Where on earth do Digital Nomads pay Taxes? Everything you need to know!

Have you ever wondered where Digital Nomads pay taxes while they work remotely all over the globe? Maybe you are trying to figure this out for yourself? We are here to help and to answer questions like: Are residency and domicile the same? What is a tax residency and why is it so important? Can you pay no tax as a tax nomad? Let’s take a better look at where Digital Nomads pay taxes.

I have written about this subject before when analyzing Who are Digital Nomads vs Remote Workers? and What Visas & Tax Incentives do they need? Please check those out for a general overview. Below we will focus on the tax aspect in particular.

Disclaimer: just a reminder that this is an opinion and by no means should be treated as legal or tax advice! We would also love to know what you think! Please scroll to the bottom of the page to post comments.

Digital Nomads vs Remote Workers

Before we dive in, let us explore the difference between Digital Nomads vs Remote Workers and if that impacts how Digital Nomads pay Taxes.

• Digital Nomads are people who travel the world while working remotely; mostly Freelancers or Self-Employed, focus more on the traveling aspect rather than a particular destination and typically spend shorter periods of time per location, moving fairly often. Some would be Perpetual Travellers, not having any home base at all, others would be Slomads and spend longer periods of time per destination.
• Remote Workers are people who are able to perform their work remotely, most are Employees and work from their homes, but recently, there are more remote workers who would travel full time or move to an attractive destination and spend long periods of time per location.

You could say that a Digital Nomad is a Remote Worker, and Remote Worker can become a Digital Nomad. Especially nowadays, the line between Digital Nomads and Remote Workers becomes more and more blurry. You can now find Digital Nomads who are remote Employees and Remote Workers who are Contractors. Some Digital Nomads would spend months or years per destination, while some Remote Workers would start traveling more often, and not only within home country borders but internationally. If the line between digital nomads and remote workers is so vague; how does that affect how they pay taxes?

Well, it all really comes down to how much time you spend per country and how that impacts your tax residency. This is because where you are considered a tax resident is where you need to pay your taxes.

Residency vs Domicile

Let’s start with some basics. Residency is where you choose to live, it might be short or long-term, but it’s usually temporary. Your domicile is more permanent and is essentially where your long-term base is and where you have substantial connections. When you’re born, you’re automatically assigned the same domicile as your parents, which is defined as your domicile of origin. You can choose the move more permanently to the place where you reside, and become domiciled there, this is usually called a domicile of choice.

Residency For Tax Purposes

So is tax residency the same as residency? Even though sometimes they are used interchangeably, they are not exactly the same. Tax residency is an international tax law concept while residency or domicile defines your right to live in a country. The residency and domicile affect the extent to which you are liable for taxes and are used to define where your residency for tax purposes.

You might be a citizen, or hold a permanent residency in one country but not be considered a tax resident there. You might also be considered a tax resident of a country without becoming a permanent/ordinary resident there. It is possible to be resident for tax purposes in more than one country at the same time. This is known as dual residence. You can be domiciled in country A, but reside and be resident in country B and still be considered a tax resident of both countries.

Territorial or Residence-based Taxation

Another thing to be mindful about is how the country of your tax residency taxes your income. Countries that do tax income (some don’t) generally use one of two systems: territorial or residence-based. In the territorial system, only local income – income from a source inside the country – is taxed. In the residence-based system, residents of the country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income. There are two countries in the world (Eritrea, and the United States) that tax their nonresident citizens on their worldwide income (there are some exceptions to that).

Countries with a residence-based system of taxation usually allow deductions or credits for the tax that residents already pay to other countries on their foreign income. Many countries also sign Double Taxation Agreements (DTAs) tax treaties with each other to eliminate or reduce double taxation.

Please see the list of countries and their taxation of local and foreign income, depending on their residence or citizenship in the country.

Yes, it is all pretty complex but understanding where you are a tax resident is quite important. If only there was one set of rules for that, right? Nope. Unfortunately, each country has its own rules for defining whether a person is a tax resident or not.

183 days rule is a myth

A lot of sources claim, incorrectly, that Digital Nomads, who supposedly are only staying short periods of time per country, don’t need to pay taxes in countries they visit and it’s only remote workers who need to do that because they stay longer at each location, therefore triggering tax obligations. Unfortunately, it’s not as simple as that.

Trying to simplify the complexities of tax residency, some would say that if you don’t spend more than 183 days in a year per country, you won’t become a tax resident there. This is simply not true.

In the majority of countries, the tax residency is not solely based o the length of time you spend living & working there. The 183 days rule is only one of many different indicators used to assess who is a tax resident and who is not. You can trigger taxes even if you stay for short periods of time if you have your center of vital interests (your economic, social, family ties) there, or if you have a habitual abode (a place where you stay most frequently). What matters are the ties/connections you have to the country and how often you stay there? Where do you have your bank accounts? Are you traveling with your partner, spouse, or kids? What type of remote work do you do there? Are some of your job duties vital to running your company or the company of your employer? Do you still have your tax residency somewhere else or not? Or maybe you have been a tax resident there before?

All of these might indicate that even if you work while on short holidays, or while just visiting the country for a few days or weeks, you might, theoretically, be doing so illegally (if you are on a tourist visa) and you might be triggering a tax obligation in that location.

Risks & Compliance

Now, theoretically is the keyword here because what the law is and how it is enforced in practice, are sometimes two different things. In this case, it would be impractical and almost impossible for a country to trace and tax anyone who works there even for a short while. This is, however, quickly changing due to, among many other things, the increased exchange of information between inter-government bodies (e.g. police, immigration exchanging info with tax offices) and international collaboration between countries (e.g. FATCA, CRA).

For now, however, no one pays taxes in a place where they worked for 3 days while being on holiday. No one would care to do it if they’ve only been there for a few weeks… But how about a few months? This is where it gets tricky. Where do you actually draw the line?

Unfortunately, Digital Nomads live in a grey area, there aren’t any clear answers or simple solutions, it’s all about managing risks. Every situation and everyone’s circumstances are different. And as a result, the risks are also very different. Let’s go over some of the most common scenarios and associated risks.

Where do Digital Nomads pay their taxes?

Generally, Digital Nomads tend to deal with their taxes in the following four ways:

They would keep their tax residency back home, only pay their taxes there, and ignore local taxes

This is a very popular way in which Digital Nomads deal with taxes, and for a reason. For now, this is one of the easiest solutions. You really want to make sure that you have a place that you can call your tax residency & where you can base your financial services (bank accounts, credit cards, etc). The main problem with this approach is that you are not paying taxes in places where you might be creating tax obligations. You are also still working on tourist visas, which in most countries is illegal and might get you deported or worse. Luckily cases like that are not very common, most countries don’t want to scare tourists away but you do always operate in a grey area. A lot of digital nomads, for years, have been operating under the radar but for nomads who are more concerned about not breaking the law, this might be a source of a lot of anxiety that can spoil the fun of traveling.

They pay taxes back home and also pay taxes locally if they are required

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. Nowadays, this is more common among Digital Nomads who expect to stay in the host country for longer periods of time. That doesn’t necessarily mean they end up paying taxes in two places, this is usually solved with Double Taxation Agreements (DTAs) between countries that dictate where and how much tax must be paid.

They become non-tax residents back home, don’t pay any tax in countries they visit, and hope to avoid paying taxes anywhere

The appeal is obvious, a chance to save a lot of money on taxes back home & anywhere else. Theoretically, you can try to get rid of your home tax residency but it’s not easy, especially if you are moving it to ‘nowhere’. If you don’t have centre of vital interest or habitual abode you might end up paying taxes based on your nationality. There is a number of international tax agreements that make sure of that. Some would tell you they have done it successfully for years but not having tax residency is no longer a thing in the digitalized world. You might get away with it for a short period of time but it’s not a good long-term strategy. Article on how ‘tax nomad’ works coming soon, sign up for newsletter to get updates.

They become non-tax-residents back home & move their personal and/or professional tax residency to a low-tax country

That’s a huge subject in itself! Choosing the best setup for your personal and professional affairs is definitely not a straightforward and easy task. It requires either a lot of research or/and expensive tax consultations or both. There are definitely legal ways in which you can structure your finances very efficiently but it usually isn’t cheap. Most tax advisors would only work with high net worth professionals, leaving nomads earning in 5 and low 6 figures in a difficult position. Don’t let this discourage you, Global Nomad Guide hopes to explore some possible scenarios in future articles, make sure to sign up for the newsletter to receive the updates.

They pay taxes back home but get Digital Nomad Visas to make sure they pay what’s required in the host country

This approach to Digital Nomad taxes might be one of the best routes out there but it depends on how good the Digital Nomad Visa really is and how clearly it defines your tax obligation? The best remote work programs would clearly state that your only tax obligations are back home, that you don’t fall into the tax residency locally, and that you don’t create any risks for your employer. However, this is not always the case, some remote work programs don’t address all of these and can trigger local tax residency. Be sure to read up on these before you decide to apply. Read our analysis and comparisons of Digital Nomad Visas for more info on this.

With most Digital Nomad Visas, you will need to provide proof of 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.

By no means is this an exhaustive list. There are plenty of combinations. Some options might be safer than others, but everyone’s circumstances are different so make sure you always get a professional Tax Advisor to help you out. If you need help filing your past tax returns, optimizing your international taxes, or fully designing your remote setup don’t forget to check out our partner Heavnn. What’s important is that you are not simply ignoring the subject and that you have some basic knowledge about these issues which would help you make more educated decisions.

Can Tax Nomads pay no tax anywhere?

Over the recent years, there’s been a lot of buzz about being Tax Nomads aka Perpetual Travellers who don’t have tax residency anywhere. It’s been presented as one of the benefits of the Digital Nomad lifestyle. But is it really possible?

Generally speaking, no it is not possible. In practice, maybe for a short period of time, you might navigate these. Become a tax non-resident back home (if your country allows that) and keep moving from country to country without spending a substantial amount of time in any location in the hope to avoid taxes but most likely, this will catch up with you sooner or later.

There are international tax laws and organizations such as OECD the Organisation for Economic Co-operation and Development that work to reduce and eradicate tax evasion. They define rules, which are implemented by membership countries, that outline the Residency Tie Breaker Rules in Article 4 of the OECD Model Tax Convention. According to the rules, if you don’t have clear residency based on where you were domiciled, your residency will be where you have your:

As you can see from the above, it’s pretty impossible to escape the tax residency. The easiest solution is to always be a tax resident somewhere and have tax returns to prove it.

You might wonder: Why would a country go after me? There are a lot of reasons: to collect taxes to run the country for one, or to make an example of someone so others don’t avoid paying taxes. It is hard to tell if and when they would do it, but there is a big risk, that at some point they will. And if they do there will be a whole lot of back taxes to be paid.

I would also recommend that you check out the Nomad Capitalist’s Nomad Tax Trap Living Nowhere for some good info about the issues with tax nomad residency.

Tax Evasion vs Tax Avoidance

You might ask: If that’s the case, how come massive organizations and the richest people of the world pay barely any taxes??? This is because Tax Evasion and Tax Avoidance are two different things. Tax Evasion is a failure to pay or a deliberate underpayment of taxes, it is illegal. Tax Avoidance is an action taken to lessen tax liability and maximize after-tax income, it’s legal even if, for some, it might be ethically questionable (that’s a discussion for another time). If you are a big corporation or high net-worth individual, you have the means to hire the most knowledgeable and skilled tax advisors and wealth managers. No matter how much expensive they are and how complex the system they set up for you is, it will most likely be worth it.

However, if you are earning in 5 or lower 6 figures, chances are you can’t hire lawyers and advisors who would find the best setup for you. In most cases setting offshore accounts, entities, and trusts in multiply locations and keeping track of your residency is most likely not worth it. Not worth the hassle and the anxiety that goes with not being entirely sure if, at some point, you won’t get caught.

Last updated June 21, 2023.