The tax consequences of digital nomadism

In recent years, the global workforce has witnessed a significant shift toward remote work and the rise of digital nomads — individuals who work entirely over the internet while traveling and have no fixed place of business. As many countries are recognizing this growing trend, the solution — the digital nomad visa — is increasing in popularity. The visa, offered under varying names, is currently available in more than 70 countries.

While obtaining a digital nomad visa takes care of the immigration requirement to enter and work in a country for a specific period, it generally does not relieve the individual from income tax or Social Security exposure, or the employer from payroll considerations.

It is much simpler to get than a traditional business visa, according to Richard Leach, a CPA and director at the Global Tax Network. “A business visa takes time, and there are a lot of hoops to jump through,” he said. “It’s like a business visa light. The process is cheaper, and there are far fewer restrictions on who is eligible. You have to show a certain amount of money or income, and on the basis of the visa you can stay and work legally in the country for the specified time.”

While the visa solves the immigration issue, it does not necessarily take care of the tax issue, according to Leach. “Only 12 countries currently attach a tax break to the visa,” he said. “These include Croatia, Ecuador and Greece. But the majority of the countries that offer digital nomad visas do not lighten the tax burden. It’s the exception to the rule.”

“They typically charge a few hundred dollars for the visa, and then there’s an income requirement, often in the neighborhood of $2,000-$3,000 a month. It’s 600 euros per month in France. Typically, the amount is what you would need to qualify for $30,000 per year. That’s a relatively low income threshold.”

Many don’t realize they are required to pay tax in the country they live in, according to Leach.

“And some countries have a withholding tax requirement. For example, Argentina assumes that 70% of your income is from Argentina, so they expect withholding on that amount every month if you have employees,” he said. “People tend to be excited about the freedom they have and the ease of getting the visa, but they ignore the withholding requirement on top of the fact that they need to file a tax return. There are compliance complexities they’re just not aware of.”

Leach, formerly a managing director at KPMG in Denver, where he led the global mobility tax services line, said he gets frequent calls from HR departments when an employee plans to work remotely in another county on the digital nomad visa.

“My advice to remote employees — and their employers — is to proceed with caution,” he said. “They should not apply for the visa just because they will get a tax break. They may or they may not, but that should not be the point. And critically, they don’t want to create ‘permanent establishment’ status, which would expose the profits of the U.S. company to tax in the remote country.”

Source: Roger Russell  – Accounting Today