Digital nomads, workations and tax: Why working abroad is not so straightforward

The number of “digital nomads” – people who live are working abroad, moving from country to country while staying connected digitally – has exploded

With an increasing number of businesses and employees recognising the benefits of distributed work models to productivity, retention and personal lives, remote work is becoming more and more widely adopted.

Furthermore, widespread internet access and communication technology such as Zoom makes remote work more accessible than ever, and so many workers are taking advantage of this increased flexibility to choose where they work day-to-day.

As a result, the number of “digital nomads” – people who live a nomadic lifestyle, moving from country to country while staying connected digitally – has exploded.

17 million Americans identified as digital nomads in 2022

One study found that nearly 17 million Americans identified as digital nomads in 2022, an increase of 131% from 2019. Similarly, some workers are using remote work to extend their holidays and vacations without taking additional time off, giving rise to the work vacation or “workation”.

Whether as a digital nomad or simply taking a workation, the option to travel to different countries while continuing a day job will appeal to many.

However, this flexibility, which sounds so promising in theory, can turn out to be a disaster in practice, with employed digital nomads running the risk of incurring tax charges and penalties for themselves and their employers.

That’s because, due to a lack of uniform legislation across countries that clarify the rules regarding working across national borders, remote work is opening up some challenging questions for tax authorities.

Remote work is opening up some challenging questions for tax authorities

For instance, how long can someone work in a country before they are considered a resident of that country for tax purposes? Do the activities of an employee in a foreign market create a taxable presence for their employer?

Some countries, such as China, India and Britain, count people as tax residents after around six months. But the rules are more complex in other countries: in the US, the “183-day” rule looks at how long a person has been in the country over a three-year period. And of course, there are a web of exceptions, caveats and all sorts of complications around.

Without clarity around these sorts of questions, digital nomads could incur taxes for themselves and their employer simply for checking their work email from an international location. They run the risk of not paying tax where it is due, which can lead to expensive fines, or the hassle of double taxation.

Rules around taxation have failed to keep up with the speed of digitalisation

Why has this situation come about? Simply because the rules concerning taxation have failed to keep up with the speed of digitalisation and changing work habits. In some cases, there may be no political will to clarify the laws around flexible work, or it is not seen as a priority by some authorities.

It is also a complex issue that may require global consensus and coordination. Regardless, what holds true currently is that digital nomads face a labyrinth of tax obligations.

Some international organisations are looking to address this problem. For instance, the Organization for Economic Co-operation & Development (OECD) is currently examining the need to adapt tax and employment rules to enable workations and cross-border remote working and this is definitely a good start, bringing global-level attention to the issue.

According to Bloomberg, the OECD plans to finish these examinations and decide how to tweak global tax rules to address workations and cross-border remote employment by the end of 2023.

Meanwhile, the European Union has made a recommendation to member states concerning the status of employees working at home in cross-border situations within the EU.

From 1 July 2023, these workers will be covered for social security in the country where their employer is based if they telework from home for up to 49% of their time.

If the employee works 50% or more in their country of residence, then the social insurance legislation of the state of residence will apply, requiring their employer to withhold and remit social insurance contributions according to the rules of the worker’s country of residence.

Teleworking for up to 40% of working time per year without taxation

However, it is not yet clear which member states will adopt this recommendation. Countries like France and Switzerland already have rules allowing teleworking for up to 40% of working time per year without consequence for taxation of income, in particular for border staff. The other downside to the EU’s recommendation is that it is not a global but purely bilateral solution.

One challenge for any global solution will be the difficulty of defining what counts as a “digital nomad” and when it is different to a cross-border teleworker, especially because many employees may not see themselves as digital nomads, despite working fully remotely as well as travelling.

The main differentiator would probably be the time someone is physically present in more than one country and how many “travel abroad days” they spend away from their home or country of employment.

Hopefully in the coming years we will see the simplification of tax rules which will allow the digital nomad lifestyle to flourish.

For instance, safe havens could be introduced where workers pay no tax or enjoy a tax-break for a specific period of time. While safe havens have a reputation for tax avoidance, times have changed and tax authorities have greater access to data to make sure any new havens are not abused.

Digital nomads and their employers must learn what their tax obligations are

These safe havens could also improve competition between countries and help states to attract digital nomads or remote work tourists. Such safe havens could also be quite easily implemented by using de minimis rules in local tax legislations.

However, until new rules are implemented, digital nomads and their employers must arm themselves with knowledge and learn what their tax obligations are or when they may cross over a given threshold, applying current legislation. Otherwise, they risk running into painful – and expensive – pitfalls.

This piece was written and provided by Dominik Skalet, international tax manager, Remote.