After spending almost two months over the past year in Bali and Thailand, I have witnessed first-hand the thriving communities of digital nomads in these locations. The COVID-19 pandemic has significantly accelerated the shift towards remote work, making the freedom to work from anywhere increasingly accessible. This shift has led to a surge in temporary and semi-permanent relocations among nomadic workers, who often seek better infrastructure, education, healthcare or simply idyllic beaches! However, this lifestyle comes with complex tax challenges which must be navigated carefully.

What is a digital nomad?

A digital nomad is a geographically mobile individual who adopts a lifestyle of remote work. They often seek out destinations with beautiful scenery, vibrant co-working communities and a reliable internet connection. The flexibility offered by remote work has provided opportunities for these people to experience new countries and their cultures, enriching both their personal and work life.

Important tax considerations for digital nomads

Tax residence rules around the world

‍Tax residence rules differ significantly across countries, posing challenges for nomadic workers. It is also possible (and increasingly common) to be resident for tax purposes in more than one country at the same time. 

Touching on tax residence in the UK, Spain and Germany

‍Most commonly, you are considered a tax resident if you spend more than 183 days per year in a country. For instance, in the United Kingdom, Spain, and Germany, this 183-day rule is applied. Additionally, Spain considers you a resident if your primary economic interests are there, while Germany considers you a resident if you have an available place of residence that you use regularly. The UK may also treat you as being tax resident if you spend as few as 16 days in the UK if you have a number of ties to the country - it can get very tricky very quickly.

Tax residence rules in the United States

In the United States, determining tax residence involves a more complex formula. If you are present for at least 31 days in the current year, the formula also counts one-third of the days present in the previous year and one-sixth of the days from the year before that. If the total equals or exceeds 183 days, you are considered a tax resident for the current year. As the US operates at both Federal and State level, you may also be resident in a particular State depending on that State’s rules. Spending time in certain cities, like New York? You could end up being subject to Federal, New York State and New York City taxes!

Tax residence rules in South Africa

South Africa uses a combination of criteria to establish residence. You must spend at least 91 days in the current tax year and 91 days in each of the preceding five tax years. Additionally, your total days spent in South Africa over these five years must equal or exceed 915 days.

Tax years vary by country, complicating matters further. For example, the UK's tax year runs from April 6th to April 5th the following year, unlike the calendar year used by many other countries.

Double taxation treaties

‍If you become a tax resident in more than one country, double taxation treaties between the relevant countries are crucial to consider. These treaties determine which country has the primary right to tax certain income and gains received by individuals, companies and other entities, and ultimately are in force to prevent being taxed multiple times in different territories on the same income/gains. Tax treaties do not cover all taxes, and in some cases (particularly in the United States), State and City taxes are often not covered by treaties, and may be payable regardless of whether Federal taxes are payable in a territory.

Taxation at source

‍Many jurisdictions levy taxation at source (similar to the deduction of tax on salaries in the UK through the PAYE system) on services performed within their country, regardless of residence. This can include remote work undertaken for clients in another country, which may still be subject to local taxation.

Practical steps digital nomads can take to avoid tax surprises

• Track your travels and maintain a running total of days spent in each country, as well as what you are doing in each country on any given day (particularly if you are working). This will help you manage your travel schedule and reduce the risk of crossing residence thresholds. Additionally, any day counts are generally not a 'target', and buffers should be built in to account for any unexpected delays or travel cancellations.
• Keep detailed records of your travel, including passport stamps, flight itineraries, and accommodation receipts. These documents can be crucial if you need to prove your residence status in any particular territory. Maintaining a diary is also helpful, even using a standard calendar app on your phone.
• Before spending extended periods in a new country, consult with a tax advisor who understands the specific rules and regulations. They can provide insights tailored to your situation, as well as considering potential implications for your employer (if relevant).

Triggering unintentional tax liabilities

‍Should you inadvertently incur tax liabilities and find yourself subject to a tax enquiry, it is essential to immediately obtain professional guidance and address the situation without delay. Engaging with tax authorities in a clear and timely manner can help minimise penalties and potentially lead to a more favourable outcome.

The right approach to managing taxation for nomadic workers and digital nomads‍

Navigating the tax landscape as a nomadic worker is complex, but manageable with the right approach. Understanding the rules, keeping detailed records, and seeking timely professional advice are essential steps to avoid unwelcome tax surprises. It is worth noting that it is often advisable to appoint one person to facilitate cross-border discussions.

This article is the first in a series which will delve deeper into the intricacies of tax issues for geographically mobile individuals.

Over the coming months Sanctoras will publish several articles exploring: 

• Obtaining visas and immigration considerations for digital nomads
• Changes in residence status 
• Filing requirements (such as those for non-resident landlords)
• A brief overview of domicile considerations

For further information or to keep in touch with updates please contact us at hello@sanctoras.com or connect on LinkedIn and Instagram.

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