Difference in lifestyle, commitment, pros, cons and compliance regulations
A digital nomad travels frequently, working remotely and only staying in a location for a few weeks or months, while an expat moves to a new country to live for a longer term, often for a career opportunity, family, or stability. DIY expat basically involves individuals moving abroad for personal reasons without or with little employer’s relocation package and support. They are handling their own tasks, which includes managing the process of moving, finding housing and navigating immigration. The key difference is the nomad’s constant movement versus the expat’s goal of settling down in one new place.
Digital nomad
- Lifestyle. Nomadic and flexible, with frequent travel between different locations.
- Commitment. Short-term stays in each place for a few weeks up to a few months.
- Work. Remote, online work from anywhere with an internet connection.
- Pros: Full-time travelling, flexibility, cultural experiences, personal growth, and freedom.
- Cons. Difficulty forming long-term relationships, potential loneliness, and the cost of frequent travel.
The nomad’s constant movement provides opportunities for income tax planning. It is possible to legally pay zero or minimum taxes by understanding the tax residency rules, choosing the right countries, and leveraging international tax benefits.
- Tax residency rules. The tax obligations depend on which country the digital nomad is considered a tax resident. Avoid becoming tax resident in countries with high tax rates by managing the time spent there and documenting travels properly by means of a travel calendar, including supporting documents.
The criteria for tax residency vary considerably from jurisdiction to jurisdiction. For individuals, physical presence in a jurisdiction is the main test. However, some jurisdictions also determine an individual’s residency by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests.
- Zero tax countries. As you may have read in our series of articles about digital nomads, countries such as UAE and Panama offer no income tax schemes, ideal for digital nomads earning their income from abroad.
- Special visas, if required. Many countries offer digital nomad visas that allow living there while benefiting from favorable tax laws.
Main compliance issue is keeping a solid administration and observing the rules of the involved countries, especially about tax residency.
DIY expat
- Lifestyle. Settling down in a new country for a longer period of time.
- Commitment. Medium to long-term, sometimes permanent.
- Work. Involves a career opportunity in the new country, which often requires work permit and local employment.
- Pros. Stability, cultural immersion, community building, friendships, and potential job security.
- Cons. Fewer travel opportunities, less freedom, and the high cost of moving and starting over.
Employment in another country entails various obligations and may require special attention to certain issues depending on the chosen structure.
- For work and residence permits a local employer is required as a sponsor.
- Employment contract. An employment contract is required considering mandatory local employment regulations and obligations.
For an international group of companies there might be a potential issue about the formal and material employer concept. The difference is that a formal employer refers to the legal structure of employment, which is based on formal, written contracts that define the employment relationship. A material employer refers to the practical circumstances, e.g. the authority to provide instructions in which manner the work must be performed; controls the work and has the responsibility for the place at which the work is performed; puts the tools and material necessary for the work at the individual disposal; carries the risk of the activities performed; bears the costs of the services rendered.
- Most countries offer special and favorable tax regime if, for example, the employee was hired while living abroad and has lived abroad or outside a certain region during a certain period.
- Often the employer is required to set up a payroll for withholding and remittance of wage taxes on periodically basis.
- Corporate tax / permanent establishment. This may be an issue especially if the employee is involved in sales activities for a foreign entity within the group of companies. To avoid a permanent establishment for corporate income tax, the following practical matters should be considered to reduce the risk of inadvertently creating permanent establishment: all prices should be determined outside the country, including any bulk discounts, , price negotiations should take place outside the country, other contractual terms should also be determined or negotiated outside the country, contracts with clients, regardless of their locations, should not be signed outside the country and fragmentation of core business activities to meet preparatory or auxiliary exception should be avoided as well considering BEPS Action 7 considerations.
Generally, a permanent establishment is a business premises in another country that is equipped with sufficient facilities to operate as an independent business. Examples of a permanent establishment include a store or other permanent sales outlet, a workshop or factory with offices. The following business premises are not a permanent establishment, a warehouse, a goods depot, an establishment that carries out solely support activities, such as research, advertising or the provision of information.
To avoid costly surprises, always consult a tax professional for personalized advice.
