In the dynamic landscape of remote work, the concept of becoming a ‘tax nomad’ has sparked intrigue and debate. As we’ve previously discussed in our post The Tax Nomad Lifestyle: Risks & Opportunities, being a tax nomad involves navigating global tax laws in a way that could potentially minimize your tax liability but can also create a number of various risks. With great freedom comes great responsibility, especially when it comes to navigating the complex world of international taxation.
We generally do not advocate for this lifestyle as the consequences of getting it wrong can be severe, but we aim to provide a comprehensive understanding of what this lifestyle entails, helping you weigh the options and understand the risks associated with it.
Decoding the Tax Nomad Concept
A ‘tax nomad’ or a ‘perpetual traveler’ is someone who arranges their personal affairs in such a way that they are not considered a tax resident of any country.
The term ‘tax nomad’ is a relatively new addition to the lexicon of digital nomads and remote workers. It refers to individuals who, through careful planning and strategic movement, manage to avoid being a tax resident in any country. This doesn’t mean they evade taxes – tax nomads operate within the bounds of international tax laws, but they operate in a bit of a legal grey zone as they leverage these laws to minimize their tax liability.
Tax Evasion: This is the illegal practice of not paying taxes by not reporting income, reporting expenses not legally allowed, or by not paying taxes owed.
Tax Avoidance: This is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law.
Tax Planning: This involves making strategic financial decisions to ensure tax efficiency and minimize tax liability within the legal framework.
The concept of tax nomadism is rooted in the idea of perpetual travel. By not spending too much time in any one country, tax nomads aim to avoid triggering residency rules that could make them liable for taxes. They often don’t have a fixed home and move from place to place, staying in each location just long enough to enjoy it but not long enough to become a tax resident. That said, it’s important to note that tax nomadism isn’t just about physical presence. Many countries have tax laws that consider other factors, such as the location of your economic interests or the country of your citizenship. This is where the concept becomes very risky, and complex and requires a deep understanding of international tax laws.
We generally do not advocate for this lifestyle as it (…) involves navigating the edges of a legal grey area, constantly balancing numerous tax compliance risks.
The Process of Becoming a Tax Nomad
Becoming a tax nomad is a complex process that requires careful planning and execution. Here are the general steps:
- Understand the tax laws: Each country has different tax laws. Some countries, like the U.S., tax based on citizenship, not residency. Others tax based on residency or physical presence.
- Establish non-residency: To become a non-resident for tax purposes, you typically need to show that you don’t have substantial ties to any one country. This often involves spending less than half the year in any one country and not having a permanent home in any country.
- Cut ties: You may need to sell property, close bank accounts, and cancel memberships or registrations to demonstrate that you don’t have substantial ties to a country.
- Manage your time: Spend less than half the year in any one country to avoid becoming a tax resident due to physical presence.
- Structure your income: If you’re a digital nomad, consider structuring your income so it’s not tied to any one country. This could involve setting up an offshore company.
These are all fascinating subjects and in future posts, we will dive into these ideas and definitions so be sure to sign up for our newsletter to be notified about new posts.
Becoming a tax nomad is not a decision to be taken lightly. It requires careful planning, a deep understanding of international tax laws, and a willingness to cut ties with your home country.
Country-Specific Considerations
Rules for becoming a tax non-resident are complex anywhere plus they vary greatly by country. Here are just few examples, to give you an idea:
- United States: The U.S. taxes are based on citizenship, not residency. This means that U.S. citizens are liable for U.S. taxes on their worldwide income, regardless of where they live. To stop being a U.S. tax resident, you would need to renounce your U.S. citizenship, which is a serious decision that should not be taken lightly. Even then, the U.S. has an “exit tax” for certain high net worth individuals who renounce their citizenship.
- United Kingdom: The UK taxes based on residency. To become a non-resident for tax purposes, you generally need to spend less than 16 days in the UK during the tax year if you were a resident in one of the three previous tax years, or less than 46 days if you were a resident in none of the three previous tax years. You also need to not have a home in the UK for more than 90 days, and spend less than 30 days in that home.
- Canada: Canada also taxes based on residency. To become a non-resident for tax purposes, you need to sever your residential ties with Canada. This includes moving your spouse or dependents out of Canada, selling your home in Canada and establishing a permanent home in another country, and canceling any provincial health insurance. Canada has “deemed residency” rules, which means you can still be considered a tax resident if you don’t establish tax residency elsewhere.
- Australia: Australia taxes residents on their worldwide income, but non-residents only on their Australian income. To become a non-resident, you need to demonstrate that you have severed your residential ties with Australia and have established ties in another country. Like Canada, Australia also has “deemed residency” rules.
The Impact of the OECD Model on Tax Nomads
The Organisation for Economic Co-operation and Development (OECD) has developed a model tax convention that many countries have adopted in their tax treaties. This model aims to prevent double taxation and tax evasion, and it has significant implications for tax nomads as it makes non-residency virtually impossible.
The OECD model tax convention determines tax residency based on a series of tests:
If you have a permanent home available to you in a country, you may be considered a resident of that country for tax purposes.
If you can’t be determined a resident based on the permanent home test, the next consideration is the country to which your personal and economic relations are closer – your centre of vital interests.
If the country of your centre of vital interests can’t be determined, the country where you habitually abide is considered.
If none of the above can be determined, the country of which you are a national is considered.
If all other tests fail, the countries involved will settle the matter by mutual agreement.
For tax nomads, this model presents a challenge. Even if you don’t have a permanent home in any country, the other tests could still establish you as a tax resident somewhere. For example, if you spend most of your time in one country or have stronger personal and economic ties to a particular country, you could be considered a tax resident of that country under the OECD model.
This is why it’s crucial for potential tax nomads to understand the tax laws of not just their home country, but also any countries where they spend significant time or have substantial ties. It’s also another reason why professional advice is essential – the OECD model and its adoption in various tax treaties add another layer of complexity to the already intricate world of international taxation.
For tax nomads, OECD model presents a challenge. Even if you don’t have a permanent home in any country, the other tests could still establish you as a tax resident somewhere.
Are you ready to be a Tax Nomad?
Is becoming a tax nomad really possible? The feasibility of becoming a tax nomad largely depends on your personal circumstances, your willingness to cut ties with your home country, your ability to navigate complex international tax laws, and your appetite for risk. Here are some key considerations:
- Personal Ties: Becoming a tax nomad often means severing personal ties with your home country. This could include selling property, closing bank accounts, and even moving your family. Are you ready to make these sacrifices?
- Income Structure: As a digital nomad, you’ll need to structure your income so it’s not tied to any one country. This could involve setting up an offshore company, which comes with its own set of legal and financial complexities.
- Time Management: To avoid becoming a tax resident due to physical presence, you’ll need to carefully manage your time and ensure you don’t spend more than half the year in any one country.
- Legal Considerations: Navigating international tax laws is a complex task that requires a deep understanding of the laws of not just your home country, but also any countries where you spend significant time or have substantial ties.
- Professional Advice: Given the complexities involved, it’s highly recommended to seek professional advice. The consequences of getting it wrong can be severe, including large fines and back taxes.
- OECD Model: As discussed earlier, the OECD model tax convention could establish you as a tax resident somewhere, even if you don’t have a permanent home in any country.
Final Thoughts
While becoming a tax nomad is theoretically possible, it’s a complex process that requires careful planning and a willingness to make significant personal and financial sacrifices. The decision to become a tax nomad is not one to be taken lightly. It involves navigating the edges of a legal grey area and constantly balancing numerous tax compliance risks. This path requires a high level of vigilance and a deep understanding of complex international tax laws. Given the potential risks and complexities, professional advice is not just recommended, it’s essential.
The tax nomad concept is a testament to the evolving nature of work and lifestyle in the 21st century. As more people embrace remote work and digital nomadism, it’s likely that we’ll see more discussion and perhaps even changes in international tax laws to address this new way of living and working.
We have written more about this subject in the post The Tax Nomad Lifestyle: Risks, Opportunities, and Implications. Stay tuned for more insights and advice on navigating the world as a digital nomad or remote worker.
Disclaimer: This blog post is intended for informational purposes only, and should not be taken as legal, tax or financial advice. Always consult with a professional advisor before making any decisions.
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Last updated November 18, 2023.
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