How is the tax jurisdiction handled in the case of digital nomads who have not stayed in a dwelling for more than 183 days?



FULL QUESTION

In the case of individuals, how is the tax jurisdiction 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 jurisdictions are generally handled for such individuals:

1. Tax Residency and the 183-Day Rule

The 183-day rule is a common benchmark 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 Taxation Agreements (DTAAs)

If a digital nomad could potentially be considered a resident in more than one country, Double Taxation 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 rights, minimizing the risk of double taxation.

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 compliance 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 jurisdiction 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 taxation 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.