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How do digital nomads pay taxes?

The rise of remote working throughout the COVID-19 pandemic has opened new opportunities for many people wanting to escape the office full-time. Not only can employees work from their own homes, but they can choose to establish a home office anywhere – even if it’s in another country.

If all you need to do your job is your computer and a secure internet connection, why wouldn’t you want to set up shop somewhere better? Becoming a digital nomad seems like a dream come true for most workers. However, it’s not always that easy to relocate overseas whilst keeping the same job in your country of origin. Time zones and accessibility aside, residency and taxation can be a roadblock.

Let’s look into what it takes to be a digital nomad, and what this style of remote working means for individuals and employers when it comes to work permits, residency visas, and international taxes.

What is a digital nomad?

A digital nomad is a remote worker who travels, using technology to do their work from wherever they might be at the time. Some digital nomads move around within their home country, while others move to another country to work remotely from there instead. The more adventurous travel around the world from country to country – though this truly nomadic lifestyle isn’t for everyone.

While remote workers operate outside of business premises, they aren’t necessarily nomads, as they can also work in the office if required. The main differentiating factor is that remote working is a necessity for digital nomads because they travel further afield. Opportunities to do this were mostly limited to freelancers and the self-employed, but many employers are now offering more flexibility.

There are many professional roles that are compatible with the lifestyle of a digital nomad, such as:

  • Developers and programmers
  • Graphic designers, illustrators, and photographers
  • Marketers and social media managers
  • Journalists, copywriters, and bloggers
  • Video producers and video editors
  • Consultants, data analysts, and sales managers
  • Virtual assistants and data entry processors
  • Language teachers and translators

It’s not restricted to e-commerce entrepreneurs and online influencers anymore. As long as you have the equipment you need and legal permission to work wherever you’re going, anyone can be a digital nomad nowadays. You’re only limited by employer policies and international tourist laws.

Can you get a digital nomad visa?

While it’s not an official term or specific document, a digital nomad visa is a permit allowing the holder to work remotely from a country other than their primary residence. It’s easy to get a tourist visa for visiting most countries, but these don’t always allow you to earn income while staying there.

This is why you need a ‘right to work’ visa if you plan to receive payment for remote work, even if the payment comes from outside the country you’re working in. You must operate in line with the immigration laws for whichever country you’re in, including ‘freedom of movement’ agreements.

Since the increasing popularity of digital nomad working during the pandemic, some countries are introducing targeted schemes along the lines of a digital nomad visa. For example, Barbados has a ‘welcome stamp’ for digital nomads, who can work there for a year if they earn a certain amount.

Malta also has a ‘nomad residence permit’ that allows remote workers to live there if they meet the minimum monthly income requirements. Bermuda has a similar ‘work from Bermuda’ scheme, and Iceland also offers a long-term remote worker visa. Other countries with digital nomad visa options include Germany, the Czech Republic, Norway, Estonia, and Portugal, plus Mexico and Costa Rica.

Where do digital nomads pay tax?

The issue with working remotely from a secondary country while sourcing your income from another is that filing and paying taxes can quickly become complicated. You’ll need to consider tax liabilities in both your country of origin (where you maintain citizenship) and the country you’re working in.

Even if the country you’re residing in offers a tax exemption for your type of temporary residency, it doesn’t mean you’ll be exempt back home. For example, if you were working in Barbados under the tax-free scheme, but your earnings were still being paid by an employer in the UK, that income would still be subject to UK taxes – including Income Tax and National Insurance contributions.

On the other hand, if you were working remotely in a secondary country but your earnings were paid within the same country, you would need to determine your primary country of residence to find out whether you still owed tax on that income back in the UK. If you’re unlucky, you could end up paying taxes twice on the same income, unless both countries have a double taxation agreement.

Wherever you go as a digital nomad, you need to take the tax residency requirements of each place into account. For many countries, you must live there for more than 183 days out of the year to be classed as a tax resident, but the rules can vary. It’s vital to know the country’s rules before working from there. To check your UK tax residence status, take the HMRC Statutory Residence Test (SRT).

What are the implications for businesses hiring digital nomads?

It might not be as much of an issue for those in self-employment, but hiring a digital nomad as an employer can have complications. Employers can state where an employee is obliged to work in their contract, so they decide whether to allow working from another location or not. This may be negotiated on a case-by-case basis, especially if it concerns a single employee working overseas.

It’s not wise for UK companies to allow employees to work remotely from wherever in the world they like, and definitely not without investigating your company’s legal obligations in each country first. In some cases, your employee working from abroad could mean you’re obligated to register as a foreign employer in that country, which could then make you liable for corporate tax there, too.

Employers also have to consider wider implications like the employee’s ability to maintain their quantity and quality of work, and how effective communication will be for collaborative purposes. Not only will employees need the appropriate equipment and software, but companies also need to ensure they comply with data protection laws in each country if they access sensitive information.

Are you an employer or employee affected by the rise of digital nomads?

If you’re planning to become a digital nomad, you need to get into the habit of keeping thorough financial records (if you don’t already do this). You’ll need to stay on top of your income, business expenses, and relevant tax legislations to avoid missing deadlines and receiving penalties. It can help to have a tax consultant in your primary country of residence to handle all the paperwork for you.

If you’re an employer with an employee who would rather be a digital nomad, you’ll need to work out a detailed legal agreement after researching the individual and corporate tax regulations in each jurisdiction. Having an accountant to manage bookkeeping and payroll can assist with gathering the financial information you need and ensuring that taxes are paid on eligible income for all employees.

As the working world continues to change with ongoing digitalisation, it’s likely that more and more countries will introduce some kind of digital nomad visa to encourage foreigners to live and work there. Should you need assistance with financial planning related to remote work and taxation, you can contact our team at GBAC, accountants in Barnsley, by calling 01226 298 298 or emailing info@gbac.co.uk.