While many employees have adopted remote or hybrid working practices to avoid the commute or to move out of the city, a small but growing number are looking even further afield. Whether it be for a more affordable cost of living, the chance to immerse themselves in different cultures, or simply for better weather, working remotely from another country is much more feasible than it was even a few years ago.
Previously, such ambitions would be hindered somewhat by the fact that working on a tourist visa is illegal in most countries. Tourist visas also tend to last only between 30 and 90 days. Conscious of the boost that foreign professionals with disposable incomes would give to their post-Covid economies, an ever increasing number of governments (57 as of July 2023) have started offering what have become known as “digital nomad” visas, also known as entrepreneurial visas or freelancer visas. Such visas allow foreign workers to legally live in a country while working remotely for foreign companies or clients and receiving foreign income. In many cases, governments also offer attractive tax incentives in an attempt to lure more expats to their territory.
While the thought of clocking off at 5pm and stepping straight onto the beach may sound like a dream, it is important to plan ahead to avoid the potential pitfalls surrounding residency and tax, or it could quickly turn into a nightmare.
The question of tax residency is all important for determining which country’s tax authority has the right to tax income, and where the individual will be taxed on their worldwide income and gains. The process of determining tax residency can be highly complex as it depends on a number of factors including the amount of time spent in a country and the ‘ties’ that individual has to that country. Most countries have a tax residence threshold between 90 to 180 days, but there are some that are more stringent and require fewer days be spent there before individuals fall into their tax net. Additionally, time physically spent in the country may only be one part of the picture.
The UK determines tax residence under the Statutory Residence Test (“SRT”), a series of tests that confers UK resident or non-resident status. Factors include:
If an individual is deemed to be UK resident, then their worldwide income and gains are within the scope of UK. If non-UK resident, they will be taxed on UK-source only, and only on capital gains arising from the sale of UK property. Other countries have their own regimes and rules and international tax treaties might also need to be considered, meaning negotiating the question of tax residence can be extremely complex.
It is perfectly possible, and often even likely, that an individual could remain UK tax resident even if they spend a significant amount of time overseas. Usually, digital nomads will pay tax where they are tax resident. However, they may also need to pay tax in the country they work from, depending on local laws and the conditions of their visa. Some visas exempt digital nomads completely from local taxes, some partially, and some not at all.
Digital nomads are therefore at risk of becoming considered resident for tax purposes in more than one country at a time in the same tax year. This is particularly true for individuals spending part of the year in the UK, as the UK’s tax year runs from 6th April to 5th April, whereas many other countries run on a calendar year basis. This overlap can cause an individual to inadvertently become tax resident in two countries at once, and potentially be liable to pay tax on their worldwide income twice. Where an individual is resident in more than one country, they will likely fall into the scope of a double taxation agreement between countries which usually determines which country has primary taxing rights and provides relief or credit in the other country.
Living as a digital nomad may also theoretically allow an individual to avoid tax residence in any country, depending on the facts and circumstances. As non-residents are generally liable to tax in a territory only on income or gains arising in that country, it follows that a digital nomad who is resident nowhere could escape liability to tax altogether, either by being tax resident nowhere or by being resident or working in a country where no tax liability arises, However, in practice this could likely be extremely difficult to achieve and could also cause the individual to fall outside of the scope of double taxation agreements, potentially leading to a double tax levy if two or more tax authorities decide they fall under their jurisdiction.
One final thought is that corporate taxes might also need to be considered if there is a risk of a ‘permanent establishment’ arising for a company by virtue of an employing working from another territory.
For many, working life has changed irreversibly in a post-COVID society, and the opportunity to marry work with travel will likely become more far-reaching as the world continues to become more digitalised. We would advise that careful pre-departure planning is undertaken by any individuals looking to become digital nomads to ensure that any potential tax traps and pitfalls can be avoided.
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