In 2024, the rise of digital nomadism reflects the growing trend of remote operations, with people exploring the world while they work. However, this lifestyle has tax consequences, as income needs to be declared and taxed somewhere.
If you don’t settle in one country for over half a year and keep moving, can you avoid tax residency and does this bring any major advantages? This is a key question for those living a nomadic lifestyle.
Remote work and tax residency
Freelancers who work remotely are free to move across borders without interrupting their income flow. Generally, if you stay in a country for less than 183 days, you’re unlikely to be deemed a tax resident. Yet, this rule has its exceptions.
The U.S. and Eritrea tax citizens worldwide, and in the case of the U.S., you’ll have to renounce U.S. citizenship to end your tax obligations. Australia and Canada may deem you a tax resident if you have a permanent address there. Conversely, EU countries don’t link tax residency to citizenship or a fixed address.
Being a freelancer with no tax residency doesn’t mean that you are exempt from all taxes. Tax obligations may arise in the country where you reside or where your income originates. When these countries differ, Double Taxation Avoidance (DTA) agreements come into play, preventing taxation on the same income in both places.
Without tax residency, you cannot benefit from DTA agreements and may face withholding taxes. Tax regulations vary globally and some countries may tax income earned within their borders from day one, while others do it only if the employer is local. Income from abroad may not be subject to tax in the country of residence, though this isn’t a universal rule.
Wintering in Malta: tax residency opportunities for European citizens
For citizens of the EU, EEA, and Switzerland, Malta is an appealing option for tax residency. Establishing oneself as a self-sufficient resident is a simple enough process, and the typical 183-day residency requirement may not always be pertinent. Regular winter stays in Malta could lead to habitual resident status, qualifying you for Maltese tax residency.
Breaking fiscal ties: here’s how
Utility bills are commonly used as proof of address, but a bank statement is often considered a more reliable form of verification. Banks typically allow clients to update their residential addresses to overseas locations without necessitating account closure or imposing limitations. Such bank statements are generally accepted by fiscal authorities as valid proof of address.
Regarding foreign bank accounts, the concepts of permanent resident and tax resident are distinct and recognized for reporting purposes. One’s permanent residence country need not match their tax residence jurisdiction, a fact acknowledged by banking officials.
By default, you are presumed to be a permanent resident of your citizenship state. Consequently, if an information exchange agreement exists, fiscal authorities in the jurisdiction where a foreign bank account is held will report to your home country’s fiscal authorities.
Proving non-tax residency is complex in certain jurisdictions, like the U.S.A. and some Western European countries, where stringent monitoring ensures tax compliance.
Other nations may adopt a more lenient stance. There, it may be enough to demonstrate absence from the country for over half the year to avoid tax residency status.
Minimize your liabilities through strategic tax residency choices
For those in profitable business sectors, it is a must to declare these profits following globally recognized principles. Wealthy individuals, therefore, can’t but establish tax residency in a country. To optimize fiscal obligations and minimize taxes, one viable strategy is to obtain tax residency in an offshore jurisdiction.
Offshore jurisdictions for tax purposes fall into 3 categories:
- Tax havens: These are countries that impose minimal or no taxes on income.
- Countries with no taxation on overseas income: Here, income earned outside the nation is not taxed.
- Low-tax jurisdictions: Investors and equity traders enjoy attractive tax incentives within their borders.
Tax havens are defined by their lack of certain taxes, specifically profit tax, capital gains tax, and inheritance tax.
The term tax haven traditionally encompasses these states:
- Cayman Islands
- Kitts and Nevis
- Dubai
- Monaco
- Bahamas
- Bermuda
- Vanuatu
- Turks and Caicos Islands
Countries with a territorial taxation system impose taxes solely on income generated within their borders and exempt foreign-earned income. Here are some notable examples:
- Panama
- Costa Rica
- Hong Kong
Malta and Uruguay offer special tax incentives to attract foreign investors. In Malta, residents with legal permits are subject to an income tax of up to 35%, applicable to worldwide income if it is remitted to a Maltese bank. However, Malta imposes no capital gains tax on funds transferred into the country from abroad.
Uruguay, previously a territorial tax system country, has revised its fiscal laws. Now, certain foreign income types are taxable. Yet, Uruguay offers a tax holiday for the first 5 years to new residents, exempting them from taxes on foreign income. This policy aims to draw foreign capital by incentivizing relocation to Uruguay.
How to determine tax residency when living or traveling abroad
Wealthy people spending much time abroad may incur tax duties in that country. For instance, if you use your Canadian vacation home regularly, it might make you a tax resident. Yet, many nations have Double Taxation Avoidance agreements to prevent paying taxes in 2 countries. Under these, tax residents of one country living in another usually don’t face extra taxes.
Say, in Spain, you are recognized as a tax resident if you spend over 183 days within the country in a year or if your primary economic activities and personal life are centered there. For those with residences in multiple countries, tax residency is typically associated with the country of their permanent home or where their vital interests are strongest. The amount of time spent in a country also influences tax residency status. Should you change countries frequently without a permanent residence, tax residency defaults to the country of citizenship.
Although moving often is a workaround to avoid tax residency, it’s not practical for business. It’s better to find a tax-friendly country. Need expert guidance on the matter? Visit our corporate website InternationalWealth or get in touch with us directly and get the info you need!