TBA Global

Digital nomads: what are the tax challenges?

Since the beginning of the pandemic, many companies have implemented remote or work-from-home arrangements, giving rise to a unique group of individuals known as digital nomads. These are people who work remotely via the internet whilst traveling and exploring different parts of the world. The number of digital nomads is substantial, with 7.3 million people in the United States alone identifying as digital nomads.

The flexibility provided by remote work allows employees to enjoy longer vacations whilst still fulfilling their job responsibilities. As a result, it has become an attractive benefit for companies to attract remote workers and can also increase productivity for many employees.

However, due to inconsistent and often much-delayed policy changes, digital nomads currently face the risk of violating national tax regulations, as it is challenging to define how this cross-border remote workforce should be taxed. If these digital nomads spend an extended period working in a particular country, they may face double taxation, or penalties for not paying local taxes appropriately.

The current controversy revolves around determining how long a digital nomad must work within a country to be considered a tax resident of that country. Additionally, if an employee primarily works overseas, the employer may be seen as generating income in the foreign market, raising further questions about the tax obligations of the employer. The specifics of these situations may vary from country to country.

In most countries, if a person stays in their territory for more than six months, they are considered a tax resident. In the United States, an individual is deemed a tax resident if they reside for 31 days in a year, or 183 days within a three-year period, as stipulated by the Internal Revenue Service (IRS).

Furthermore, determining which country’s social security benefits a digital nomad should be entitled to is also a challenge. The European Union (EU) previously stipulated that residents who spend at least 25% of their time or earn at least 25% of their income in a member state can access that country’s social security system. However, with the rise of digital nomads, the EU has proposed that if an employee’s remote work time does not exceed 49%, they would still be entitled to the social welfare of their employer’s country. However, this proposal has not replaced the “25% rule,” and not all member states have adopted it. Currently, countries like France and Switzerland allow employees to work remotely for up to 40% of their time without generating taxable income.

This is currently a challenge that the OECD is attempting to address by the end of the year. However, differentiating between “digital nomads” and regular cross-border remote workers is not an easy task, and depends on employees’ subjective definitions of themselves. In the absence of clear policies, digital nomads and their employers should proactively educate themselves about relevant tax regulations and ensure that they are complying with local employment laws to mitigate any potential risks.

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