Navigating International Tax Law: Key Insights for Digital Nomads
For anyone stepping into the location-independent lifestyle, the concept of ‘tax’ frequently emerges as a key concern.
So, before you become overwhelmed by endless ‘international tax law’ searches on trusty old Google, it’s crucial to grasp the fundamentals of this complex field. As a qualified British lawyer, with international experience, I can help!
This article seeks to unravel the complexities of so-called ”international tax law” and to make you aware that the term is somewhat misleading. Believe it or not, there is no such thing as ”international tax law!”
The term ”international law” actually refers to the wide variety of laws drafted by different countries to create competitive tax legislation. The aim is to draw people and businesses to their economies, whilst ensuring that everyone is contributing their fair share to the government.
Read on to discover more about international tax law for digital nomads.
The Ever-Evolving Landscape of International Tax Law
Governments around the world are constantly devising new tax incentive schemes to lure investment into their borders.
For example, in 2022, the Cyprus digital nomad visa was introduced. Under the terms of this visa, you will be free from tax charges on your worldwide income until the 183rd day of your stay.
Also, tax law changes often coincide with political campaigns. For example, Estonia introduced the world’s first digital nomad visa in 2020 in line with its ambition to become the world’s leading digital society. With every new campaign, there appear to be more changes in tax law.
Often these changes can be highly beneficial for digital nomads and entrepreneurs with international businesses. Therefore, it’s vital to keep informed about international tax law for digital nomads by referring to reliable, up-to-date sources (including this blog!).
Room for Interpretation in Tax Laws
Laws, by design, often leave space for interpretation. This is particularly true for international tax law. Concepts like ‘reasonable’, ‘economic sense’, or the definition of a ‘home’ in tax residency cases can be interpreted differently, even if concepts are backed up by precedent cases. I have seen this happen time and time again.
This means that it’s extremely important for you to seek guidance from professionals on navigating the nuanced interpretations of international tax law for digital nomads.
After-all, if everything was clear-cut there wouldn’t be a need for judges or lawyers who interpret the law and can argue one way or another. This approach could save you a signifiant amount of stress, time, and legal drama down the line!
Writing vs. Enforcing Tax Laws
There’s a huge difference between legislation enactment and its enforcement. Some countries promote programs like Golden Visas for wealthy immigrants, yet the actual process of acquiring such a visa can be very difficult.
Often, administrative burdens put people off trying to take advantage of tax incentive programs. For example, implementing international tax law might require you to hire multiple legal and accounting professionals in various countries, which makes the process seem like too much of a burden as opposed to a benefit.
Many countries operate on a self-assessment tax system, placing the onus on the individual to calculate their taxes and submit tax returns promptly. Failing to comply with tax laws can result in penalties, and engaging in tax evasion can lead to imprisonment. So it’s vital to fully understand international tax law for digital nomads.
Despite the many parties involved in international tax law, the most important thing to be fully aware of is the fact that you ultimately bear the primary responsibility for understanding what is permissible and what is prohibited under international law.
National Variations in Tax Laws
There’s no one-size-fits-all ”international tax law.” Each country has unique tax laws, with some even having varying state or municipality taxes. Tax rates, tax residency criteria, and tax incentive programs can differ dramatically between countries, even neighbouring ones.
For example, the number of days required to become a tax resident in one country can be 183 days, yet its neighbouring country might categorise you as a tax resident from the day you move there.
Even when you hear that 100 OECD countries have signed an agreement, bear in mind that it will still have to go through the national legislative system to become law in each country and will often have to be adapted before being accepted into the country’s legal system.
Economic Considerations in Tax Laws
Attractive tax laws do not automatically translate into economic advantages. Low tax rates or economic investment incentives may not yield long-term benefits if they don’t align with your actual business needs.
For example, just because a country is offering residency permits in exchange for some form of economic investment, this doesn’t necessarily mean that obtaining residency in that country will benefit your business in the long term.
Always keep in mind that even if one country appears to have attractive tax laws, this does not mean it will make economic sense for you and your particular situation. If your business doesn’t need a European base, then why would you go and set up in Jersey or Portugal even though their low taxes are attractive?
Other factors will always need to be considered, for example, possibly registering your business for VAT / GST or being able to demonstrate ”economic substance” (as is required to set up a business in Jersey).
I fell into this trap when setting up my first dropshipping business. Despite not living in the States, I established a US LLC due to the tax incentives offered.
However, I quickly realised that without having a US Social Security Number or Individual Taxpayer Identification Number (which can be quite difficult to obtain), I would not be able to set up Shopify Payments. This practically rendered the company useless for the purposes I actually needed it for!
Therefore, it is always imperative to do a proper investigation BEFORE deciding to simply incorporate a company in a country based on how attractive it appears at first glance. Trust me, this approach will save you time and money in the long run!
Overall, if you only take one thing from this article, it’s vital to fully understand the complex world of international tax law for digital nomads (or hire someone like me to help!)
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Disclaimer: While I strive to provide accurate and helpful information on a wide range of topics, it is essential to note that I am not a tax specialist. I do not hold myself out to be a tax advisor. My knowledge is based on my experience, general principles and concepts, and the information provided should not be considered as specific tax advice tailored to your unique circumstances. For personalised guidance on tax-related matters, it is always best to consult with a certified tax expert or professional who can assess your individual situation and offer the most relevant and up-to-date recommendations. Remember, proper tax planning and adherence to tax laws are crucial for financial stability and compliance, so seeking expert advice is a wise decision.