Taxes for digital nomads: a complete guide to navigate the maze of rates and benefits

1. Flexibility and freedom of travel. Digital nomads can choose their work location, whether it is a beach in Bali, a café in Paris, or a mountain retreat in the Alps. They also get to choose their working hours and office setting.

Being a digital nomad is a way to expand travel opportunities. For example, foreigners may travel across the EU without an additional visa after obtaining a Digital Nomad Visa in Hungary, Italy, Malta, Portugal, or Spain.

2. Higher satisfaction with life. Studies conducted by MBO Partners, a platform for the self-employed, show that 89% of digital nomads are satisfied or highly satisfied with their work. For non-digital nomads, the indicator is 76%.

Digital nomads highlight a better work-life balance, experiencing a new culture, and meeting new people as benefits of such a lifestyle.

How to obtain residency abroad

3. Cost efficiency. Digital nomads often choose a place with a lower cost of living than their country of citizenship. For example, a single person needs approximately $11,000 a month to maintain an average lifestyle in New York, while in Lisbon, the sum is $4,600 or €4,265 per month. The capital of Portugal is considered among the most popular cities for digital nomads worldwide.

Digital nomads also cut costs by residing in a tax-friendly country. For instance, Antigua and Barbuda or the UAE do not have a personal tax income.

4. Higher quality of living. Depending on one’s needs, a digital nomad may settle in a region with a better climate, such as the Caribbean, or with a better healthcare or education system, like the EU countries.

5. Path to citizenship. In some countries, a Digital Nomad Visa leads to a passport. For example, digital nomads who travel to Portugal obtain a Digital Nomad Visa and then a residence permit. After 5 years from the moment residency was requested, a foreigner has a right to apply for Portugal citizenship by naturalisation.

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Citizenship and residency. Citizenship is a legal status granted by a country to an individual, conferring certain rights, privileges, and duties, including the right to vote, work, and reside in the country, and often entails a more permanent and encompassing relationship with the state.

Residency generally pertains to the status of living in a specific place, often for an extended period, and can influence rights and responsibilities such as eligibility for certain public services.

Tax residency is the legal status that determines which country or jurisdiction an individual or a business is obligated to pay taxes to. It is based on where a person lives and generates income.

The conditions of becoming a tax resident depend on the country. Typically, it takes 183 days a year to live in any EU state to become a tax resident. However, there are exemptions. For example, it is possible to become a tax resident in Cyprus after two months if a foreigner does not pay taxes elsewhere.

In the US, one must live there for 31 days a year and 183 days during the last three years to become a tax resident. It is recommended to check the duration one needs to stay in a specific country in order to get tax residency there.

Domicile is a place of permanent residency. It is usually a country that an individual has the most ties with, like a passport or parents. Domicile affects an individual’s taxes.

Unlike tax residency, domicile does not change with the travelling of a digital nomad. This concept is important in several taxation legislations, such as those in the UK and Australia.

Tax systems. The tax system determines how a digital nomad must pay taxes. There are three approaches, or tax systems, in the world:

1. Territorial tax system. The income earned within the country is taxed, while foreign income is exempt. Hong Kong and Singapore are examples of countries with a territorial tax system in terms of personal income tax.

2. Worldwide tax system. Tax residents of states with such a system pay taxes on all income, regardless of where it is earned. For instance, it is applicable in most EU countries, Australia, and Canada.

3. Citizenship-based tax system. In this case, an individual pays taxes based on their citizenship, irrespective of tax residency or the location of their income source. Today, only two states operate within such a system: the USA and Eritrea, a small country in Eastern Africa.

With any system in place, it is the responsibility of a digital nomad to pay taxes in both the home and host countries. It is advisable to study potential levies prior to applying for a nomad visa or a residence permit abroad.

Personal income tax, PIT, is levied on individuals' earnings, including wages, salaries, dividends, interest, and other forms of income. This tax is typically calculated on an annual basis and can vary depending on factors such as income brackets, deductions, credits, and exemptions. Sometimes, higher income is taxed at higher rates, which is called a progressive tax system.

The PIT ranges between 10% and 55% globally. In the USA, the average rate is 37%. The UK implemented a progressive scale with a 20—45% rate. The average rate in the EU is about 40%.

Digital nomads are obligated to pay PIT in the country of their tax residency. Sometimes, they will also need to pay it in the country of their income source.

The list of tax-friendly countries for digital nomads:

• 0% in Antigua and Barbuda, Argentina, Bahrain, Barbados, Bermuda, the Cayman Islands, Costa Rica, Croatia, Kuwait, Malta, Montenegro, Qatar, and the UAE;

• 10% in Bosnia and Herzegovina, Bulgaria, Kazakhstan, North Macedonia, Paraguay, and Romania;

• 12% in Macau;

• 13% in Bolivia;

• 15% in Hong Kong, Hungary, and Latvia.

Value-added tax, VAT, is a consumption tax levied on the value added to goods and services at each stage of production or distribution. The amount of VAT paid by the consumer is based on the final price of the product. VAT is also referred to as a goods and services tax or GST in some countries, such as Australia.

VAT rates vary between 7% and 27% worldwide. According to the EU legislation, the rate must be at least 15% in any EU state; on average, it is above 21%. Several countries do not levy it, including the USA, Hong Kong, and Qatar.

Digital nomads may be subject to VAT. The rules governing this tax vary significantly by country and service type. Hence, digital nomads must be aware of their VAT obligations in each jurisdiction where they operate.

Corporate income tax. It is imposed on the profits of companies and other entities recognised as separate legal entities from their owners. It is typically calculated as a percentage of a company’s taxable income.

Digital nomads who operate as freelancers or sole proprietors typically do not pay corporate tax. Instead, they are responsible for personal income tax. Digital nomads who run their incorporated businesses, such as a limited company or an LLC, may be subject to corporate tax on the profits of their company.

Social security contributions. Governments normally collect a percentage of personal income and distribute it towards public healthcare and pensions. Digital nomads may need to pay social security contributions to their home country, their host country, or both, depending on their residency status, employment situation, and applicable international agreements.

For example, a digital nomad in Hungary or Estonia is required to contribute to public funds of those countries. In contrast, remote workers residing in Malta will likely be exempt from those contributions if they already pay in the country of citizenship or income source.

Typically, a digital nomad lives in one country but earns income from another, which can lead to potential tax liabilities in both jurisdictions. To tackle this issue, governments conclude special bilateral treaties called Double Taxation Agreements (DTA). These agreements aim to prevent the same income from being taxed twice.

DTAs establish rules and mechanisms to allocate taxation rights between the countries involved, ensuring that income earned in one country is either exempt from tax in the other or credited against the tax liability in the taxpayer’s home country. Moreover, DTAs often include provisions to prevent tax evasion and avoidance by encouraging cooperation and information exchange between tax authorities.

The list of double tax agreements in force is normally available on the national tax authority’s website. Even without DTAs between host and home countries, there are destinations with appealing personal income tax rates.

Digital nomads have several options to avoid double tax liability:

• travel to the country where foreign income is not taxed and only pay taxes in the country where their income comes from;

• travel to the country which has a DTA with their country;

• not to stay in a country for longer than 183 days and keep tax residency in home country;

• travel to a country that has a zero income tax and pay taxes in their country.

The USA is one of two countries with a citizenship-based tax system. This means that an American citizen pays taxes regardless of their location of work, residency, or tax residency.

The personal income tax rate in the US is based on brackets, which are layers of income. Each bracket has its own percentage of income taxed. As income increases, the tax rate on the next layer of income becomes higher. The rate varies from 10% to 37%.

Digital Nomads from the US still have a chance to avoid double taxation. The American government has signed over 60 such treaties, including most EU countries, Canada, China, Australia, Georgia, Israel, Japan, and Mexico.

The US uses other means to prevent its citizens from paying taxes twice. The country has 25 international treaties called Totalisation Agreements.

The agreements exempt wages from social security and Medicare taxes if an individual pays those taxes in a foreign country. The list of countries subject to Totalisation Agreements includes most EU countries, Switzerland, the UK, and Japan.

Digital nomads with an American passport can also work in a country without a personal income tax for remote workers, such as the UAE, Bahrain, Antigua and Barbuda, and Barbados.

Hungary’s White Card is a residence permit that grants employees and managers of foreign companies the right to obtain residency in Hungary. It is issued for 1 year and can be extended once for the same period. After 2 years of residency, a nomad must submit a new application.

Applicants for digital nomad residency confirm a monthly income of at least €3,000 and rent or purchase a property in Hungary. Digital nomads are not entitled to permanent residency and citizenship, and they cannot include their family members in the application.

Digital nomads in Hungary do not pay personal income tax if they are present in the country for less than 183 days a year. Otherwise, they are obliged to pay 15% of their income, which is the lowest rate in the EU.

The Hungarian government has double tax treaties with over 80 countries, including the EU members, the UK, Australia, Canada, China, and Turkey.

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Italy’s Digital Nomad Visa is designed for non-EU citizens working remotely and wanting to obtain a residence permit to relocate to Italy. It is issued for 1 year and can be extended. After 5 years of living in Italy, nomads may get permanent residency. Getting citizenship by naturalisation is possible 5 years later.

To qualify, applicants must confirm an income of at least €32,400 per year from sources outside Italy and demonstrate savings of €30,000. Experience of working remotely must exceed 6 months.

Residence permits are granted to a spouse, children, and parents of a digital nomad.

The income tax rate in Italy is calculated on a progressive scale of 24 to 43% and depends on the taxpayer’s annual earnings. Italy has signed more than 100 double-tax agreements with most European countries, the USA, Australia, Canada, China, and India.

The Malta Nomad Residence Permit is available to employees and the management of foreign companies, freelancers, and self-employed. The permit is valid for 1 year and can be extended three times. A spouse and children can join the application.

Digital nomads in Malta are not entitled to permanent residency or citizenship, which means they must leave the country after a maximum of four years of residence.

To get a Nomad Residence Permit, applicants confirm a monthly income of at least €3,500 outside Malta.

Digital nomads do not pay taxes on foreign income in Malta.

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Portugal’s Digital Nomad Visa is a two-year residence permit for freelancers, foreign company employees, self-employed, and individual entrepreneurs. It is subject to extension. After holding residency in Portugal for 5 years, the digital nomad can apply for permanent residence or citizenship.

Digital Nomad Visa applicants confirm a monthly income of at least €3,280. They also need to buy or rent residential properties in Portugal. It is allowed to join a spouse, children and parents to the application.

Digital nomads in Portugal become tax residents after living there for more than 183 days a year and subsequently pay the same rates as other residents on a progressive scale. These nomads must earn at least €39,360 per year, resulting in a tax rate of 37—48%.

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Spain’s Digital Nomad Visa, or Visado de Trabajar a Distancia, grants the right to obtain a 3-year residence permit in the country. It may be extended for 2 years.

The income requirement is €2,646 per month, earned outside Spain. Spouses, children, parents, and grandparents of the main applicant can also get a permit.

After 5 years of living in Spain, a digital nomad can apply for a permanent residence permit. After another 5 years, a foreigner is eligible for a Spanish passport.

In Spain, digital nomads pay an income tax at a fixed rate of 24% if their total income does not exceed €600,000 per year. Income above this amount is taxed at 45%. Also known as "Beckham Law", this Spanish tax regulation was introduced in 2005. This status allows foreigners to benefit from a reduced tax rate on their Spanish-source income and exempts their foreign-source income from Spanish tax.

Individual cost calculation for the Spain Digital Nomad Visa

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Other European countries that have Digital Nomad Visas are the following:

• Albania;

• Croatia;

• Cyprus;

• Czechia;

• Estonia;

• Germany;

• Greece;

• Latvia;

• Montenegro;

• Romania.

1. A digital nomad visa offers various benefits, including flexibility and freedom of travel, higher satisfaction with life, cost efficiency, and the potential pathway to citizenship.

2. Some countries tax only local income, while others levy global earnings as well; understanding the tax systems of both home and host countries is crucial for paying taxes.

3. Digital nomads may encounter various types of taxes, including personal income tax, value-added tax, social security contributions, and corporate tax for nomads with enterprises.

4. Relocating to another country does not automatically imply double taxation. Check DTAs if applicable, and grounds on which foreigners become tax residents in your country of choice.

Some European countries that have digital nomad visas are Hungary, Italy, Malta, Spain, and Portugal.