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119. Can I Be a Tax Resident of Nowhere? Answering The Ultimate Digital Nomad Question
Episode 1192nd October 2023 • Work, Wealth & Travel - A Digital Nomad Podcast • Nicole Vilaca
00:00:00 00:18:26

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Nicole aims to give digital nomads a comprehensive understanding of the challenges and implications surrounding the idea of being a tax resident of nowhere. I dive into what is tax residency, how can you get out of your home country's residency system, and if it's truly possible to live a laptop lifestyle and pay zero tax.

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Hello and welcome to the Work Wealth and Travel podcast. I'm your host Nicole a k a Nomad, Nicks, and today I'm gonna be diving into a question that I get a lot and that I also see that Google seems to get wrong a lot of the time because this is such an in-depth question to answer and it really is unique for every individual person and nomads.

Situation and that question is, can I be a tax resident of nowhere? When I started my global citizen tax journey years back, this was one of the first questions that I had too, because of course, as a digital nomad, you want, and if possible, it would be amazing for all of us to pay. Very, very low tax, but ideally we want to pay no tax and so we think I can be a tax resident, nowhere I can pay 0% taxes.

I am technically not in any country's system and I can just travel the world and do this forever. And that is not a long-term way of thinking. But also a lot of countries will not let you be a tax resident of nowhere. So we're gonna dive into this question today, and I'll give you more of an insight of what that looks like.

If you truly can be a tax resident of nowhere,

Before we start, I am going to define what the heck a tax resident actually is. I am going to take it straight from JA, G P T, so that you have the exact definition. So let's dive right in to begin with now, tax resident refers to an individual company or other entity. In this case, we're more so speaking about individuals because we're keeping it pretty surface level based on the laws of a particular country in subject to tax, on its worldwide income due to domicile, residents, place of management, or another criteria of a similar nature.

The specific rules and criteria to determine tax residency can vary significantly from one country to another, and it can absolutely vary significantly, every country has established their own rules and laws as to if you are a tax resident or even just a resident in general in their system. So for individuals, , Tax residency typically depends on three things.

For business, it looks different. Here we're going to only be talking about individuals. So the first one is physical presence. So many countries determine tax residency based on the number of days, and I know you've probably heard this before. We all have and individual spends in the country during a fiscal year.

For instance, in many places, if an individual spends 183 days or more in a country in a calendar year than they may be deemed as a tax resident. So physical presence is one of the things. Increasingly physical presence is becoming less of an issue. And the countries aren't so concerned. Have you stayed 179 days or 185 days?

That's not really how it works anymore because there are so many other ties that you can have to a country like your passport, your license, your bank account system, your credit cards, a home, a family. There's so many other things that can tie you to a country, not just 183 days. So increasingly that is just an old concept.

The next one is domicile. So domicile is an individual's permanent home or principal establishment. So even if you as an individual are not physically present in a country for a long period of time, you can still be considered a tax residence if you have domicile in that certain country. And then the third one is the center of vital interest.

Again, this is more prevalent nowadays than the physical presence. So some countries will look at where your personal and economic ties are stronger to determine where your tax residency is. So like I said, this can include family economic activities, property holdings, and so much more your government will likely have on their website.

On the official government website of that country. I know I did this for Canada when I was leaving, but I highly recommend going on the official government website and seeing all of the different ties. They will have it listed somewhere, the different ties where they could potentially use those ties to your disadvantage in the future.

Because let's say you have a home. A home is a pretty big one, but you have a home. Well, they're not likely going to let you, and again, this depends on the country, but likely they're going to want you to stay inside of that country's tax residency because a home is a pretty big investment. You are going to be having to pay taxes to the government on that home and many different types of taxes at that.

So it really does depend on. The economic and sometimes the social ties that you have as well. I know in Canada for me, they wanted to know if I had a storage unit, if I had any subscriptions, if I had any ties in terms of social communities. So if I was a part of any communities or memberships, like a church club or something along those lines, which is wild, but they will likely try to use every type.

Possible to keep you as a taxpayer in that country.

So in saying all of that now, can you become a digital nomad? Travel the world full-time, not trigger tax residency in any of the countries you travel to. So that usually means not having very strong economic ties. You're not opening a bank account and a credit card and buying a home, and you're not staying.

It's typically three or six months. Usually it will be six months, but most likely your visa for most countries. . When you are able to actually enter that country, you won't need a visa, but you will get a stamp in your passport. So that will likely for most countries, be for three months, but then if you end up staying for whatever reason, if you get a digital nomad visa or something for six months, then you may become a tax resident and have to pay taxes in that country again.

It very much so depends on the specific country. However, you may become a tax resident and have to pay taxes in that country. If you do have those economic ties, or if you have been in that country for longer than it's typically 183 days. So let's say you don't want to become a tax resident anywhere.

You're only gonna stay in every country for two to three months. You're going to leave your home country's tax residents and you're gonna pay taxes. Nowhere in the world is this a possibility. So what I recommend is googling. on your government website. So example for Canada, you're going to go to Canadian government whatever their website is, like GC or something like that.

I don't know it off the top of my head. And then you're just gonna type in tax resident of nowhere and you want to make sure that you are getting this information from the government website that is so important to not get it from any other . Any other website, only the government website, you can call the government, but then they're going to want your information and you don't really want them putting that in your file.

So really try to look up on the government website only if you can be a tax resident of nowhere, and they will have an answer because this is increasingly becoming more common with digital nomads and remote workers. And for most countries, again, I can't say yes or no because it's going to depend for every country, but for most countries, the answer is going to be no.

And this is how it works. So for most countries, what you'll see, Especially Western countries. The US is different because you actually have to revoke your citizenship and passport to become a non-resident and then non-citizen of America. So America's a little bit different, but for most of the other Western countries,

You will not be able to be a tax resident of nowhere. What they're going to say when you look into this further is that if you are a tax resident of nowhere, then by default you are a tax resident of their country. I. So they are, these countries are getting wise to what's happening, especially these western countries that want to keep people and its citizens in their clutches.

They want that tax dollars, they want the money as much as possible. They are increasingly making it more difficult. So you will see likely somewhere online that it says if you are a tax resident of. Nowhere you have not gained official residency and tax residency and done the paperwork and the process and you'll know if you've done this.

'cause it is a process. It's not something, most times you can fall into it sometimes, but if you're deliberately doing it, it will be paperwork done and you will know if you're a tax resident there, if you have not become a tax resident of any other country. Like I have in Paraguay, for example, that was a four or five month process.

I know I did that. I know I'm a tax resident there, but if I wasn't a tax resident there, if I was just traveling the world full-time, no, I would still be a tax resident of Canada. I would not be able to just roam the world freely as we all hope we could. And . Pay no taxes because the Canadian government would want their tax money.

And now this does again, depend on how much tax you're going to be paying. Some countries, if you are a non-resident, they will tax you differently or you will only have to pay money, for example, on your income in that country specifically and not in any other countries. It looks different. For every country, but they will still want a piece of that pie.

Whether that means you pay income only on money that goes into that country, or you pay worldwide income, whatever that may look like, they will still want their piece of the pie.

Now in order to mitigate this, you have options. Oh my gosh, you have so many options. But the question that I usually get is people who are starting out or have been on their digital nomad journey for the short term, and they ask me, where do I pay taxes? So this is a great question, and what I will usually answer is

Just continue paying taxes to your home country unless you know that this global citizen digital nomad lifestyle is a lifestyle that you want for the long term when you're thinking of leaving your home country's tax residency. This is a pretty permanent thing, even in Western countries that are not America.

It's not a permanent thing. I could get Canadian residency in the future again, if I wanted to. It would take a bit of time and money, there would be some things associated with that. But I could get it again in the future if I wanted to. But that doesn't mean that this is something to be taken lightly.

To be considered lightly because it is a process to get rid of your home country's tax residents and residents in general, and you want to ensure that you are going to a country that is going to have good infrastructure and is going to benefit you. But if you're starting out on this journey, likely stay in your home country's tax residence.

Figure out if this lifestyle is a lifestyle that you want in the long term. If it's something that you only see for five, even 10, 15 years out, is it really worth it to set up this entire new infrastructure? And if you have a business to set up holding companies or a business elsewhere, if you are . Going to eventually go back to your home country's residence?

The answer is no. So this is a big decision for me. When I decided to leave Canada, I knew I would never live there again. I never wanna own a home there. I never want to live there or have any assets there ever again.

And so I could leave the Canadian tax system because I didn't have a home in those big ties to Canada. Otherwise, it would be more difficult for me to do so. But I also knew . That I was never going to live there again. And so I can start my global citizen journey and I can start looking into other options.

But if I knew in five years, 10 years, 15 years, that I would be coming back to Canada, I. It doesn't make sense to start creating all these business entities and personal residencies. When you get rid of a business, you're likely going to have to pay tax when you dissolve that business in whatever country that business is located in.

So you don't want to start this journey just to know that it's something short term, and that's what I always recommend. So if you are starting a nomad lifestyle, . Pay taxes to your home country until you know that this lifestyle is something that is going to be permanent long-term, the rest of your life, quite honestly for you.

And then start looking into other options of where can I get tax residency that's beneficial. Where can I set up my business that's beneficial? And then this comes into the five flight theory and I actually have a blog post on the five flag theory. I'll link it in the show notes. And if you have not heard of the five flag theory before, it essentially means having all of your eggs or your flags diversified.

You don't want to have, as a global citizen, as somebody who's left your home country, left that residency behind. You don't want to have everything in that one country or. In any one country because if something changes in the government, if you don't like the way that the direction of the country is going, which is kind of the direction that a lot of Western countries are going in, quite honestly, for me personally, then you have options.

You have options because your residency, your tax residency and your bank accounts and your passport are not all located in that one country. So . The five flags within this theory is your residents, your business, your bank accounts, your citizenship, and your tax residence, which is different from your residents.

Now there are, I think there's up to seven different flags now because increasingly, you can have your investments and you wanna have all of these diversified in different countries, but to keep it pretty simple, it was originally based off of these . Five flags. So you want to have a bank account that you use in a place that is different from your residency in a place that is different from your citizenship in a place that is different from where your business is registered.

You want to have all of these diversified so no one or even no two countries has claims on all of these different assets. If a country decides to , Close down a bank account for you. You have others, you have options. It's not like you only are worried about this one country and this one bank account, and if they shut it down, oh my gosh, I'm so stressed because I don't know what they would do.

All of my money is there. That is not the situation that you want to be in, and that's why once you start considering this, there's a lot of time. A lot of effort and quite honestly a lot of money that goes into it to start your global citizen lifestyle. So if you are starting on this journey, if you're not sure if a global citizen life where you never live in your home country again, is going to be something that's right for you.

Don't start this process quite yet. Don't start diversifying. Don't start having these five flags because the residency is time consuming and expensive. The bank accounts time consuming and expensive. The business time consuming and expensive to set the citizenship, oh my gosh, if you wanna buy that or start investing in citizenship, time consuming and expensive, and you're likely going to need a lawyer for

Setting up all of these things. Bank account might be a little bit different if you're physically located in that country, but still most of the time as a non-resident or a non-citizen, you're going to want to have a lawyer to set up a business bank account or just a personal bank account for you. So time and money are considerations for all of these things.

You want to make sure that you have the money and the finances to start this as a lifestyle, and you also want to make sure that you never plan on returning to your home country again. That residence is gone and you're ready to start new.

Using the world as your oyster to start creating these five different flags for yourself.

There is so much more that I can dive into on this topic, and this is a very all encompassing topic. There is a lot that goes into this and there's no one size fits all, so that's why I can't really tell you . What's the best option for you to do? Because everyone's residency right now looks different.

Where you want to live looks different. What your business is and where your clients are located looks different. So it's, there's no one size fits all. It truly is a unique setup to every individual person. Now if you are interested on learning more, definitely read my blog post below where I go into detail about the five flag theory and what that actually means.

Feel free to check out all of my links below. I talk a lot about finance investing from a nomadic perspective, not just from somebody who's staying in their home country for the rest of their life, but from a nomadic perspective. On my Instagram and here on this podcast, if you're listening on YouTube, head over to the Work Wealth and Travel podcast on all major podcast platforms.

I have episodes out three times per week. I have a solo episode, a guest interview where we talk about all things work, wealth and travel. And then I have my Digital Nomad Digest segment with my co-host, Cammy. . We are both digital nomads, very different types of digital nomads, and we talk about all things nomad, lifestyle alignment, and finance every single Friday.

Subscribe to the podcast, check out all of my links below, and if you want to chat further on this topic, I would love to do so. Feel free to book a call with me down below and I would be happy to chat with you.

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