Best Tax Setup for Digital Nomads

Have you ever wondered about taxes for digital nomads? Do you really need to pay taxes? Starting a business can be a great way to take control of your career and have the freedom to work and live anywhere in the world.

However, one important decision that must be made when starting a business is choosing the right type of corporate entity and the country of incorporation.

This decision will have a big impact on your business’s success and should be taken carefully with professional assistance.

Key Takeways

• Consider corporate tax rates when choosing a country for your business.
• Some countries offer favorable or even zero tax rates with specific business setups.
• Choose a country with favorable business bureaucracy and resources for entrepreneurs.
• Be aware of double taxation implications when incorporating a company in a country different from your residence.
• Understand Controlled Foreign Corporation (CFC) rules to prevent tax evasion, especially when incorporating in a low or no tax jurisdiction.
• Research Double Taxation Agreements (DTA) between your country of residence and country of your business to avoid paying income tax twice.
• Seek professional international tax expert assistance when opening companies abroad for suitable structures and compliance

Open a Business Abroad

One of the main factors to consider when choosing a country of incorporation for your business is the corporate tax rates.

There are locations that offer favorable tax rates, with some even reducing it all the way down to zero percent with some specific business setup.

Another important factor to consider is the ease of doing business in that country.

Some countries have more favorable business bureaucracy and offer a range of resources and support for entrepreneurs, making it easier to start and run a business from another country.

When it comes to choosing the right type of business entity, it’s important to consider the legal and financial implications because some entities offer more protection for the owners while others are more suitable for specific types of businesses.

Taxes for Digital Nomads

If you incorporate a company in a country other than the one in which you are resident, you need to be aware of double taxation implications.

In the country in which you have incorporated your company, you’ll pay the corporate tax, while in your country of residence, you’ll pay taxes as an individual on the income from abroad.

If you are resident in Italy and have your company in UK, you may pay corporate taxes in UK plus personal taxes in Italy.

However, there are some exceptions.

If you are a resident in Ireland, England or Portugal (without citizenship), you can acquire a special status.

This status allows you to pay zero taxes in some conditions.

Each country has its own set of corporate tax rates and regulations, and it’s important to understand the different options available.

Choose the Best Country

In general, countries can be divided into three main groups based on their corporate taxes:

1. Offshore countries, with very little or no corporate taxes, also known as tax heavens or offshore jurisdictions.

These countries offer very attractive tax conditions but are often associated with abusive practices and they are considered non cooperative countries for tax purposes, often blacklisted by many countries.

Examples of tax heavens are Panama, Seychelles and the US Virgin Islands.

2. Whitelisted countries with low tax rates.

These countries have a good reputation and offer favorable tax conditions.

Examples include Malta (5%), Gibraltar (10%), Cyprus (12.5%), Latvia (15%), The United Kingdom (19%) and Estonia (20%), Ireland (12.5%), Netherlands (19%) and Luxembourg (15%), which offer low tax rates and are often used by international corporations as a place to incorporate holdings.

3. Countries which are a mix of the groups above.

These countries has some characteristics of the groups mentioned above.

For example, Delaware, USA (0% tax rate) is not blacklisted and is suited for big companies or businesses that don’t sell to the US. Florida (0% tax rate) is not considered an offshore country. Singapore (8.5% to 17% tax rate) is neither on the blacklist nor on the ‘grey list’ and has a good international reputation.

It’s important to note that the right country and type of business entity for your business will depend on your specific business model, operations and goals.

Keep in mind that in many countries, you are required to get licenses to start a business, this means more research, time and costs.

So prefer countries that don’t request licenses or make this process as easy as possible.

Another important question to address is if you need to be physically present in the country of incorporation and have a local office.

The answer to this question depends on the jurisdiction in which you choose to incorporate your business.

If you live in the country where you incorporate your company or if you have a partner who lives there, you have more options because some countries require a local resident director and this could be yourself or your partner.

However, if you run a bigger enterprise that earns more than 10 millions in profit each year, you may vhoose a set up in countries that require a local functional office, such as in the UAE RAK Free Trade Zone (FTZ) as a foreigner.

But for the average entrepreneur, this option might not be financially feasible.

In some cases, there are jurisdictions where you can pay others to get a local nominee resident director and registered office, however, this can be pricey and may not be the best option for all.

Pay Attention to CFC Rules

It is also very important to be informed about CFC Rules.

CFC or Controlled Foreign Corporation refers to a corporate entity that is registered and conducting business in a country other than the one where the controlling owner resides.

The ownership threshold for a controlled foreign corporation is typically 50% or more, but some countries may have different percentages.

These corporations can be owned by either individuals or companies that have established a foreign subsidiary.

CFC rules were established to prevent tax evasion and each country has its own set of CFC laws, although the structure is similar.

These rules come into play when a controlled company is set up in a low or no tax jurisdiction, such as a tax heaven, and the owner’s resident country has a higher tax rate.

In these cases, the controlling owner is liable to pay tax in their resident country on certain income, whether active or passive, generated by the controlled foreign corporation.

It’s important to note that each jurisdiction has different CFC rules and regulations.

Therefore, before choosing the best country to start your business, it’s recommended to research and check the CFC rules around the world as they can be strict, soft, absent or with exceptions.

FAQs (Frequently Asked Questions)

What is CFC rules?

CFC or Controlled Foreign Corporation refers to a corporate entity that is registered and conducting business in a country other than the one where the controlling owner resides.

What is the best tax setup for digital nomads?

One important decision that must be made when starting a business is choosing the right type of corporate entity and the country of incorporation.

How to avoid double taxation?

Research also about treaties for double taxation avoidance because if there’s none between your country of residence and the one of business incorporation, maybe you’ll end up in paying income tax twice.

Tax advices to digital nomads?

If you want to talk about tax advices to international digital nomads schedule us a call.

Conclusion

This blog post aims to help you make an informed decision and ensure compliance with these regulations to minimize your tax liabilities.

Research also about treaties for double taxation avoidance because if there’s none between your country of residence and the one of business incorporation, maybe you’ll end up in paying income tax twice.

So, find a country with which yours has a Double Taxation Agreement (DTA).

We highly recommend that you talk to an international tax expert when opening companies in other countries.

These services will assess your situation and determine the most suitable structures, while making sure that your paperwork meets the standards criterias.

Do You Want to Setup a Company Abroad?

If you are an international entrepreneur looking for the best tax setup in Europe, we have a blog post about Estonia for Digital Nomads.

Do you want to know more about taxes in Portugal?

Schedule a call with one of our lawyers in Portugal clicking in the button below.