Using remote working to travel abroad looks attractive, but it can come with a large tax bill – The Irish Times
Seeing Instagram posts of people working poolside in the tropics while slogging our way to work in the depths of the Irish winter would seduce even the hardened office dweller to go remote.
While so-called digital nomads have been around for decades in different forms, we saw an explosion of them during the pandemic thanks to employers realising that work could get done in places other than the company office.
Forbes reported that in the first year of the pandemic alone, the number of digital nomads jumped 50 per cent to 11 million in the US, increasing to 15 million by 2021.
These days digital nomads encompass the self-employed like freelance copywriters who take clients from all over the world to people doing a steady 9am-5pm in tech.
They just happen to do their hours from Oia in Greece instead of the office.
Thanks to companies instituting remote working policies by popular demand, work from home for many has expanded from “working from your kitchen table” to “any kitchen table in the world” as long as it has a similar time zone and fast internet.
For those lucky enough to avail of freehanded “work while you roam” employment conditions, it makes sense to work in a country of their preference.
With Ireland offering little incentive in the cost of living or sunshine departments, many are viewing digital nomading as a way to bypass crippling rents.
Aside from sun, surf and sand, tax advantages are also on the nomad’s checklist with certain countries rolling out the low personal tax rate red carpet for cashed-up foreign workers in hopes of an economic and industrial boost.
Portugal offers non-habitual residents a 20 per cent flat tax rate on qualifying income, a massive discount compared with the up to 48 per cent Portuguese residents have to pay with an added exemption from wealth tax thrown in as a sweetener.
Income earned offshore is not subject to local tax and people can avail of the tax regime for 10 years.
Tax advantages coupled with one of the lowest costs of living in western Europe has seen Portugal and, in particular, Lisbon top the most desirable locations for digital nomads.
The LA Times reported that American citizens living in Portugal shot up 45 per cent in 2022 as the country’s house prices increased nearly 19 per cent in the past year thanks to foreign buyers, according to Bloomberg.
Some locals have protested about gentrification and housing squeezes they say are caused by digital nomads at last year’s Web Summit.
One banner read “1 digital nomad = many forced nomads” in response to the increased rent forcing out original inhabitants.
Ethical dilemmas haven’t deterred the nomads from flocking to Portugal, which CNBC last year described as “a cool place to start over” for “burned-out millennials”.
When the United Arab Emirates introduced a one-year visa for remote workers, many assumed they could skip off to Dubai and avoid all personal income tax like the locals.
However, this visa requires the applicant to earn at least $3,500 (€3,200) a month from their employment with an organisation outside the UAE.
Meaning many would still be subject to paying some tax to another country particularly if their country of residence and the UAE does not have a tax treaty that allowed exemptions.
Things can get pretty complicated when trying to work out how much tax you might owe when you get paid by a company in one country, ordinarily reside in another but are living it up in an entirely different one again.
The last thing anyone wants to bring home with their tan is a large and unexpected tax bill, which happens more often than you think, according to Stephanie Wickham, managing director at Expat Taxes.
Wickham founded her company after noticing there was a gap in the market for tax advice tailored to the large number of expats (returning and leaving) in Ireland.
“The interest at the minute is unbelievable because digital nomading is quite sexy. People know they can earn similar salaries and pay cheaper rent,” Wickham explains.
“But people say funny things like you can’t be taxed twice because it’s in the agreement but the double tax agreement doesn’t say anything like that.”
Wickham explains that such agreements don’t make it illegal for you to pay tax on the same thing twice. Instead, they offer credits for tax you have already paid in one country to reduce what you might be liable for in the other.
Only advice from qualified professionals in their respective jurisdiction will prevent legal and financial headaches down the road
— Stephanie Wickham, managing director, Expat Taxes
While digital nomading can look financially attractive, it can get expensive when it comes to managing your tax affairs.
“You need to get advice from both sides, from the Irish side and the foreign side. That’s two tax advisers so that adds up,” said Wickham.
Wickham stresses that only advice from qualified professionals in their respective jurisdiction will prevent legal and financial headaches down the road.
According to Revenue, if you have been tax resident in Ireland for three consecutive tax years, you become ordinarily resident from the beginning of the fourth tax year. If you leave Ireland after this time, you continue to be ordinarily resident for three consecutive tax years.
For these three years you must pay Irish tax on your worldwide income except for income from a trade or profession, no part of which is performed in Ireland; income from an office or employment, where all the duties are performed outside Ireland; and other foreign income, for example, investment income, if it is €3,810 or less.
People should also be aware of the different tax years that operate in other countries. For example, in Ireland it runs from January to December but in New Zealand it goes from July until the June of the following year.
This is important when would-be digital nomads are trying to establish tax residence because it usually requires spending at least six months in a place in the same year.
Wickham says the Irish system is “pretty straightforward” in some respects for PAYE workers.
“If you have someone who is Irish, is a resident and they are in the country for more than 183 days in the year then they are a tax resident,” Wickham explains.
Or residency can apply if you spent 280 days in the country over two years which means choosing a leaving date can become strategic.
“If someone calls me in April saying they want to leave Ireland, there’s a good chance they will still be considered a tax resident because of that two-year look-back rule but then we can probably use a double tax treaty,” she said.
She advises people looking to break ties with Ireland for tax reasons to make sure they “don’t cut it too fine” with their number of days inside the country.
“A day is counted for any part of the day spent in Ireland. If your flight from Bolivia lands at five minutes to midnight, that’s a day gone,” Wickham says. “Until you break tax residency you pay Irish tax so the starting question for most people is when are you going to break residency.”
The process can be sped up under certain tax treaties which Ireland has hammered out with other countries to ensure people pay a fair amount of tax between the two nations.
There are 74 double taxation treaties in effect, covering income tax, capital gains tax, USC and corporation tax.
Given that different countries have different requirements on, for example, how to tax the tidy profit you made on your house before moving back to Ireland, it pays to get advice from qualified professionals working in both regions.
Some people think they can swan off to Portugal but keep their Irish home ready to come back to. That’s not something you can realistically do
— Stephanie Wickham, managing director, Expat Taxes
The good news for renters is it’s easier for them to prove that they’ve broken ties with their old country for tax reasons.
“Until you tie break, you are a dual resident. You tie break when you establish a permanent home in another location,” Wickham says. “This is quite easy if don’t own a permanent home. You usually just have to break a lease in the old location, take up a new lease and get a tax residency cert in the other location. Then Ireland loses the right to tax your income under some treaties.”
Homeowners will have to demonstrate their property is no longer their permanent home, something Wickham recommends doing by renting it out for long periods of time. Allowing members of the family to live there in between your visits home won’t suffice.
“Some people think they can swan off to Portugal but keep their Irish home ready to come back to. That’s not something you can realistically do.”
If you decide to rent out your property, taking advantage of Ireland’s high rents while enjoying lower ones elsewhere, you will still need to pay Irish tax.
“Any Irish-sourced income will always be taxable. If you are renting something out in Ireland, it will be taxed in Ireland. It may also be taxed again in the location you are living in,” warned Wickham.
You will then have to continue submitting Irish returns for any non-PAYE income held from assets in Ireland including rent and share dividends, in addition to your local returns.
Digital nomads also need to consider what impact swanning off to Bali for a few years might have on their pension and other State benefits.
Wickham advises people to consider voluntary contributions if they fall behind the necessary requirements to draw on social security when they return.