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04.1 Residency for Digital Nomads
Residency for Digital Nomads
Taxes, residence and insurance are the annoying but unavoidable travel companions of every Digital Nomad. Regardless of how far or how long you travel, these are things that you will have to deal with. There is just no way around it.
Why even Digital Nomads need an actual Residence
By living without a fixed residence, you don’t only forego a lot of rights and comforts, but also fall victim to the false assumption that you are no longer subject to taxation.
The amount of “fake news” on the internet about Digital Nomads and tax responsibilities is unbelievable. Believing that you do not have to pay taxes if you don’t have a permanent residence can have disastrous consequences. These will become apparent at the latest when the you decide to return home, or even settle somewhere else.
Keywords: Origin of Capital, Proof of Taxation, Proof of previous Tax Residence, etc..
This page will take a look at the range of advantages and rights you will miss out on if you don’t have a proper residence, which obstacles and dangers you should be aware of as a Digital Nomad. We will also cover some of the best suggestions we have for Digital Nomads, to help you travel and live with as much freedom as possible.
Residency and Taxation
Digital Nomads and Taxes
In general, Digital Nomads without a permanent residence must continue to pay taxes in their home country. An e-Residence, a postal address, or the payment of corporate tax or taxes on dividends in another country, do not constitute an exemption from this.
In most European countries, the duty to pay taxes is directly linked to residence. Usually an individual is seen to be a resident if he owns or rents property in a country, the circumstances of which lead to the conclusion that the individual intends to keep and use the property for himself. If an individual does not own or rent a property he may still be seen to be a resident if the circumstances lead to the conclusion that he intends to stay in the country for more than a temporary period of time. In both cases, it is the circumstances as a whole which are decisive and not the registration of the individual as a resident with the relevant authorities. Nor is the will of the individual of consequence. If the individual is seen to be a resident by the authorities, then the individual has a duty to pay taxes in that country on his entire income, regardless of origin.
And even if, the Digital Nomad has not lived in his home country for a whole year, he will remain subject to taxation there without restriction, (see also „Notable unknown Tax Regulations„). To avoid this, you must completely and officially leave your residence behind.
In most countries the deciding factor in determining who is subject to taxation is residence. The most notable exception is the US, where all citizens and Green-Card holders are subject to taxation regardless of their residence status.
Notable
If you so much as rent an apartment, or have an apartment “at your disposal” in your home country, you can be seen as a resident. “At your disposal” is simply lawyer-lingo for being in possession of a key to an apartment, with which you could open it and decide whether or not to stay there. It is of no consequence whether you actually use the apartment or not.
Furthermore, it is absolutely irrelevant from the perspective of the tax office, whether you have deregistered as a resident with the authorities in your home country or not.
Please Note:
Deregistration as a resident neither limits nor ends your duty to pay taxes in your home country.
The Danger of Renting Holiday Apartments and Hotelrooms
In most European countries, holiday apartments, hotel rooms and second homes all count as a residence. This is because any apartment, house or room that is suitable for living and which is “at your disposal” constitutes a residence.
Even if you do not register your residency with the authorities yourself, this will be reported to them sooner or later, whether by an unpleasant neihgbour, a spiteful ex or old colleagues. This can have nasty consequences. On top of this, just staying in a specific location, even without the ownership or use of an apartment, can amount to residency. This is the case if the circumstances of your stay lead to the conclusion that your stay is not solely temporary. A stay is assumed to not be temporary once it exceeds six months.
Please Note:
Staying in your holiday home for more than 3 weeks per year, can already amount to residency and render you subject to taxation.
You should also be aware of the following…
- A second home is treated just the same as the primary home!
- Deregistering as a resident has no effect on taxation!
- Registering in another country or providing a postal address has no effect on taxation!
- The use of someone else’s property can still amount to residency!
- The temporary use of your old room at your parent’s house can be absolutely detrimental.
- The permanent renting of a hotel room can still constitute residency.
But surely it works if you do it in secret?
Our experience has shown, that many Digital Nomads believe that the tax authority is completely unaware of the apartment they own or the multiple times they have been back in the country. This is more false hope than fact.
You can count on the tax authority to secretly collect all possible information and even track your movement. And if they are still uncertain whether or not you are a “resident”, looking at business and personal credit cards, guest books, user registers and passenger protocols of airlines, will definitely bring the truth to light. So, do not imagine that you can hide your residence from them! The discovery of residence after the fact, is often accompanied by substantial costs. Do not underestimate the sum of interest on late payments or punitive fees. Nor does it stop there. On March 13, 2008 the German Federal Court heard the case of a man accused of tax evasion. The man unsuccessfully argued that he was not subject to taxation as his second home in Germany did not constitute residency. Additional to the costs he had already incurred as part of the unpaid taxes, he was also faced with the court costs and legal fees, as well as the high time demand of legal proceedings.
The Disadvantages of not having a Residence
Example: The Use of Bank Accounts, Merchant-Accounts und Digital Currency Accounts
When opening a private or business bank account as a Digital Nomad, you will have to provide not only a valid proof of identification but also written proof of residence.
The proof of residence can be proof of registration from the relevant authorities or a recent water or electricity bill. The latter must not be older than 2 months and must include your full name and postal address.
Please Note:
If you move to another address or to another country after opening an account, you must notify your bank immediately and again provide proof of residence. If you do not do this, the bank has the right to block your account.
Development: New regulations this year mandate that financial institutions providing users with Merchant-Accounts, I-Accounts and Digital Currency Accounts must adopt the “KYC” regulations. You can find more information on this by looking up the „Know Your Customer Policy“ in your search engine.
Example: Flight Bookings, Rental Cars, Hotel Reservations
The most important piece of equipment in every Digital Nomad’s backpack is of course a laptop. A close runner-up is a credit card that works worldwide.
Why? Because everyone who has tried to do so much as rent a car in a new country in the last few years, knows that life is hard, without a credit card. It is almost impossible today to book a flight or a hotel without one. A credit card which is accepted worldwide is something no Digital Nomad can go without.
But: No Credit Card without Residence
… because in almost every case, the same rules that apply to the opening of bank accounts, I-accounts, merchant accounts and digital currency accounts, also hold true when applying for a credit card. No residence, no credit card.
PayPal, Payoneer, MasterCard, Paxum & Co.
Even though the above named financial service providers are based in the US or Canada, if you think that you can generate income on such accounts, and withdraw it in cash from an ATM without alerting your local tax authority, you are quite mistaken!
Whether the data is collected by the central bank or the tax authority is irrelevant. The point is that, there are numerous Financial Information Exchange Agreements between the US, Canada and many European and non-European countries.
Don’t let the argument, “but my friend has been doing it for years,” convince you.
Living abroad and Bank Account back Home – does that work?
No, because …
… because if you move to another address or abroad after opening a bank account, you must provide the bank with new proof of residence, either via a proof of registration or via a recent water or electricity bill. If you do not notify the bank, the bank has the right to block your account.
… the duty to pay taxes in the old home does not end when you move abroad, or even when you deregister with the authorities. By having an active bank account in your home country, this can be taken as an indication that your economic base has not changed and remains in your home country. In this case you will remain subject to taxation.
Please Note: Don’t forget, as a rule the tax office has complete freedom when it comes looking into the domestic bank accounts held in your name.
Example: Financing your Lifestyle
How do you finance your lifestyle as a Digital Nomad? Do you sell products, provide digital services, trade?
Whichever means you have of generating incoming, or which means you would like to have, you should take the following into account:
Whatever your profession, even if you are trading at your own expense, you will need a suitable vehicle to do so. This, not only form a liability perspective, but also because of the associated tax benefits and the advantages this provides for your clients. Whether this is a company, corporation or some other legal structure, depends on your specific circumstances.
- …because otherwise your clients cannot deduct payments to you from their taxes,
- …because otherwise you risk breaching VAT-regulations,
- …because not having a tax residence does not give you freedom, it risks your freedom,
- …because even Offshore Companies lose their anonymity as soon as you open a business bank account for the company,
- …and you are not exempt from taxes merely because you like to travel.
Please Note: E-Commerce and VAT
Since January 1, 2015 anyone who offers services via the internet to consumers within the European Union, has a duty to pay VAT for these services. For example, if a private individual living in the EU buys an e-book from a non-EU compnay, then the proceeds from the book paid to the seller are subject to the VAT-regulations of the EU.
The new obligations regarding the registration of an EU VAT-number apply to products for download, e-books, Webhoster, SEOs, telecommunications, broadcasting, fee-based communities, online-tools, online games, web design, online marketing, streaming, online research services and any other consumer services and products provided online.
You can find more information about this on our website: https://www.vat-eu.com. More information on the topic of e-Residency and company set-up in Estonia is available here.
Please Note: “No Payment without Invoice”
This basic principle is still valid today, perhaps even more so than ever before.
If your European client wants to deduct a payment made to your from his taxes as part of his business expenses, he must be able to provide “proper invoice”. This receipt must include the name, address, VAT-number and tax file number of the person who issued the invoice.
Most clients will ask for such an invoice for their own security anyway. The invoice can be helpful to both you and the client if a dispute arises, and is proof of the seriosity and discretion with which you treat your business transactions.
Take Away: Without a legal person, for example a company, it is not possible to supply your clients with a “proper invoice”.
The Problem without a Residence? As with opening a bank account, when registering a company, you must provide proof a residence. Furthermore, the same rule applies when you go to a bank via e-Residence. Even in Finland!
Example: Health Insurance Abroad
If you want to live your life abroad or relocate your residence to another country for tax reasons, then your health insurance coverage at home will expire. This, because you have either spent too much time abroad, or because you have deregistered. At least, in principle!
Please Note: Travel health insurance only provides coverage in conjunction with a valid domestic health insurance, it is also usually limited in time, requires a permanent residence and are therefore not suitable for the lifestyle of a Digital Nomad.
Of course, you can always apply for private health insurance in every new country you come to, but as a rule your application will only be accepted if it is accompanied by a proof of residence.
And without Health Insurance?
It is better not to simply trust in the Hippocratic Oath. If you have ever sought treatment abroad without insurance or a credit card, you will know that this can go very wrong. Such a plan can quite literally have deadly consequences.
Without health insurance you may be met with alarming costs, all of which you will have to cover yourself.
Example: Criminal Law
Problems when applying for a new passport, strict registration obligations abroad, forgoing social services – just some of the examples, why life without a residence is not to be recommended. But there is one more point that we would like to bring to your attention. Why? The following example should answer that quite succinctly:
Let us assume, that you find yourself in a south American or Asian country. After a beautiful hike, you get back into your rental car, drive and back to the city. Suddenly a child runs out into the street in front of you. You step on the breaks, but it’s too late.
Without a permanent residence you are in deep trouble. You are going directly to jail. At least until all circumstances which contributed to the terrible accident have been assessed, and you are hopefully declared innocent of any wrongdoing. Without a permanent residence, being allowed to go home until the legal proceedings commence is out of the question.
And there are many more less severe circumstances that can have similarly unpleasant consequences, if you don’t have a permanent residence. Keep this in mind when deciding whether to travel the world without a place of residence.
Example: Marriage
Getting married without a permanent residence is also problematic.
In many European countries the marriage must be registered by the competent registrar. The competency of the registrar often depends on the place of residence of the two would-be spouses. If there is no place of residence it is not possible to ascertain the competent registrar.
In most European countries, a civil union will not be recognised without a visit to the registrar. A church marriage is not legally binding and the spouses therefore have no right to the general legal protection of marriage or the advantages that spring from this. This means they do not obtain the right to split the difference in spousal income or any other tax benefits.
On top of this, if there is a legally registered marriage, the absence of a permanent residence can have other detrimental effects. For example, any matrimonial property which does not constitute a part of the community of accrued gains cannot usually be added to the registered marriage contract. Like the competency of the registrar, the competency of the register court is also determined by the place of residence of the spouses. Adding matrimonial property to the registered marriage contract is very important, because it provides spouses with the right to object to transactions involving the registered property.
Example: The Right to Court Settlement of Legal Disputes
In civil law the competency of the court is determined by the general place of jurisdiction of the persons involved. The place of jurisdiction is usually said to be the place of residence. This means that a court will only take up a case if it is competent based on the residence of the persons involved.
Of course, specific legal disputes may be subject to other regulations, but the significance of the place of residence should not be underestimated. The court competent for disputes involving a particular person is always determined by the residence of that individual. If the place of residence at the time of the dispute is not known, the last known place of residence is used to determine the competent court.
For persons involved in a dispute the latter can have unpleasant consequences, as they may have to travel a long distance and arrange accommodation. They will also have to find legal representation at the location of the competent court, because most legal councils will not travel a long distance to represent a client for small or everyday disputes.
This means that the lack of residence means, that legal disputes can be overly burdensome and very expensive.
Our Advice: Do not trust in an incomplete understanding of the facts; turn to experts to tell you about all the possible pros and cons instead. Our tax consultants and lawyers are there for you!
Important: only one of these criteria needs to be met, in order for a company to qualify as an "Active Company"!
