- QUESTION POSTED BY: Student
- PROGRAMME: Postgraduate Diploma in International Taxation
- TOPIC: Jurisdiction of Tax Extended (WEEKS 23 & 24)
- LECTURER: Renier van Rensburg
FULL QUESTION
In the case of individuals, how is the tax jurisdictionTax jurisdiction refers to the authority granted to governments or local taxing bodies to impose taxes on individuals, businesses, or transactions within a specific geographical area or based on particular criteria. This concept is a cornerstone of international tax law, determining which countries have the right to tax certain individuals or entities and under what conditions. As businesses and individuals... handled in the case of digital nomads who have not stayed in a dwelling for more than 183 days?
ADDITIONAL WRITTEN ANSWER
When taxing individuals, particularly digital nomads, the key issue revolves around determining tax residency. For digital nomads who frequently move between countries, the traditional rule of spending more than 183 days in a tax year in a particular country as a threshold for tax residency may not apply in the usual way. Here’s how tax jurisdictionsTax jurisdiction refers to the authority granted to governments or local taxing bodies to impose taxes on individuals, businesses, or transactions within a specific geographical area or based on particular criteria. This concept is a cornerstone of international tax law, determining which countries have the right to tax certain individuals or entities and under what conditions. As businesses and individuals... are generally handled for such individuals:
1. Tax Residency and the 183-Day Rule
The 183-day rule is a common benchmarkBenchmarking, within the context of transfer pricing, refers to the process of analysing and comparing financial and economic data from independent companies to establish a fair and arm’s length price for controlled transactions. It is typically conducted using databases that provide details about comparable companies and transactions. The objective is to determine whether the terms and conditions of intercompany transactions... for tax residency in many jurisdictions. Under this rule, an individual is generally considered a tax resident in a country if they spend more than 183 days in that country within a tax year. However, for digital nomads, who often do not meet this threshold in any one country, determining tax residency can become complex.
Key considerations for digital nomads include:
- No clear tax residency: If a digital nomad doesn’t stay in any single country for more than 183 days, they may not qualify as a tax resident under this rule in any jurisdiction.
- Permanent home test: Some countries also look at where an individual maintains a “permanent home” or habitual abode. Digital nomads often lack a fixed permanent home in one jurisdiction, further complicating the issue.
- Center of vital interests: In some cases, countries assess where an individual’s “center of vital interests” lies. This includes family ties, economic activities, and personal ties. If a digital nomad has substantial ties to a specific country (for example, they maintain a home, close family, or business there), that country may claim them as a tax resident, even if the 183-day rule isn’t met.
2. Application of Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Agreements (DTAAs)
If a digital nomad could potentially be considered a resident in more than one country, Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Avoidance Agreements (DTAAs) between those countries may apply to resolve the conflict. Under a DTAA:
- Tie-breaker rules can be used to determine which country has the right to tax the individual. These rules often focus on factors like permanent home, center of vital interests, and habitual abode.
- Even if the nomad moves frequently, the DTAA would help clarify which country has primary taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to..., minimizing the risk of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double....
3. Sourcing Rules
Some countries may still tax a digital nomad’s income based on the source of the income, regardless of the individual’s residency status. For example:
- Employment income: If a digital nomad earns employment income while physically working in a specific country, that country might still tax the income earned within its borders, even if the nomad isn’t a resident.
- Business income: If a digital nomad is self-employed and derives income from clients in multiple countries, each country might seek to tax the income sourced from work done within its borders, depending on its local tax rules.
- Passive income: Income like dividends, interest, or rental income may also be taxed in the country where the payer or source of income is located.
4. No Tax Residency Jurisdiction
Some digital nomads aim to avoid establishing tax residency in any jurisdiction by constantly moving and not meeting residency thresholds anywhere. However, many countries are now more aware of this practice and may still assert tax claims based on the individual’s connections to the country, the source of income, or even personal tax complianceTax Compliance refers to the adherence of individuals and businesses to the tax laws and regulations of a specific jurisdiction. It encompasses the timely and accurate filing of tax returns, the payment of tax liabilities, and ensuring that all tax-related obligations are met as stipulated by legislation. Compliance involves more than just submitting tax forms; it includes maintaining accurate financial... obligations, especially if they are a citizen of that country (like the U.S., which taxes its citizens regardless of residence).
5. Special Tax Regimes for Digital Nomads
Several countries have introduced special tax regimes for digital nomads in recent years. These regimes typically allow digital nomads to reside in the country without becoming full tax residents, often exempting their foreign-sourced income from local taxation. Some examples include:
- Estonia’s digital nomad visa: While digital nomads can stay in the country, they are only taxed on Estonian-sourced income, not their global income.
- Portugal’s non-habitual resident (NHR) regime: Offers favorable tax treatment for certain foreign-sourced income for a period of 10 years.
- Croatia’s digital nomad visa: Digital nomads can live in Croatia without becoming tax residents or being taxed on their foreign-sourced income.
In Closing
For digital nomads who don’t stay in a dwelling for more than 183 days, tax jurisdictionTax jurisdiction refers to the authority granted to governments or local taxing bodies to impose taxes on individuals, businesses, or transactions within a specific geographical area or based on particular criteria. This concept is a cornerstone of international tax law, determining which countries have the right to tax certain individuals or entities and under what conditions. As businesses and individuals... is primarily handled by:
- Determining tax residency: If no single country meets the 183-day rule, other factors such as permanent home, center of vital interests, and sourcing rules may apply.
- DTAAs and tie-breaker rules: These agreements help prevent double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... if more than one country claims tax residency.
- Sourcing of income: Countries may still tax income sourced within their borders, even if the individual is not a resident.
- Special regimes for digital nomads: Some countries offer favorable tax regimes specifically for digital nomads.
Ultimately, digital nomads need to carefully consider their movements and income sources to navigate potential tax liabilities across jurisdictions.