that service.
I could go on an on, but you get the idea. Without the residence, you are basically a long-term tourist. If you are not enjoying the social benefits of a society, why should you pay taxes for them?
In fact, you actually pay some taxes when buying local products or using local services.
Thus, I honestly believe that when you become a wanderer and assume the costs of doing so, it’s completely ethical to avoid taxes legally.
In this article, I talk about how to avoid taxes legally. This is a very polemic topic that always leads to some controversial arguments, but I wanted to address this from a mature perspective, talking not only about the benefits, but also about the consequences, and ethical and legal considerations.
Do you have any comments? Don’t hesitate to share your thoughts with us 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.