The Digital Nomad Tax Loophole

27 October 2016
Avatar
Bence Zakonyi
Tucanoprod Freelance writer/researcher Senior Marketing & PR
"Digital Nomadism" is not an exotic lifestyle but a global social phenomenon, which affects hundreds of thousands of people. According to the popular belief, digital nomads are young people who love traveling and searching for adventures. Admittedly, this lifestyle fits young professionals, who want to gain experience. On the other hand, there are more and more employees, who are not earning enough money to survive in their home country. Their work can be done remotely, and they become outsourced freelancers. It means they can live better and cheaper in other locations than in their country. Rich or wealthy individuals also can enjoy the nomad status, because of their luxury lifestyle (and tax advantages).  Only working online from abroad is not nomadism. Digital Nomad is the individual who is on the road. When you are traveling or staying without stable local presence, meanwhile working online, you are a real digital nomad. 
 
Global taxation of individuals is a complex and merely standardized process with different laws, regarding the question of tax residency. Nomad taxation is made for those individuals, whose citizenship allows paying taxes on the base of tax residency. It is hard for the US citizens but more than easy for the EU nationals. As a general rule (with a lot of international exceptions)  the taxpayer becomes tax resident when stays more than 183 days in one jurisdiction. If you don't stay so long in one country, then it will be hard to tax you. Because you're out of the system.
 
How Digital Nomads avoid paying tax legally?
 
There is nothing new in the structure. The base of personal financial freedom, the five flag theory describes the easiest way. Countries consider individuals as tax residents when they stay physically and work more than a specified time limit in their territory. If a digital nomad spends less than the qualifying period in one country literally (and practically for sure), they can avoid paying the taxes without legal consequences. 
 
All individual cases are different, and of course, international income tax cases are not easy or straightforward processes. However, there are now a lot of digital nomads, who dropped off the radar. Now, nobody cares about the taxation situation of digital nomads as a whole "global social class." 
 
Most modern tax residency solutions for Digital Nomads
 
However, nomads as freelancers or employees of foreign contractors still have to issue invoices, open bank accounts, pay insurance fees, among other financial needs. That's why professional digital nomads should resolve the question of their tax residency status. There are individual solutions and official residency schemes forged for them. Sometimes these programs serve the HNWI applicants, but immigration costs decline so fast, that even nomads can apply nowadays. With the help of these programs, the objective changes. The nomads must maintain the beneficial resident status instead of avoiding it. There are several solutions, I am researching now for example the not-known Senegal scheme, because that African country is not even a member of the OECD’s AEoI standards agreements. 
 
Practical examples of the Digital Nomad's Tax Loophole
 
Malta's Self-sufficient Visa lets the taxpayer obtain the Maltese tax resident status. If the resident not works in Malta, doesn't have to pay local income tax on the not remitted revenue from foreign sources. The resident can keep the status until not spends more than 183 days in another jurisdiction. It means that the nomad is a Maltese tax resident and doesn't pay tax there. On the other hand, he/she can't spend 183 days or more in any other single country, so they don't become tax residents of any other high or low tax jurisdictions. This is a temporary residence permit solution.
 
Panama offers the Friendly Nations Visa, which is a permanent residence scheme. The residents must spend some time in Panama if they want to apply later for the citizenship. Although as Panamanian permanent resident can travel and work anywhere, enjoying the low taxes and tax exempt possibilities of the leading offshore jurisdiction.
 
Paraguay offers now the most affordable legal permanent residency solution (from approximately USD3,000), and it's not an offshore financial center. Permanent residents, who don't reside in Paraguay don't pay income tax. And this status can be maintained without almost any personal presence. The resident must visit Paraguay only once during a three years period. 
 
Where should Digital Nomads establish their companies?
 
Without substantial presence or with a beneficial residency status, (where you don't have to pay taxes on your foreign-sourced income) the best choice is going offshore. When the contractor of the nomad accepts the invoice from an offshore company, then classical tax havens' legislations are the best tools. 
 
These are only examples because Digital Nomads have several ways to legalize their income with low or no taxation. (Until the developed countries' governments realize that they managed to chase away a lot of skilled professionals and try to tax them independently of their residency status) 
 
This post is not about theoretical knowledge. I am Digital Nomad for more than ten years now. If you are interested to read a freelance researcher's independent publications about immigration and global taxation, take a look at my Tucanoprod.com.
 
What is your favorite structure for Digital Nomads? Or you think that these online teleworkers should pay tax like you? Please, let me know your opinion in the comments!