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Digital Nomad Tax – A Guide

How do digital nomads pay their taxes? Where do they pay? Do they have to register with the Inland Revenue everywhere they go?

Unfortunately, the answer is not straightforward, as no universally-valid tax law covers digital nomads and their worldwide earnings. This is why we put together these guidelines – to help you out on your digital adventure. Here is what you need to know.

What are the types of digital nomad tax?

Like every service provider, digital nomads are required to pay income tax, and if they run a business, they must also pay corporate tax.

Different rules apply to different cases. Personal tax, for example, is paid in a country where the digital nomad is a tax resident, while corporate tax can be paid in a different jurisdiction. Let’s take a look at this distinction closely.

Handling personal tax as a digital nomad

While each country discretionary establishes the rules applicable to personal tax and digital nomads, generally, to be able to pay income tax in a country, you must be a resident. And again, as a rule, to qualify as a resident, you will have spent at least six months in that country. For a digital nomad, this may be challenging as they tend to move from one place to another after short periods of time.

But not all is lost or impossible. Some countries, such as the United States and Eritrea, apply tax rules to an individual’s income, no matter where they’ve earned it, based on their citizenship.

In contrast, most EU countries, Canada, Australia, Japan, New Zealand, and Korea, have a residence-based taxation system whereby only residents of these countries are liable to taxation.

On the other hand, countries like Panama, Thailand and Paraguay apply a territory-based taxation system whereby only the income earned on the territory of the country is subject to taxation. Usually, offshore tax havens adhere to this tax system.

However, given that digital nomads are always on the move, they may apply for tax residence or even citizenship if the country where they are has a low tax rate. The digital nomad visa can help tremendously solve the tax residence problem.

Digital nomads and corporate tax

Companies fall under a different taxation regime. Unlike individuals, companies can pay tax where it is registered or managed -even in a foreign country. There is also the international tax principle of “permanent establishment”, which allows companies to pay profit tax in countries where they do not have a tax residence on condition that the company operates in that country.

Knowing the local tax laws in force in the country where your digital nomad-run business plans to operate is vital for your financial well-being. 

Apart from income and profit tax, companies pay additional taxes, such as social taxes, which are due in the country where their employees are located, and VAT (especially in the EU) – in which case, they need to register for VAT and submit annual VAT returns.

As a digital nomad looking to set up and run a company in a foreign jurisdiction, you will likely face numerous challenges. But thanks to digital-nomad-friendly programmes, such as Estonia’s e-residency, companies can be incorporated and run by non-residents and non-citizens – remotely. Let us examine this option more closely.

E-residency:  a lucrative solution for digital nomads

Hugely popular among digital nomads, Estonia’s e-residency programme can make it significantly easy to run your business from abroad. 

As one of the most advanced start-up nations in the world, Estonia provides access to all its relevant e-services and online systems – from income tax to VAT to social tax – through its e-residency programme.

The scheme attracted an impressive number of digital nomads, entrepreneurs and freelancers to the country in the 8+ years since it was launched.

By allowing anyone, whether they are an EU citizen or not, to run an EU business from anywhere, the programme boosted the country’s economy significantly, making it a top destination for digital nomads.

To run a business in Estonia remotely, you must obtain an e-residency digital ID that will enable you to run all the company’s affairs conveniently online. With a secure electronic signature, you can access your business banking system, fill in and submit your tax returns, etc. Besides, the e-residency application process is quite smooth and affordable in Estonia. Not to mention that you don’t need to appoint any local director to run your company’s operations.

However, to establish a business in Estonia, you will need a local contact person who will act as your “messenger” and “mailbox”.

There are many forms of company ownership, but the most popular is the private limited company (OÜ), which requires a minimum share capital of 2,500, making it affordable and attractive.

In addition, the Estonian tax system is one of the most competitive in the world. If you pay tax in the country, any distributed profits incur a 20% tax (or 20/80 of net distributed profits). Dividends are paid every 3 years and are taxed at 14% (14/86 of net distributed profits). 

Estonia has signed double taxation treaties with more than 60 countries worldwide, meaning that if you are already paying the same category of tax in any of these countries, you will not pay the same tax in Estonia – e.g., employee social tax.

As an EU country, Estonia also imposes a corporate tax (VAT), depending on the nature of the business activity. The revenue level required for VAT registration in the country is €40,000 per annum.

Final thoughts

One of the most testing aspects of operating in another country as a digital nomad is finding your way through the maze of domestic and international tax laws. However, with the right advice and direction, anything is possible. 

Zazzoo offers a plethora of payment solutions for digital nomads, empowering you to handle your operations smoothly online. 

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