Tax Guide For Digital Nomads, Freelancers & Online Businesses

Zuletzt aktualisiert: 18. Januar 2017 | in Uncategorized

Tax Guide Online Business

I don’t know of any topic that is more controversially discussed as the one about digital nomads or any sort of internet marketer or freelancer paying (or not paying) their taxes. Is everyone required to pay tax? Or does it depend on where you are living, working and traveling? Or does it rather depend on which nationality you are?

In this guide I will help you understand everything you need to know about if you need to pay taxes depending on your current situation, where you have to pay your taxes and how much taxes you have to pay.

Let me tell you right away that there are two very widespread, but untrue beliefs:

  • „If I live in a country on basis of a tourist visa then I don’t have a tax liability in this country.“ This belief is especially popular in Asian countries (and yes, especially in Thailand and increasingly Vietnam and the Philippines that are among the most popular places for digital nomads).

This is not true because it is the law in almost every country in the world that if you live there for 183 days or more (in other words: for the most part of the year) then you are considered a tax person in that country and required to pay tax on your worldwide income.

A lot of these „nomads“ who are already aware of the untruth of the first statement and aim to do it the correct way by spending less than 183 days in any country (for example 5 months in Thailand, 5 months in their home country and 2 months traveling) and setting up a company so that they can make bigger investments in the future (like buying property) also have a wrong belief:

  • „If I set up an offshore company in Hong Kong, Singapore etc. and don’t live in that country then I won’t have to pay neither corporate profit taxes nor personal income taxes.“

This is also not true because you will always pay personal income tax on the director’s salary you pay yourself. Believe me, I have a company in Hong Kong myself and even though the tax rates there are relatively low – you still need to pay! If you are interested in this I wrote a complete guide on this topic.

And regarding the corporate profit tax, you will also pay that one at least for the first financial year and only then you may apply for an „offshore exemption claim“ at the inland revenue department (provided that all of your revenues are derived from outside the country). Be prepared to submit a lot of documents, receipts and contracts (do you have any as a digital nomad or freelancer?) that prove that all your business activity is actually taking place abroad.

Sure you can also set up a business in the „classical“ offshore countries like Seychelles or British Virgin Islands but then it’s the question if you really want to keep the majority of your money in a bank account of a tropical island with less than 100k citizens. A good idea might be to spread your money between these „real“ offshore locations and others such as Hong Kong or Singapore. I will explain this strategy in more detail in just a moment.

Now that you know how it’s not done let’s take a look at how it’s done. If you are currently in the situation that you run (or plan on running) an online business and still unsure about the whole tax topic for digital nomads then this guide should help you understand everything you need to know. Don’t be that guy who thinks that „digital nomads don’t pay taxes anywhere, that’s why they are called nomads, right?“. The consequences, fines and penalties can be severe if you don’t comply with the laws of the countries you are staying in. So it’s important that you are fully aware of the rules (= laws). Take a few minutes to read through this guide and it might save you a lot of trouble in a few years from now.

I think it makes sense to structure this guide in a way that I discuss the most common questions you hear people ask all the time.

How Do Digital Nomads Pay Taxes?

A lot of people think they can just cancel (deregister) their domicile in their home country, sell their apartment (if they own one) and then live and work in any country they can get a tourist visa for and not worry about paying taxes anywhere, not in their home country and not in the countries they live in during the year.

Thailand is probably the most famous example for this, there are lots of people who go on several visa runs every year and stay well more than half of the year in paradises for digital nomads like Chiang Mai and Bangkok, from where they work. What many of them don’t know (or try ignoring to admit) is that they are actually tax liable in Thailand.

Overview of the 4 types of Tax Liabilities:

  • Unlimited Tax Liability: If you live in a country for 183 days or more per year (= habitual residence) or you have your first domicile registered in that country then you have to pay taxes on your worldwide income in that country.
  • Limited Tax Liability: If you don’t live in a country for 183 days or more per year (= no habitual residence anywhere) and have not registered a first domicile in any country, but you generate revenues in one country (e.g. rental income), then you have to pay taxes only on these revenues in that country.
  • Advanced Limited Tax Liability (applicable only in some countries): If you move to a country with low tax rates (generally less than one third than that of your home country) then you are still tax liable in your home country for 10 years, unless your home country has made a double taxation agreement with the country you are living in.
  • No Tax Liability: If you don’t live in a country for 183 days or more per year, have no registered first domicile and have no income directly derived from one country (e.g. rental income, interest payments or dividend payments) then you are not liable to pay tax in that country.

This is obviously very general information and there are a few specialities to these rules:

  1. In most countries it’s totally irrelevant if someone has registered a domicile in that country or not. What counts is whether he or she spends 183 days or more in that country. If yes, then this person has to pay taxes (unlimited tax liability) and if not then he needs to pay only on the income directly derived from that country (limited tax liability).
  2. US Citizens have to pay taxes on their worldwide income in the US no matter where they have their habitual residence or how many days they spend in one country. What counts is the US Citizenship: If you have one you may as well skip to the final section of this guide. Exception: You spend at least 330 days out of any 365 day period abroad and have your tax home abroad.
  3. UK Citizens need to be aware of the extra rule: They consider you as a tax resident if your only home was in the UK during the last financial year (that is, be careful: 6 April to 5 April) and you have owned, rented or lived in it for 91 days or more (right, that’s just about 3 months so the 183 day rule doesn’t apply in this case).
  4. German Citizens that own an apartment or house (= living space) in Germany are required to submit a tax return even if they don’t have their habitual residence in that country. It then depends on the revenue department (Finanzamt) if they accept your status as „limited taxable“ (beschränkte Steuerpflicht), means whether you only need to pay taxes on earnings directly derived from Germany.
  5. Citizens of some countries (e.g. Spain) have to pay taxes in their home country for 4 years after moving to another country.

Whatever your nationality, the most important thing you need to know is that if you spend 183 days or more in one country then you will have a tax liability somewhere (in that case you need to check which rules and exceptions apply to your country as described above).

A Practical Example

Let’s say you live in Bangkok, Thailand. Live? Well, you get three tourist visas every year each with 3 months in total length. Means you spend well more than the crucial 183 days per year in Thailand. Are you then considered a tax person in Thailand? Of course you are.

You might think that you don’t really do any business in Thailand when building your affiliate sites or do client SEO for businesses all over the world? Well, that’s not the point. The point is that you are spending more than 183 days in Thailand and this fact makes you liable for paying tax. Unless you pay taxes in another country that Thailand has a double taxation agreement with. For example, if you have already paid income taxes on your director salary of your company in Hong Kong, then of course you don’t have to pay taxes on that again.

However, since you are a tax person in Thailand you will still need to submit a tax declaration. That sounds quite like a big headache, doesn’t it?

Two suggestions: You either avoid staying in any country for more than 183 days or more per year, or you simply set up a company in Thailand. Yes, maybe it will cost you more in taxes, government fees, work permit etc. compared to some offshore destination but in the long run it will save you a lot of money when they discover you had been doing tax evasion for years and they demand thousands of Dollars (or Baht) when they collect tax on your retrospective earnings plus fines plus potentially imprisonment.

Sounds like a horror scenario, doesn’t it? Well the digital age is still relatively young and so is the new lifestyle of running online businesses from anywhere in the world. There are still no clear international tax laws concerning digital nomads who have no „habitual residence“ anywhere in the world. However, a lot of them think they are in a „grey zone“ when they are actually not. You now know the rules so let’s come to some tips on how you should structure your life and business.

Watch the video:

Should You Set Up a Company as a Digital Nomad?

See, this is why I don’t really like the term „digital nomad“. A nomad is someone who travels around with no defined goal or vision. So sure, if you are just freelancing all the time and have no intention on scaling your online business then of course you can just set up bank accounts in every country you go, connect a PayPal account to them, get paid on that and live from month to month.

But how about if you are not just working and getting paid on freelancing sites like Upwork or Fiverr? How if you want to take on clients and do their online marketing? A lot of them will expect proper invoices stating your tax and VAT registration numbers. Even many of the renowned affiliate programs require a registered company so that they pay you.

And more importantly: How about if you have some big goals you want to achieve in your life? Let’s say you are a serious internet marketer like me who wants to build up websites, contacts and clients and strives to make more money every single month so that you can save up money and eventually invest in property, stocks, businesses or whatever you are dreaming of or think is necessary to provide for your future lifestyle, family and retirement.

Well then of course you should set up a business. This is exactly the reason why I decided to start a business in Hong Kong. If I had no real plan at all then I could just call myself a „digital nomad“, open a savings account at Bangkok Bank and just live a „nomadic lifestyle“ with no plan (and always live with the risk that one day a Thai or German official wants to see my taxation statements for the past five years).

The Only Way To Pay No Taxes

Let’s look at the theory first and then at the practice. You will not have to pay taxes anywhere if you are not registered as a tax person anywhere in the world nor have a company that is liable to pay taxes.

The 3 Requirements for not paying taxes:

  1. No tax liability in your home country: You don’t have your „habitual residence“ in your home country and no income derived from your home country (as already discussed earlier in the overview of tax liabilities, e.g. apartment rental income, dividends, interest payments etc.)
  2. No tax liability abroad: You will need to carefully check the taxation laws of each country you are staying in. In theory you will need to pay taxes in most countries you are living and working in, however, if you only stay in these countries on basis of a tourist visa (and less than 183 days per year) then you are not being registered by the local authorities as a tax person.
  3. No business that is liable to tax: You would either register no business at all and get paid on a private bank or PayPal account. Or you would register an offshore business that is not liable to taxes for revenues generated outside of the country. Popular examples would be Panama, Mauritius, Seychelles, BVI and potentially also Hong Kong or Singapore if they accept your application for an offshore exemption.

Now let’s look at the practice and there’s actually two ways to pay no taxes, but only one way I would recommend. I have already described the less desirable one in the last section:

The bad way:

You call yourself a digital nomad, don’t start a business, don’t spend 183 days or more in one country and don’t own any property.

  • Advantage: You are not required to pay taxes in most countries.
  • Disadvantage: You won’t be able to save up money for a big investment. Why not? Well imagine you want to buy a condo in Kuala Lumpur and tell your banker to transfer 5 Million Ringgit to the developer. Don’t you think he will ask you where that money comes from? Don’t you think he will require a proof that you paid taxes on this money?
    Also, the laws regarding „stateless“ people are still unclear and maybe one day someone will ask you to present a proof that you paid taxes. It’s always better to have something than nothing.

The good way:

You set up a business either in an offshore location like Seychelles or British Virgin Islands or in Hong Kong and submit your application for an offshore exemption after the first annual audit.

  • Advantage: No taxes and still the opportunity to save up money and make big investments by using your company.
  • Disadvantage: As soon as you make such a „big investment“ like buying a property you will need to submit a tax declaration every year in the country you made the investment in, and then it’s up to the official if he or she accepts the fact that you don’t pay any taxes on your regular director’s salary. What I’m saying is: They might ask for your tax assessment.

My recommendation:

If you are living and working in your home country, then obviously start a business there and pay taxes like every other business owner, too. If you are like me and spend most of your time of the year abroad in two, three or four countries, then this is my recommendation:

First, start a business in either Hong Kong or Singapore. They have some of the best combinations of reputation among other businesses, stable economic environments (your money is relatively save in the banks of these countries), reasonable maintenance costs (accounting, auditing, renewal of business license) as well as relatively low taxes (for example, the profit tax rate in Hong Kong is 16.5%).

Then, after a couple of years when you know that your business is running more or less stable and you know that you don’t want to return to your home country to take up a job, then you could make the next step and open a „real“ offshore company for example in the Seychelles, where you pay 0% taxes.

Do you see the advantage of this strategy? This way you diversify both your financial portfolio, reduce the tax rates you pay on average and most importantly: Still have a proof that you paid personal income tax for the director’s salary of your Hong Kong or Singapore company. Of course, you wouldn’t pay a salary from your Seychelles company but rather save up to invest in property, stocks or businesses.

Remember one thing: The goal is not to pay 0 taxes. The goal is to generate a lot of money and ultimately wealth.

Which brings me to the next point.

Don’t Make This Mistake

Don’t spend too much time worrying how to avoid taxes but rather on how to make more money. I see so many guys who spend hours of their days doing research and trying to figure out all sorts of different ways on how to avoid paying taxes.

Sure, there’s nothing wrong about the idea to optimize your finances so that you don’t pay more taxes than necessary. Just don’t overthink it too much! It’s far better to think about ways to create more money than to think about ways to minimize taxes.

Don’t think about how you can maintain your current level of earnings per month but instead focus all your attention how you can grow and expand your business and generate more money so you don’t even have to bother paying 10%, 15% or even 20% in corporate taxes.

Too many guys who finally succeed making money online lose themselves at one point when they stop thinking about how to grow their business but instead worry how they can maintain the level they currently have. What then often happens is that their business goes down again because they spend less time working on it than before because they got lost in all the organization of their finances.

Therefore: Hire someone to do your accounting, pay your taxes and just focus working on your business. If you continue to make more money then you shouldn’t have a problem paying a certain percent in taxes. Most people use PayPal and only few of them complain about their high fees (4.4%). Same with the taxes: Just pay them, focus on your business and you will make more money anyway.

These are pretty much the most important points I wanted to cover in this guide. Before I come to the summary let’s look at one more topic you might also be interested in:

Double Taxation Agreements

A double taxation agreement (DTA) is a treaty between two countries in order to avoid, well, double taxation. Example: You are from England and buy an apartment in London and rent it out. You don’t live in the UK and have no revenues there other than the rental income. Instead you live in Thailand where you have registered a company and pay taxes for both your profits and director’s salary.

Since you generate revenue in the UK from your apartment you will need to submit an annual tax declaration and also state the revenues from your Thai company (under the section revenues abroad). Since the UK has a double taxation agreement with Thailand (and most other countries in the world) you will not have to pay taxes on your Thailand revenues again, but only on your rental income.

The same applies for Thailand: In the tax declaration your submit to the Thai revenue department you would also state the rental income of your London apartment, and again since you paid taxes for that in the UK you won’t have to pay double due to the DTA.

Long story short: You may have to pay taxes in more than one country, but not on the same revenues.

Summary

You now know about the crucial 183 day rule. So if you spend more than half a year in one country, then just pay taxes in this country and continue focussing on your business instead of running the risk that you get caught in the future due to tax evasion.

And even if you travel a lot and spend only a few months in each country, then I would still recommend you to set up a business and pay taxes. You can always set up another offshore business with no taxes in the future to diversify your income.

But at least you will have a proof that you paid taxes somewhere which will save you potential trouble in a few years from now, and also you can make investments in property or other assets which is almost impossible if you just live the freelancer and digital nomad kind of lifestyle.

And remember: Don’t waste too much time on this whole tax topic. Get everything right, outsource your accounting and auditing and then focus again on working on your online business.