16 December 2021
Many column inches have been devoted to the new ways of working that are now available as a result of the coronavirus pandemic. Those who historically have worked in an office no longer have to be office bound, with technology leaping ahead to provide remote working solutions for many. In what feels like an ever-shrinking world, those remote working solutions can be accessed from virtually anywhere. Those who hanker after the sun can, in theory, work from the beach or poolside.
But while the technology might be in place for remote working, international borders, legal requirements and local considerations are not always in tune. Tourist access to a country is often easy to obtain, sometimes requiring a visa, but may also come with restrictions on the ability to work there. For many countries, protecting the local job market is important.
However, foreign visitors also generate economic benefits by bringing in funds from overseas that are spent locally. Recognising the potential for remote working to provide this local benefit, many countries are now embracing the concept of the digital nomad visa.
What does it mean?
The idea is quite simple. Individuals working remotely are able to obtain a digital nomad visa, giving them permission to stay in the country longer than the traditional tourist visa and also to work while living there. The pool of people to whom this option is attractive is predominantly professionals, freelancers and entrepreneurs and competition is developing around the visa offering.
Some countries (such as Croatia, Estonia and Greece) offer a visa that is valid for up to a year, while others offer visas for a longer period. For Italy, the initial visa is for two years, after which it can be extended, and the Portuguese digital nomad visa offers a pathway to permanent residence. Croatia, Greece and Italy are offering tax incentives to attract nomads and Iceland also allows their families to relocate without additional visa requirements.
But what about tax?
As tempting as it may be to live and work abroad for a time and benefit from these tax incentives, care must still be taken with the tax position in the country of origin. Someone leaving the UK to work abroad still needs to apply the UK statutory residence test and consider the time they are present in the UK, whether or not for work, as well as their other connections to the UK, to determine their UK tax residence position. Depending on the timing of departure in a tax year, the connections they retain and the amount of time spent working abroad, it is possible to still remain UK tax resident such that income earned abroad would remain taxable in the UK.
For those who own their own company, there are other bear traps to beware of. It is possible to move the residence of a company for tax purposes where management and control rests in a jurisdiction that is different from the country of incorporation. This could result in increased tax liabilities for the company where the overseas tax rate exceeds the UK rate, as well as increased administration costs. It is also possible for a company to become simultaneously resident in both jurisdictions in some circumstances, with scope for double taxation of the same profits. If the company residence point is missed, penalties for non-compliance with local tax regimes can be severe.
Even in circumstances where the place of management and control of a company remains unchanged, the relocation of senior staff can create a taxable permanent establishment in another jurisdiction, with profits attributable to that permanent establishment being subject to tax in the overseas country and associated additional administration issues to contend with. Local employment taxes may also apply, including social security, and local payroll filings may be required.
Other tax issues
Permanent establishment issues are not confined to companies, and partnerships can equally find themselves with complex tax situations to deal with where one or more of the partners works remotely. A permanent establishment in these circumstances can create foreign tax liabilities for all the partners with significant additional reporting requirements.
The position of consultants who operate through their own service company has been the subject of targeted legislation over the years in the UK, due to the perception of unfair tax advantages, but many of those who operate in this way still see themselves as self-employed. Digital nomad visas could provide flexibility to this sector in where they provide their services, but the tax issues are likely to remain, along with the additional compliance required by IR35. It is also possible that other jurisdictions will have similar rules.
Remote working from abroad certainly has its attractions, but it’s not quite as straightforward as booking some accommodation and setting up the laptop. The digital nomad visa will help with some of the historically grey areas legally but, for the time being at least, it seems likely that they will mostly appeal to a narrow category of the genuinely self-employed, who do not have to contend with some of the most complex areas of international tax.
As always, the tax aspects can be complex and anyone considering a move abroad should take formal advice, so they fully understand the implications and requirements before doing so.
For more information, please get in touch with Shirley McIntosh, or your usual RSM contact.