September 2019: updated with information from my new book.
You might have been wondering where you need to pay taxes when you are an international entrepreneur or a digital nomad.
This article tells you where to look. And how to look.
Tax laws are mostly a domestic affair. Each State has its own taxing rights. If you fall under the tax jurisdiction of a State, you’re obliged to pay taxes. If you do not fall under the tax jurisdiction of a State, you’re not obliged to pay anything. There isn’t some sort of global constitution determining you have to pay taxes “somewhere.”
When you understand where taxing rights start, and where they end, you can start to play. You can become a resident in a country which doesn’t tax your type of income, for example. Or arrange your affairs so that no countries taxes any income.
Regardless of what you’ve heard in the media the last couple of years, actual tax laws and rates have not changed that much. What has been severely restricted, is the use of artificial constructs (such as shell companies) to lower taxes.
The bottom line is that tax authorities look at facts. They weigh not only the paper, but also the economic reality.
To determine where you have to pay taxes, the first question for an individual is: where do you live. The second would be: where (and how) do you generate your income.
Where to Pay Taxes as an Individual?
As mentioned, as an individual it matters where you are a resident. Unfortunately, there are no uniform rules. Each country has it’s own rules determining when you have to pay taxes and when not.
Most people just think one is tax resident when spending 183 days in any given country. While the 183 rule is very common, it is not universal, and often not the only factor. In Hong Kong there is a 60 day rule, in the UK there is a 16 day rule for former long term residents. In countries such as France and the Netherlands tax residency is based on facts and circumstances, such as running a business or having economic or social ties.
If you look at the different factors, they all track what you do, not who you are. The only exception is the US, which taxes people based on their nationality regardless of how they live.
This might be confusing, but look at the positive side: it offers possibilities. It means that by moving abroad, you can get out of any system you do not like, and move to a tax-friendly place. You see, there are countries that do not tax income, tax income at a low rate, or do not tax certain types of income (with a foreign source, for example).
You might end up paying nothing at all!
Your Type of Income
The next questions is: how do you make your money?
Business activity can be done in your own name, or through a company you own. It can be done offshore, or right in your home office.
A common way to receive income is by receiving a profit share (dividend) from your own company. There are all sorts of variations possible. There are business registrations with high corporate tax on both it’s own income and on dividends (almost all Western corporations). There are companies with a relatively low corporate tax and no tax on outgoing dividends (UK Limited). And there are countries with no income taxes at all (Dubai/UAE).
Freelancers do not have to deal with corporate taxation. Since they do business in their own name, all their income is (or isn’t) taxed in their country of residence (if any).
True. It is not always easy to find out where to pay taxes. Each situation is unique.
It’s probably a very unsatisfactory article, but where you have to pay taxes really depends on how you structured your life and your income streams.
You cannot expect me to completely explain the details in this short article. Luckily, I released a unique and easy to read book called The Tax-Free Digital Nomad explaining all these details. It’s probably your best bet if you wish to understand this topic better.