Digital Nomads – Current Tax Rules
Given the growing number of digital nomads arriving to Portugal during the past year, we have been facing new challenges and opportunities regarding the applicability of the existing tax rules to the increased globalisation and mobility, mostly in what concerns the working world.
Portuguese tax law, and in a sense, International Tax Agreements, are not prepared to cover the current professional flexibility. Working or providing services remotely, using technology, allowed foreign citizens (and even Portuguese citizens returning to the country) to establish in Portugal permanently, or for a few months, sometimes under the assumption that if their income is paid by foreign entities, there would be no tax implications in the host country.
However, under the Portuguese Personal Income Tax Code, a person becomes a tax resident of Portugal, namely when he/she spends more than 183 days in Portugal or, even shorter periods, when they may be considered as having in the country his/her place of abode, which is not as rare as we may think in the case of digital nomads.
As a first consequence of being deemed as a tax resident of Portugal, please consider that all residents for tax purposes must declare annually their worldwide income. Portugal has signed Double Tax Agreements with a significant number of countries to avoid double taxation, but it does not mean that an exemption applies. In most cases, the country of residence would only deduct tax paid abroad (if due), which may potentially result in an additional tax to be charged.
It is also relevant, and commonly ignored, that, according to the Portuguese Personal Income Tax Code as well as most Double Tax Agreements signed by Portugal, professional income is considered sourced in the country where the activities are performed.
As it can be seen, digital nomads may easily fall into a complex array of rules, that must be properly assessed before decisions are made. When one considers moving in the middle of a tax year (and always when the tax year does not correspond to January - December as in Portugal), it is also highly advisable to seek advice regarding the best timing to do so, considering not all countries adopted a partial tax year rule.
We would also highlight the fact that the above affects not only freelancers. For those, determining whether they have or not a fixed installation and where they mainly provide their services from may be crucial to determine income tax implications as well as social security implications.
However, since the pandemic shook our work environment, employees around the world are also facing new challenges. It is now possible, even for them, to work from abroad, in a different country, in a different continent. In such cases, the impact would also be felt in what regards the taxation of the salary, as well as social security contributions. But also, employers may be deemed as having presence in our country (which may have tax consequences under some circumstances) and face the need to register, for instance for payroll purposes.
Although we understand global mobility was already the trend, and we had all predicted that the future would be this flexible, the change came at a larger scale, earlier than expected. Our rules are not adapted (although we can “work with what we have” is far from being the clearer regime) and our public services and entities, such as tax departments and social security, are not prepared to deal with these situations requiring them to adapt the existing rules to new realities, not corresponding exactly to their usual procedures.
A positive note must be given. A significant number of digital nomads are in fact working in eligible activities to benefit from a reduced tax rate under the NHR tax regime. Please be aware that being under the Portuguese tax rules may clearly represent an advantage and contribute to tax efficiency. Even when it is not the case that one specific situation is covered by the NHR benefits, freelancers, commonly without a significant amount of costs associated to their activity, may benefit from a simplified tax regime, where part of their income is automatically deemed as expenses and, therefore, not subject to taxation.
Additionally, or alternatively, just like other European countries, the Portuguese Government is studying a tax reform to provide the digital nomads with benefits and to attract this kind of professionals to the country.
If you feel the above is an interesting opportunity to you or maybe alerted you to the need of seeking advice, we shall be here to assist you.
Raquel de Matos Esteves
Head of Tax
