Tax basics every digital nomad needs to know about earning abroad

People often picture ‘digital nomads’ as working from a beach in Santorini or joining a work meeting from a café in Bangkok. While the work-life balance, frequent travels, and exploration are amazing, no one talks about the administrative struggles that come with this lifestyle. One of those challenges is understanding how and where to file your taxes while globetrotting.

Many digital nomads think they don’t have to pay taxes since they are always on the move. Some others end up filing taxes multiple times on the same income. Whether you are a digital nomad or frequent traveller, understanding these basics can help you stay compliant and avoid penalties. Essentially, tax regulations vary from country to country and can change. In this article, we will focus on helping you understand the basics while you determine what best applies to your situation.

Also read: How to choose destinations that maximise tax benefits for nomads

Understanding tax residency

Tax residency forms the bedrock of your obligations as a digital nomad. It decides where you need to pay taxes and on which income. Here are some ways it’s determined:

• The 183-day rule:If you spend more than 183 days in a country in a year, you’re usually seen as a tax resident there. For digital nomads, it can be hard to keep tax residency in their home country while travelling. If you don’t become a resident elsewhere, you may still owe taxes at home.
• The ‘centre of vital interests’: Residency is not only about the number of days spent in a country. Other factors, such as your permanent home, family ties, and economic interests, also play a role. When you split time between multiple countries, a tax authority may look at your "centre of vital interests" to determine your tax home. This includes where your family lives, where you own property, and where your primary business and personal ties are.
• Global tax systems: Countries can impose a worldwide, territorial, or citizenship-based tax system. Some countries, like the US, tax citizens on their global earnings regardless of where they live (citizenship-based taxation). The IRS offers the Foreign Earned Income Exclusion and foreign tax credits to help prevent double taxation. On the other hand, countries like Croatia offer digital nomad visas with tax exemptions on foreign income for up to a year if you don’t exceed the residency thresholds.

To determine your status, various country-based residency test tools consider the number of days you spend in the country, along with your ties, such as work or accommodation. It is essential to track your tips meticulously, using apps or spreadsheets, and note the days you spend in each location. Exceeding the limits can trigger taxation obligations.

Also read: How to plan your taxes across multiple income sources

Navigating double taxation

Double taxation happens when two countries both want to tax the same income. This is a common issue for nomads working abroad. For example, if you live in one country but earn money in another, you might have to pay taxes in both places.

Double taxation agreements (DTAs) are deals between countries to stop you from paying tax twice on the same income. These agreements determine which country you’ll pay taxes to, and often offer exemptions so that you don’t end up paying taxes to two countries on the same income. If you are considered a tax resident in two countries simultaneously, a DTA's "tie-breaker" rules will decide. In this case, factors such as where you have a permanent home or your centre of vital interests will determine where your taxes go.

If you work in a treaty country, you might qualify for reduced withholding rates on dividends or royalties. However, if you are not a tax resident in any country, you may lose access to these benefits and face taxation in multiple countries. Always check the OECD Model Tax Convention or government resources to identify existing DTAs and how to access this provision. The benefits of a DTA are not automatic; you must actively claim them on your tax return.

Understanding digital nomad visas and tax

Many countries now offer digital nomad visas, sometimes with tax exemptions, to attract remote workers. The tax rules for these visas can vary widely by country.

• Temporary non-resident status: Some countries, like Malta, offer digital nomad visas that provide tax-exempt status for your foreign income for a specific period.
• Tax incentives: Other countries may offer special tax regimes, such as Spain's Beckham Law, which provides reduced tax rates for a set number of years for eligible nomads.

A digital nomad visa doesn’t automatically handle your taxes. Check whether the visa offers any tax breaks, and be careful not to stay too long or build strong ties that could make you a tax resident.

Also read: Digital nomad visas: Which countries are easiest to move to now?

Tax deductions and record keeping

Keeping accurate records of your income and expenses is essential. Most countries allow deductions for some business-related expenses, such as:

• Travel expenses (flights, accommodation, visas)
• Office equipment and software
• Internet and communication costs
• Professional services (accounting, legal advice)

Keeping digital copies of your receipts and invoices makes tax filing easier and helps if you ever get audited.

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Common tax mistakes to avoid

Here are some taxation pitfalls digital nomads should be mindful of:

• Assuming you are non-resident: Many nomads incorrectly assume that because they are not in their home country, they no longer have tax obligations there.
• Underestimating local tax rules: Failing to research local tax obligations in your host country can lead to unexpected tax bills and penalties. Some countries may require you to file taxes even for short stays or for performing any work for a local company.
• Poor record-keeping: If your travel and financial records aren’t complete, it can be hard to show tax authorities where you live or figure out your taxes. It can also make it tough to claim deductions.
• Ignoring corporate tax: If you have a limited company, working remotely could mean your business is seen as having a base in another country, making it subject to corporate tax there.

Staying compliant and avoiding penalties

Failing to report your income or misunderstanding your tax obligations can lead to penalties. Here’s how you can stay up to date and follow the rules.

• Checking government websites for tax updates
• Consulting a tax professional specialising in expat or nomad taxation
• Tracking your days of stay in each country using travel management apps
• Keeping a detailed log of your income sources and currencies.

Remember, tax laws change, so it’s essential to get advice that fits your personal situation.

Also read: Beyond the basics: Smart ways to grow as a digital nomad

Managing taxation and foreign earnings with Grey

Handling taxes as a digital nomad can be tricky, but following the rules gives you peace of mind and keeps your finances stable. Knowing where you owe taxes, using tax treaties, keeping good records, and choosing trusted financial tools can make things much easier.

A global payment platform like Grey can help you keep better records and make tax filing easier. With accounts in USD, GBP, and EUR, you can handle payments and spending in different countries all in one place. It’s simple to track your money, and you get low fees, good exchange rates, and fast payments. Grey’s invoicing tool also helps you stay organised and avoid mistakes when filing taxes.

Get started on Grey today to find an easier way to manage your finances around the world.

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