Digital nomads, international remote working and tax implications

Digital nomad arrangements are becoming very popular. Although there is no single definition of a digital nomad, the concept tends to encompass remote workers who regularly travel while working. These could be employees or self-employed people who use digital telecommunications technology to carry out their work. Traditionally, digital nomads were mostly self-employed people but since the start of the COVID-19 pandemic, the number of digital nomads who are employees has increased exponentially.

There is a wide range of digital nomads. Some could live completely nomadic lives with no permanent home base, moving from one jurisdiction to another. Others might only work remotely for short periods of time, or during workcations. The rise of digital nomads means that the workplace is no longer geographically restricted, with flexible location-independent working arrangements on the rise. A working environment with remote work is now the rule rather than the exception. However, complete freedom for international remote work is still rare due to a number of obstacles such as local immigration rules, employment, tax, social security etc.

Although many digital nomads might rely on tourist visas to work from a jurisdiction, working on a tourist visa for extended periods might be against local law. Getting a work permit or work visa each time a nomad goes to a new jurisdiction might also be too cumbersome. In order to cut down on red tape and boost the economy through tourism, many countries now give out digital nomad visas. The conditions of such visas vary and could include a minimum earnings threshold, private health insurance, proof of employment, police background checks etc. Cyprus also has a digital nomad visa scheme and in March 2022 increased the number of available visas from 100 to 500.

Taxation is one of the biggest obstacles to international remote work.

Depending on each country’s tax residency rules, a digital nomad might be found to be tax resident in the jurisdiction they are working from. This could lead to double taxation if the jurisdiction of his employment continues to tax him/her as resident. Sometimes, double taxation is eliminated through tax treaty mechanisms or agreements between tax authorities, but this is not always the case.

Even if the digital nomad is not found to be tax resident in the jurisdiction they are working from, or if they are found tax resident, double taxation is avoided, a travelling employee could trigger taxation for the employer in the form of a permanent establishment. Generally, countries can tax non-resident companies or individuals if they have a permanent establishment in another jurisdiction. Therefore, the foreign employer could be taxable in the jurisdiction where the employee is working from if under local rules, the activities and overall working arrangements of the employee give rise to a permanent establishment.

Although each jurisdiction might have its own rules in determining when a permanent establishment is established, there are several common triggers derived from the OECD Model Tax Convention, which jurisdictions tend to follow. An employee who has an office or fixed place of business in another jurisdiction could trigger a permanent establishment for their employer. This can include a co-working space, hotels, Airbnb spaces, if they are paid and chosen by the employer and especially if they are used repeatedly by the same employee or other employees of the same firm. In some jurisdiction, a home office might also be considered as a giving rise to a permanent establishment.  

A permanent establishment might also be triggered by having someone locally who has the authority to sign contracts on the employer’s behalf, or who has an executive or senior management role, or who provides core business services or undertakes sales activities.

If a permanent establishment is established in the jurisdiction where the remote work is taking place, then profits of the employer/company might be allocated (and taxed) by that jurisdiction. This could have serious cost implications, especially if the remote worker is in a senior management position. Let us not forget that prolonged presence of a director of a company in another jurisdiction could affect that tax residence of the company.

Apart from the taxes that may be due (which could be negligible), an employer who has a permanent establishment abroad might need to register the permanent establishment according to local rules. This can be a significant burden especially for partnerships. The employer might also have to run a local payroll and undertake transfer pricing analyses to show the allocation of profits to the permanent establishment. This is likely to be costly, especially if the employer has no foreign presence elsewhere.

EU nationals who wish to work remotely within the EU obviously do not need a digital nomad visa, as they benefit from the EU’s freedom of establishment and the free movement of workers. Nevertheless, EU nationals face the same tax issues, as far as the possible change of tax residency, or creation of a permanent establishment. It is up to Member States to decide whether a remote worker is tax resident in their jurisdiction, or generates a permanent establishment of their employer. EU law and the fundamental freedoms are not triggered, unless there is discrimination (i.e. different treatment of a foreign remote worker with a resident remote worker).

In order to mitigate the tax risks, companies/employers need to assess and approve requests for travel on a case-by-case basis, as the threshold for triggering a permanent establishment might vary under local rules. So far, tax rulings in this area have gone in all directions. We will be reviewing these and the situation in Cyprus in the next instalment of this newsletter.