Digital nomads and global mobility tax risk

Diversification in talent

From an operating perspective, professional employment organizations (PEO) and employers of record (EOR) have also increased in popularity, as an expanding labor market brings a significant number of new entrants alongside established vendors. These vendors allow businesses to engage employees in countries where they do not have a legal presence, with the EOR/PEO assuming the compliance and payroll requirements and effectively loaning the employee to the engaging company.

From a talent perspective, the concept of remote work has increased in popularity significantly. From being a relatively uncommon arrangement or restricted in many situations, remote and hybrid working has now become a necessity in many companies, and as a consequence, shifted the balance of power to employees. From highly skilled employees, employees in senior positions, to roles that require less or no in-person working, some employees have been able to negotiate longer-term remote working arrangements or influence company policy. This requires input from tax and finance departments to balance risks and compliance while HR and talent requirements necessitate an approach that enables mobility rather than inhibits employee movement.

Digital nomadism

In recent years, the introduction of a category of “digital nomad visas” has expanded, allowing employees to work in a country without needing a local employment contract, immigration sponsorship from an employer, or the personal expense that investment visas may require.

A Harvard Business Review article¹ describes digital nomadism as “a lifestyle where one leverages remote work to travel and live in varying, often affordable locations around the world.”  Interest from employers in digital nomad arrangements is increasing, in part due to the increase in the number of countries offering digital nomad visas since the end of the pandemic and the ability to enable mobility with relative ease.

These incentives also create risks, as a recent Grant Thornton survey² showed that 49% of respondents identified remote working as the key mobility tax risk issue to manage. While encouraging digital nomadism may appear attractive as a means of incentivizing employees and enabling increased mobility, companies should be aware of the potential tax risks of such visa programs.

A widespread misperception of digital nomad arrangements is that there is limited exposure to income tax and tax compliance obligations at the individual taxpayer level along with correspondingly limited employer responsibilities like payroll and employment taxes, and critically limited or corporate tax exposure and compliance obligations.   

Few countries, however, offer specific tax breaks for either employees or employers. A Grant Thornton review of 21 countries found 79% of digital nomad visas have no relief from individual tax while 85% have no exemption from corporate tax risk. 

Benefits to countries

• Talent attraction, diversification and upgrading workforce
• Targeting growth and upskilling in certain industries
• Economic benefits – tourism, taxes, local economy boosts

Benefits for employers

• Removes immigration compliance risk
• Provides mobility opportunities where no business need for relocation or an assignment
• Expands an existing remote work policy to more countries
• Extends remote working timeframes beyond market trends of up to 30 days
• Delivers on a promise of “work from anywhere”

The tax risk reality

Without specific tax relief under a digital nomad visa program or provided under a double tax treaty, companies must rely on tax laws in the country the digital nomad employee is working to determine the potential tax exposure that could arise from having an employee working remotely on a digital nomad visa. In this circumstance, a corporate taxable presence may be deemed to exist, potentially resulting in corporate and other entity taxes and obligations, including:

• Corporate registration with tax authorities
• Filing of corporate tax returns
• Attribution of profit and transfer pricing considerations
• Liability to corporate income tax
• Liability to indirect taxes
• Potential tax authority scrutiny of activity

A range of employer obligations may also arise, requiring a company to comply with local regulations and potential exposure to employer taxes and other tax risk, where: