Remote working and digital nomadism have been on the rise since the beginning of the pandemic. More and more people are starting a new life abroad without necessarily being aware of the tax rules and requirements in their expat country. Taxes are far from being their primary concerns. And yet, tax residency is a crucial factor, considering that there are tax treaties between your expat country and your home country, and depending on your personal situation. How can expats be in line with tax rules?
Taxes rules and tax residency
Establishing your tax residence is the first step to filing your tax return. For instance, you have to be aware of the taxes you have to pay in your home country and in your expat country. In general, tax residency meets at least one of the following criteria: your main residence is in your home country, your main professional activity (whether you are employed or not) is carried out in your home country), and whether most of your income (salaries, assets, investments, etc.) are in your home country. If your home country remains your tax residence, you will have to pay tax on income from all sources. If you have your tax residence in your host country, you will only pay tax on income from local sources, depending on their nature and whether or not there is a tax treaty between your home country and your host country. Expat taxes therefore vary from one country to another, depending on these factors.
It's worth noting that the notion of tax residency is specific to the individual. Someone can be a tax resident in their home country, and their spouse considered a non-resident. If you are the only one moving abroad while your family remains in your home country, this might affect your tax residency. If you have assets in your home country, you will continue to pay property tax and tax on rental income (if the property is rented). If you sell property, you will have to pay the capital gains tax following the sale. At the same time, employees who have been transfered by their companies are usually eligible for tax exemptions during the period of activity abroad, under certain conditions. Meanwhile, cross-border workers have to pay income tax in their country of residence.
When there is a tax treaty between two countries
An expatriate can be considered a tax resident of several countries under certain conditions, for example, if they have retired in one country but are receiving their pension from another country). However, many countries have signed tax treaties to avoid double taxation. In presence of a tax treaty, the amount is calculated according to different taxation methods: minimum tax rate (depending on the progressive scale), and average tax rate.
In the case of an expat living in a country having a tax agreement with their home country, income from their home country, including salaries and pensions paid by the home country, must be declared. This also applies to income from liberal or independent activities carried out from a structure domiciled in their home country, income from independent industrial or commercial activities carried out through a structure established in their home country, real estate or movable income located in the home country, dividends paid by a company in their home country, life insurance taken in the home country, etc. Consider having a look at the tax treaty between your home country and your expat country, especially if you have movable property, real estate and/or stock assets in your home country. Remote workers and digital nomads abroad are advised to pay particular attention to these aspects.
Beware of tax deductions as well as these might vary depending on the country you are a tax resident in.
Other points to consider
What is tax evasion? For an individual or a company, tax evasion means reducing the amount of tax you are required to pay by transferring your assets to a country offering more tax benefits. While tax evasion involves legal procedures, it remains ambiguous. It is on the borderline between tax optimization (lowering taxes legally by respecting tax rules in a particular country) and tax avoidance (using illegal means to pay less tax).
The first step to avoid tax evasion is to declare your taxes on time. Indeed, failing to file a tax return is considered tax evasion. The same applies when you don't disclose taxable income or property or income. Expatriates are therefore responsible for listing all their taxable income. It's worth noting that insolvency is also considered fraud. Any deliberately incomplete or false declaration will be sanctioned.
Beware of bank accounts. In theory, expatriates are allowed to open a bank account in several countries. But in practice, the opening of a new account remains subject to the tax regulations in force in the given country. So make sure to check with the tax authorities of the country in which you will be paying taxes. Opening an account in another country without declaring it to its tax authorities is considered tax evasion. Likewise, while owning dividends and receiving other income abroad is not illegal, it is mandatory to declare them.
Some countries have also implemented an exit tax for taxpayers who transfer their tax residency abroad. You, therefore, have to be careful. It is your responsibility to file all the documents concerning the activities covered by the exit tax. Many countries are currently stepping up their control mechanism to prevent tax evasion. In general, large groups and companies are frequently mentioned, but small structures and individuals are also concerned by these measures. In case of doubt, the best thing to do is to check with tax authorities as soon as possible.
