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Over the last four years, more than 65 countries have launched digital nomad visas allowing remote workers in one country to continue working for their employer while living in another country. Many remote workers have taken advantage of this opportunity to explore new parts of the world and sometimes enjoy a more affordable cost of living.
However, while digital nomad visas (DNVs) might seem like a simple way to give remote workers mobility and flexibility, they can come with hidden tax costs for both employees and employers. In this article, we will look at the two main tax issues that emerge: personal income tax and corporate tax liability. We will also look at what should go into travel work policies to avoid these issues.
Personal Income Tax
One big problem with digital nomad visas is that if you are employed in one country, your employer has probably employed you based on income tax and social security contributions in that country. They are set up to withhold and report on your salary in that country, and they may not be set up to do that for you in another country.
Some countries have considered this when putting together their digital nomad visas and have specifically exempted visa holders from having to pay income tax on their foreign-earned income and have said that they remain subject to benefits and employment law in their own country. For example, Croatia has explicitly exempted DNV holders from paying local income tax.
But most other countries have not made the same provisions. That means that in most cases, anyone staying there on a digital nomad visa becomes liable for local income tax after 183 days of residence. For example, this is the case in Hungary and Portugal.
Not only does this mean that both employees and employers have to adapt to a new taxation system, but there can also be implications with double taxation. Some countries, like the United States, require citizens to pay taxes wherever they are in the world. In other countries, you usually continue to be a tax resident until you have been absent for a full tax year. So, you could be liable to pay in both countries. Some countries have double taxation agreements to avoid this problem, but these have to be researched on a case-by-case basis.
Avoiding this kind of taxation liability is one of the main reasons why Airbnb included in their remote work policy that remote workers can only stay in any foreign country for up to 90 days at a time.
Corporate Tax Presence
While the individual living in another country can become liable for personal income tax, their presence there working for their employer can also create corporate tax liabilities for their company. This happens if the person’s presence is determined to give the company a business interest in that country, and therefore tax liability.
For this reason, individuals should not use digital nomad visas if they are moving to another country where they will represent their employer. Some type of work visa is a better option. And if a staff member is in another country working remotely, but not acting as that company’s representative, they should avoid doing local business for the company. That means not making local sales and not signing local contracts. If they happen to make a business contact there as an unexpected result of their presence, the contact should be passed back to head office to be managed through appropriate channels.
In addition, having a branch or permanent establishment in another country can lead to tax liability. Therefore, remote workers should work from home, coworking spaces, or other public spaces such as libraries and coffee houses. They should never rent a dedicated office space to work from.
Remote Work Travel Policies
One effective way to avoid these headaches is to have clear travel policies in place that prevent these issues. These are some of the things to consider including in travel policies.
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Place of Work
All employees should always have a permanent place of work registered, and things such as their tax and social security liability should depend on that place. When that place changes, staff should have an obligation to advise their employer. In the case of digital nomads who move around consistently, they should have a permanent address for tax purposes even if they do not live at that address.
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Notice of Travel
The policy should be clear about who employees need to notify about traveling and when. For example, a company may not feel it is necessary that a remote team member advise anyone if they choose to spend two weeks working from the home of a family member in the same country. They may feel it is necessary for remote employees to tell their direct line manager if they intend to spend a month working from a foreign country to manage issues such as data security and time differences. They may consider it essential that remote employees inform both their line manager and HR if they intend to travel anywhere for more than 90 days. The rules should be crystal clear so that employees and managers know when to get HR involved.
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Length of Travel
It is reasonable for companies to have rules in place that do not allow staff to spend more than a specific period, for example, 90 or 180 days, in another country. This is not to say that no staff member could ever take advantage of a digital nomad visa to spend a year or even two working remotely from overseas, but this would be considered “non-standard” and would need to be negotiated with HR.
Why Travel Policies Are a Good Idea
Some companies are reluctant to put strict travel policies in place because they know that flexibility and mobility are valued by their remote employees. But having a clear policy also helps manage their expectations before they join the company, and can help avoid dissatisfied employees further down the line.
Employees tend to feel disheartened and abandoned when they encounter issues with their pay such as unexpected tax bills and burdensome international bureaucracy to navigate. Losing benefits and missing out on bonuses can also leave a sour taste in their mouths about the company. Taking steps to avoid this while maintaining an overall flexible approach is likely to lead to happier remote workers in the long term.
