5 tax strategies for digital nomads and location independent entrepreneurs

Last updated January 7, 2017

Dateline: Brasov, Romania

In King, the newest single by British electronica trio Years and Years‘, vocalist Olly Alexander sings about the shackles of a bad relationship and how he wants out.

I’m certainly not a music scholar, but it seems the title “King” is a nod to the feeling of freedom he feels in said relationship. However, in reality, he knows he is anything but free and is asking to be let go from the sense of false freedom.

It sounds a lot like expats doing taxes.

I caught you watching me under the light

And oh, oh, oh
I was a king under your control
I wanna feel like you’ve let me go
So let me go

The phenomenon of digital nomads spawned by books like The Four Hour Workweek is huge. Thousands of people have quit their jobs in the United States, Canada, Australia, and Europe to live overseas in Southeast Asia and other emerging countries. No doubt, many feel like kings.

Here’s the dirty little secret: many digital nomads and location independent entrepreneurs are not in tax compliance back home. I call this “The Nomad Trap”; the idea that simply leaving your country as a tourist is enough to keep you from paying tax. If you’re in this boat, the fines and penalties could be huge. Even I have trouble keeping up with the endless tax laws these governments put out.

On top of that, most digital nomads I’ve met in my travels haven’t properly structured their affairs to legally reduce or eliminate taxes. While some people unnecessarily set up offshore companies, others who need them totally ignore that.

Hopefully, you know by now that simply leaving your home country for greener pastures doesn’t mean an end to your tax obligations… especially if you’re a US person.

Just as in the song, you may feel like a “king” or queen with the freedom that being a digital nomad provides. However, maintaining your home country’s passport means you are still a king under the control of that government.

If and until you give up your citizenship, you have to play by their rules or risk the penalties of non-compliance. As always, ignorance of the law is no defense to tax authorities. And as of 2017, countries like Australia have been issuing more and more strict tax rulings to non-residents.

If you want to truly be free and not under the thumb of your local tax authority, here are some important steps. It doesn’t cost a lot to get started, but doing this stuff right from the beginning can save you countless hours of time and great expense.

As they say, an ounce of prevention is worth a pound of cure. Which is why we’ve taken the time to tell you about these five important tax strategies for digital nomads.

1. Become tax non-resident in your home country

This was one of the big discussion points at my private club meeting in Monaco earlier this month. More countries are raising the stakes for their citizens to escape taxation at home, even when your primary home is overseas.

For digital nomads, this can be especially challenging. Countries like the UK, Australia, and others limit the amount of time you can spend there once you’ve ticked the box to have your tax domicile located elsewhere.

That’s why obtaining a second residence can be an important step for digital nomads. Historically, many people obtained permanent residence in countries like Panama, but in my opinion, Latin America can be needlessly bureaucratic and surprisingly expensive. Options in eastern Europe and Asia are often more attractive, although the choice is yours.

Putting down roots in your country of residence can help your case even more. This includes renting an apartment, getting a drivers’ license, joining a country club, or docking your yacht at the local marina. Every little step helps.

For US citizens, being tax non-resident can be as simple as spending 330 days in foreign countries in any 365 calendar day period. However, you still have to structure your company properly to avoid paying a minimum of 15.3% tax for Social Security and Medicare.

2. Earn your money in an offshore company

All too often, I see entrepreneurs, and especially consultants, living overseas earning money in their personal name or even using a corporation in their home country.

There’s a reason you left California, and you ought to ditch your California LLC, too. Around our office, we refer to California as a sort of plague. There are some circumstances where using a corporate entity in your country of citizenship can be useful; in some cases, you can even structure it to be tax-free. It’s better to have an offshore company, though.

However, doing business in your own name may qualify you for tax exemptions like the Foreign Earned Income Exclusion in the United States, but it may leave you open to other taxes as mentioned above. If you’re not a US citizen, you could still be on the hook for income tax on your entire business profits if you mess up on step #1, or if you spend too much time somewhere else.

3. Be careful where you live

Being a digital nomad or perpetual traveler is all about being able to call anywhere “home”. Just make sure your definition lines up with that of the tax authorities where you lay your head.

Here in Europe, most countries practice what is called “residential taxation”. Live there long enough — often 183 days or more per year — and you’ll be taxed on your worldwide income. Some countries aren’t as aggressive as the United States at taxing your foreign investment income, but you can’t be too careful.

Fortunately, many of the countries sought out by nomads practice “territorial taxation“, which means that only income you earn in that country is taxed. Malaysia, Singapore, and Panama are a few examples of this. In simple terms, that means that earning money in an offshore company and not remitting it to where you’re living can keep you tax-free.

Of course, the United States is the most aggressive of all with what is called “citizenship-based taxation”. If you follow these steps, though, you stand a good chance to eliminate most forms of tax… unless perhaps you’re the sole employee of a business doing $20 million in profit.

If you travel from place to place as a tourist, you’ll enjoy the best of both worlds. Just be careful; the US can tax you if you overstay your welcome as a tourist. I think it’s written on the Statue of Liberty under “your huddled masses yearning to breathe free”.

4. Bank overseas in a foreign currency

Your newly internationalized business should use foreign currencies as a diversification tool. If you’re from the United States, holding US dollars in your personal and business account can be a ticking time bomb.

It’s easy to hold foreign currencies in offshore banks, and currency exchange rates in some of the large wealth havens in Asia are often excellent.

Banking offshore helps bolster your case that you’re truly a global citizen, not just someone on vacation. Again, every step in that direction helps.

5. Have an accountant that specializes in expat tax law

When I operated and invested in businesses in the United States, I retained the top tax firm in town. My annual tax return looked like a small town phonebook. Paying that firm thousands of dollars a year was well worth it, despite some of my employee friends who thought paying more than $399 at H&R Block was insane.

That said, the minute I saw the light and started applying offshore strategies, I found tax counsel that understood what it’s like to be an expat. For as expensive as my US-based firm was, they didn’t understand stuff like the FEIE or what an FBAR was. It rarely came up among their clients. Hiring an expat-focused tax preparer doesn’t have to be expensive. In fact, my expat tax attorney costs about the same as my high-powered domestic firm when I lived in the United States.

If you need help applying these tax strategies, apply here to see if you qualify to work with me 1-on-1 and avoid the tax pitfalls location independent workers face.

Andrew Henderson
Last updated: Dec 28, 2019 at 4:59AM

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19 Comments

  1. Greg Jorgensen

    Item #4 above seems to imply that holding assets in foreign currencies in overseas banks will let one avoid FBAR/FACTA reporting. According to the IRS publications assets denominated in foreign currencies are converted to US$ for reporting purposes.

    If I am not understanding the reporting rule, or what you mean in this article, please explain.

    Reply
    • Andrew Henderson

      Yes, all amounts held in overseas banks are reportable once reaching the threshold, regardless of the currency they are held in. The IRS has rules for determining the US dollar equivalent of each year’s high balance.

      Reply
    • paulie9

      You may have read too much into it. I think he means a time bomb in the sense that US Dollars are fiat and could be devalued at any moment. Holding the local currency and Yuan and Swiss Francs may be a safer strategy for example. In the past he has stated that we must always report ALL accounts etc. for the reasons you stated.

      Reply
      • jonkruse

        Interesting because argentina uses US dollars because their currency is a ticking time bomb and devalued at any moment.

        Was this just a fear 2 years ago for US currency or a realistic one today.

        Reply
        • Joe

          I believe the author was referring to the fact that assets held in a government-controlled currency are ultimately under the control of the government which controls the currency. For example, if a government decided to go cashless and allow electronic currency only, that government would have full and total control over all assets held in that currency, including the ability to track each currency unit, deduct taxes at any rate it chooses, or simply relieve you of all said assets if it sees fit. Holding your assets in multiple currencies diversifies the risk by placing your wealth at the mercy of multiple governments rather than just one.

          Reply
  2. Joanne Munro

    Hi there, I live in the UK but travel around a lot. I make money solely by selling digital products and courses (the buyers are international) and not by offering my services. If I became a digital nomad (spending up to 3 months in one place) then who do I pay tax to and how can I lower it? Thank you in advance – the world definitely isn’t set up for this way of living!

    Reply
    • Gregor

      Did you ever find an answer to your question? I have the same question but with Canada.

      Reply
      • Matt

        As long as you do not establish residency in another country, you are still a tax resident of Canada no matter how long you are abroad. You should still file taxes in Canada on all income as if you’re living there.

        Reply
    • MrFinance

      If i were in your position, i would incorporate in a coporate tax free destination and not be liable for said taxes

      Reply
    • Sandy Mc Rose

      That depends on your turnover and profit

      Reply
  3. Nancy

    My sister recently married and her new husband is a Scot living in the US. My sister is 1/3 owner of a small medical billing company. They would like to move to Scotland and she would like to work from her new home instead of her US office. One business partner, who is going through a divorce, is threatening to tie her up with litigation if she moves. She says that she cannot work legally from another country. My sister believes that she just wants a larger cut of the profits for herself because she is going to need a larger income in order to “maintain her lifestyle”. The third partner has some reservations since they both answer telephones, taking turns when the other is busy, and my sister collects the mail and pays the bills. Otherwise, she can work do her share of the work from anywhere. My sister’s income is under $100K. Do you have any suggestions? She has tried to find lawyers to help her understand what she can and cannot do since she thinks her partner is just making up reasons to force her out. So far other lawyers have taken money and offered no real advice on the situation.

    Reply
    • Graham Campbell

      I would buy out one of the other partners to have the majority shareholding and set the rules to suit myself. Failing that – sell out your share. The other partners have displayed their true colours and it will end in tears or a backstabbing.

      Phones can be managed via Skype or voip systems but some people are a bit backward with technical innovation. A friend set up a small Asterisk server and now the entire worldwide clan operates on voip with a speed dial number per person. I believe he set it up as a single phone number with extension numbers.

      Reply
  4. John

    Regarding best foreign currencies to hold in foreign banks like HSBC in Hon Kong, I lost a 20% value on my swiss francs around 2011; the yuan, about 4% over the last two years; and the HKD (local currency is pegged to the USD; so if the ISD drops in value I suspect tge HK Monetary Aurhority wiuld depeg which is questionable or the valie would drop along with the USD….

    Reply
    • Graham Campbell

      The SG and HK banks have in excess of 20% equity. ALL the western ones have 2-3%.
      THAT, to me, is more important than a few Forex losses. When the balloon goes up – the Asian banks are better placed to weather the storm. HSBC allows you to hold many currencies, so I collect and hold a basket then spend accordingly.

      Reply
  5. John

    Sorry about all the typos

    Reply
  6. Nick

    Hey Nomad, been following your writing for a while, you’re quite an inspiration and a great source of knowledge. Thanks! I have a situation which seems to be unique, insofar that I can’t seem to find anything about it on the web. I have 3 citizenships at the moment, US and from 2 EU countries. I am however not a registered resident anywhere. Not even a default resident. The last country I lived in and was resident of I de-registered and filed my final taxes when leaving. No nation’s government knows where I am… I am of course still filing tax returns in the US every year, however I intend to renounce my US citizenship soon and as I understand when I do so I will need to prove to them that I am allowed to legally stay in the country where I do the renouncing, which, being in the EU, I am. I make my living from trading, so I don’t have a company to worry about, I already have both US and EU bank accounts. All the info I find deals with people managing their “home” country’s tax requirements, but once my US citizenship is gone, I won’t have one. Do I have it “made in the shade” so to speak, or is there some nasty surprise waiting for me somewhere…?

    Reply
    • Stasa Momcilovic

      Hello Nick,

      Thank you for your comment!
      If you are interested you can send us your application and we’ll see how we can help you.
      Here is the link https://nomadcapitalist.com/apply

      Reply
  7. John

    Hey NC….
    I work as a consultant in a Bitcoin related finance company.

    As everyone, I am happy to pay my taxes, just looking for a way to pay less of them. I have an LTD in UK, and I was wondering what country you would suggest for lower taxation. In addition, besides being a consultant, I also trade;

    I was wondering if you can cover such a topic as a whole, as lately seems to be a very common thing, in terms of more and more people have started trading Cryptocurrencies and have a 2nd regular job.

    I live in Italy and I plan to live here. Italy however has also a high tax rate, so I was wondering how can I live here and pay less taxes?

    In addition, I have heard that recently Portugal announced that crypto profits from trades won’t be taxed.

    What would your suggestion be? Where do you think I should create a company, and how to make it so that I dont pay high taxation here in Italy?

    Reply
    • Stasa Momcilovic

      Hello John, thank you for your comment!
      If you are interested you can send us your application and we’ll see how we can help you.
      Here is the link https://nomadcapitalist.com/apply

      Reply

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