Slack from Sicily. App development in Abu Dhabi. Time sheets from Thailand.
Work-from-anywhere policies and digital nomad visas have created a wealth of opportunities for remote work and shifted immigration and mobility choices from the employer to employee.
But as countries promote their digital nomad visas—28 and counting, according to the OECD—the tax rules have not always caught up, leaving employers, employees, and independent contractors to determine their tax liability.
“You have all these burdens from a tax and legal perspective that if you don’t take this into account, you might have a really big problem for your company,” said Ana Vieira, senior director of finance, tax and accounting for the employment solutions company Remote.
Employers, especially technology companies, feel compelled to allow remote work to attract and retain talent. Gartner, Inc., a research and advisory firm, predicted in 2021 that by the end of that year 51% of knowledge workers worldwide expected to work remotely. Gartner also found that organizations that wanted a full return to the office risked losing up to 39% of their workforce.
But the true nomad worker—moving every few months from place to place—is more dream than reality.
Many businesses adopt the same practice, offering employees up to 90 days of international work per year in an effort to avoid tax and visa issues while meeting staffers’ demands for alternative work arrangements, said Richard Tonge, who advises tech clients as a global mobility services principal at Grant Thornton LLP.
The 90-day threshold can be found at the likes of Airbnb, Shopify, and Wise. That’s well short of the 183-day residency rules in most tax treaties that trigger a host of tax obligations for workers and companies.
“It’s a bit of a myth that this digital nomad thing really, really works in the long term,” said Sam Ross, a Remote vice president and general counsel. “This whole idea of an employee kind of moving from one country to the other and updating the employer as they go—in my opinion, it’s not actually realistic.”
Tax Policy Hasn’t Kept Up
Part of the reason companies land on 90 days is because it feels like a reasonable amount of risk given the “inexact science” of navigating double tax treaties, domestic tax law, and immigration rules, said Tonge.
Employees must pay taxes based on their country of fiscal residency, and that can get complicated.
For instance, a worker for a company registered in Malta who wants to live in Germany for more than six months a year has to register and start paying taxes in Germany, said Bogdan Danchuk, founder of EasilyGlobal.com, a digital nomad immigration and tax advisory service.
But their employer is likely taking out taxes in Malta, especially if that’s where the staffer was hired. So the worker would have to contact the two tax administrations to figure out how to get some of those Maltese taxes back. The rate is ultimately determined by the tax treaty between Malta and Germany, and could differ if the employee moved to another country. Of course there’s a chance the German tax authority won’t realize it is owed money, but that’s a risk, Danchuk said.
Countries’ policies on digital nomads, particularly post-pandemic, are constantly evolving, creating an added layer of complexity, especially for small businesses, said Anna Downey, co-founder of Buzzbar, a pay-as-you-go digital marketing services company, and a quasi-nomad herself.
Downey launched her company in the UK but now calls Madeira in Portugal home for more than six months a year, traveling to the UK and globally the rest of the time.
Companies need to know whether there’s a double-taxation treaty between governments where the employer is based and where the employee is working. They also have to check on social security withholdings and visa requirements.
For example, Vieira cited a Remote client that had company headquarters in Germany, a UK-based CFO and a US-based CEO. The C-level positions triggered permanent establishment in both the UK and the US, but because neither lived nor worked in Germany, the company ultimately didn’t owe taxes there.
Countries have been quick to announce new policies or propose new rules around remote work, but a proposal is not the same as finalized tax regulations.
Costa Rica announced in 2021 that it would have a new digital nomad visa, but it was focused on immigration, not taxes, said Tonge. The final version, in addition to the easier visa process, exempts both the employee and the foreign company employer from tax status in Costa Rica.
Spain introduced legislation in 2021 to expand its so-called Beckham Law, named after David Beckham, the British soccer star who in 2003 joined the Real Madrid club. The program creates a lower tax rate for certain types of employees who move their residence to Spain and excludes from taxation income earned outside of Spain, offering significant tax benefits.
But the expansion of the law is not in force yet—tax advisers and their clients are still waiting for the government to make it official, explained Marta Ramos, an international tax manager for Grant Thornton in Spain.
Companies and start-ups have to adapt and support their employees more quickly than countries can change their policies, Downey said. And not every company can pay a Big Four accounting firm to help navigate compliance, she noted.
“You’re trying to plan and manage and grow a business based upon things that you either speculate or consider will or are happening, but there’s no detail on it,” Downey said.
Up to Interpretation
While the law in many places sets a threshold of six months for when an individual becomes a taxable resident, that tax obligation falls on the employee. In some localities, the employee’s tax residency might trigger registration requirements for the employer to withhold wage tax, social security, or both.
It can also change from one country to the next.
“Companies don’t know how tax authorities are going to look at this. And will they go after it? And are they going to have exposure?” said Tonge.
Since practically the start of the pandemic, Tonge has been fielding multiple queries each week from current and potential clients about how to be compliant, but tax law has not kept up with the fluidity of the global workforce, he said.
That said, it’s rare to see countries come after a company with fines or legal repercussions for an employee who stayed longer than six months without paying taxes, Danchuk said.
He thinks companies shouldn’t be cowed into “extreme cautiousness” when it comes to remote work. Danchuk said he recently met in Lisbon with a digital startup that was founded and based in Copenhagen, and decided to open a second headquarters in Lisbon. But the majority of its workforce will sign fully remote contracts with the option to come into an office or to do trainings for just a few weeks a year.
“A lot of talent is being shifted to companies which adapt that flexibility,” said Danchuk.
But Ross said there are good reasons for companies to err on the side of caution, particularly those aiming to remain compliant at the same time they are trying to grow and entice investors.
“Frankly, no one really knows what’s going on,” he said.
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