Can you live anywhere without taxes
Digital nomad taxes
Anyone looking for “digital nomad taxes” or “digital nomad taxes” on Google will most likely want to know what (optimization) possibilities there are in terms of taxes and how one can even “escape” tax liability.
In Germany we are generally subject to tax progression. That means the more you earn, the more taxes you pay. At the top you pay up to 42% plus solidarity surcharge and, if applicable, church tax on taxes.
So there is not so much left of gross earnings. So the question arises as to what options are there to reduce the tax burden somewhat.
Here you can find out how you, as a digital nomad, can legally obtain tax exemption or pay no tax on a large part of your income. However, this step is very radical and also requires a little courage. The article is therefore not for you anyway if you want to stay registered in Germany and you are not ready to leave your gates in Germany behind you.
The step is therefore not that easy. There are also some disadvantages for you, which we will go into below. There is also always the moral question of the value that Germany has achieved for you so far (school and education system, etc.). The question always remains unanswered, to the extent that you are willing to give back this value, which the system creates for others through your own work.
But the article is not intended to trigger a fundamental discussion, but rather to provide inspiration for everyone who seriously wants to turn their back on the German tax system.
Table of Contents
Step 1: Relocation of habitual residence
The first step to escape tax liability from Germany is to move the center of life from Germany or to avoid it in Germany. The relocation of the center of life also runs under the term “habitual residence”. Because as long as you have registered a place of residence here, you are subject to unlimited tax liability in Germany (Income Tax Act (EStG) § 1 tax liability).
Unrestricted tax liability means that your income is taxed regardless of whether you earn it domestically or abroad. Natural persons who have their place of residence or their usual place of residence in Germany as well as German foreign employees, including their relatives, who receive their remuneration from a public fund are subject to unlimited tax liability.
There may still be regulations on the double taxation agreement that limit unlimited tax liability, but as a rule you pay taxes on everything you earn in Germany if you live in Germany and have registered a business here. Of course, this also applies when you are abroad.
Relocate your habitual residence from Germany
In order to move the center of your life from Germany or to have no habitual residence in Germany, you must meet the following conditions:
- Stay less than 183 days a year or less than 3 months straight
- No own rented apartment with full power of disposal
- No furnished room with the parents
- No spouses and minor children in Germany
- No contracts or memberships whatsoever
In principle, this means the point that gives you an opportunity to come back to Germany.
But even if you move the center of your life, there is still the possibility that you will be subject to limited or extended limited tax liability in Germany.
This is the case, for example, if you are neither domiciled nor habitually resident in Germany, but still receive income in Germany. See also the Income Tax Act (EStG) § 49: Limited taxable income.
Or if you have other points of contact or economic interests in Germany but, for example, move to a country where you are taxed lower, then the German state will find suitable points of contact there as well. Because then the commercial profits will still be taxed in Germany.
These classifications from the tax office require that you continue to pay taxes (even if only to a limited extent) to the German state because the center of your life is largely in Germany.
There are now countless articles and advice services (for example also in our digital nomad beginners guide or on displaystaatenlos.ch (he will advise you on all aspects of freedom) on unlimited, limited and extended limited tax liability.
The following is to be noted: If you move away or relocate your habitual residence from Germany, then you should make sure that all points of contact in Germany are eliminated.
If you run a GmbH or a UG (entrepreneurial company), many people come up with the idea of simply relocating their place of residence and the company abroad. But unfortunately the tax authorities first look at the market value and the book value of your company.
The taxes on the capital gain (difference between market value and book value) must then be paid to the German state. There is also a good chance that the rating will not be in your favor.
However, if you stay in another EU country (e.g. Cyprus) the tax will be deferred. This is because the state regards the EU as a tax system and as a member you are privileged to participate in this system.
However, if you move to a third country (for example an offshore tax haven), then you have to pay the tax on it directly.
Then there is of course the case that you keep your place of residence in Germany and set up a corporation abroad with a low / low corporate tax rate or trade tax rate.
Here, too, German law applies again and says that you are subject to additional taxation (the taxation of income from a foreign subsidiary with a domestic shareholder) because you pay less than you actually have to pay.
The German tax office thus receives the difference between the “too little” paid taxes. More on this also in the law on taxation of foreign relations (foreign tax law): § 8 Income from intermediate companies.
Corporations are therefore not a solution if they were once registered in Germany and you might want to take the company abroad.
In summary, so far it can be said that you can only escape the tax burden from Germany with a business if you break down your tents here completely and no longer have any connection points in Germany.
Step 2: De-registration from Germany
If you comply with the above points and you are no longer habitually resident in the German state, you can deregister in Germany. To do this, you usually have to go to the citizens' office, which will certify your de-registration via a de-registration confirmation.
Keep the certificate in a safe place. Because you will need these later for passport matters at the diplomatic mission abroad. You can also usually use this for extraordinary dismissals and at the tax office. The bureaucratic step is relatively easy. You can keep your passport, by the way.
Now those are getting more interesting disadvantage that come to you:
- Opening bank accounts is now very difficult in Germany
- Many service providers do not accept foreign bank accounts
- From now on you will only get your passport at the embassy or consulate (although it is actually faster there)
- Participation in municipal and state elections is no longer possible
- You have to deregister your business from Germany or this usually expires automatically when you deregister
- Tax returns must be submitted retrospectively to the tax office by the day of deregistration
Please note that after deregistering you may still be subject to limited or extended limited tax liability. This is especially the case with the following points:
- As a higher-income entrepreneur
- Participations in German corporations
- Still economic interest in Germany
So it may happen that you have to pay your taxes on other types of income for the next 10 years. For the average digital nomad who is just starting their first online business, this is not the case.
Therefore, think carefully beforehand whether you are willing to accept the disadvantages.
3rd step: Your life as a perpetual traveler
From now on you can start your life as a perpetual traveler. A perpetual traveler is someone who stays in different countries in compliance with visa regulations and thus benefits from tax advantages and reduced living costs. The degree of self-determination can grow enormously as a result.
How you shape your life is ultimately up to you. Some travel to 20 countries in a year and others constantly commute between a handful of countries.
In principle, you are considered a permanent tourist and a guest of every country. Depending on the visa, you can stay in the respective country for between a few months and six months. If you don't want to have a headache with the visa, then you should displayUse the visabox. They take away the bureaucratic hurdles and you can get your visa quickly and easily.
It is important that you do not stay too long in a country and "accidentally" shift the center of your life there. Otherwise it can happen that you are subject to tax liability in this country.
But that's not too bad as long as you live in a country that does not levy taxes on foreign income. You can find out more about this in the following sections.
Step 4: Use the right tax system
You can distinguish 4 tax systems worldwide. Which includes:
- Residence taxation of worldwide income
- Residence taxation without foreign tax laws
- Territorial taxation systems
- Systems where no direct tax is payable
To get tax exemption, tax systems 1 and 2 are out of the question for you. But we go into all systems.
Residence taxation of worldwide income
With the residence taxation of worldwide income, your entire income is taxed. Approx. 130 countries worldwide work according to this system (including Germany). This means that you become taxable if you receive income domestically as well as from abroad.
For this article, the residence taxation of worldwide income is of no interest if you have deregistered from Germany and left the gates behind you.
Residence taxation without foreign tax laws
If the country in which you are staying has residence taxation without foreign tax laws (e.g. Switzerland), you can legally set up a foreign company and reduce your tax burden.
However, income tax still has to be paid on the distribution of dividends and salaries. The system is therefore rather less interesting for completely avoiding taxes.
Territorial taxation systems
The system of territorial taxation only allows you to tax domestic income in around 40 countries around the world. Income received from abroad is completely tax-free.
This is where it gets interesting: For example, if you move your place of residence to Panama and register a company in Dubai, you can offer digital products for the German market, for example. These are then completely tax-free.
In both cases, sales tax does not apply because neither your company nor you are located in the EU.
There is also no corporate tax as you do not pay corporate tax on companies in Dubai.
In addition, there is no income tax. Because foreign income does not have to be taxed in Panama. Panama has no foreign tax laws and you don't pay any taxes on dividends and salaries either.
However, you have to tax income from a Panama company as domestic income as soon as you have permanent residence. Therefore it makes more sense to only have the residence in Panama and to relocate the main business to another country (like Dubai).
There are a total of 40 countries with territorial taxation and without foreign tax laws.Some of them are:
- Costa Rica
- Hong Kong
The so-called non-dom states also offer a similar system. Especially if you are an EU citizen, you have special advantages when it comes to immigration. Which includes:
Foreign income is also tax-free here as long as it is not transferred domestically. Taxes that are due are usually due for living expenses (rent, electricity, etc.) in Germany.
In the non-dom states, however, a minimum income of 1000 to 1500 euros must be earned, which must be taxed.
Countries with no direct taxes
In addition, there are 22 countries that do not have any direct taxes. In most countries, immigration is relatively difficult or the quality of life leaves something to be desired (e.g. Somalia).
The most convenient countries include Monaco and the Bahamas. Below is the list of 22 countries:
- British Virgin Islands
- Cayman Islands
- Norfolk Isles
- St. Bartholemy
- St. Kitts and Nevis
- Turks and Caicos
- Wallis and Futuna
- Western Sahara
For example, if you invest your money in the Bahamas, you pay no income tax, no capital or withholding tax, no corporation tax, and no wealth or inheritance tax. In addition, there is no gift tax. The property tax is also very low. But even an exemption from this is theoretically possible.
Of course, you should always make sure that the quality of life in the respective country is right. Because just because you pay little or no taxes does not mean that you can live there carefree and worry-free.
Step 5: found a company (digital nomad taxes)
Theoretically, you can also forego starting a company and simply bill your customers for the corresponding services privately.
However, it is advisable to have your own company because, depending on the legal form, liability or asset protection is also possible.
However, not all that glitters is gold.
For example, if you decide to start a company in Belize, you may be surprised by the high costs later. Here the transfer fees are often 50 to 80 euros per transfer. The same goes for the Seychelles.
Another problem can be that European tax authorities do not recognize invoices from offshore companies. Classic affiliate models are much more suitable here, where you get credits and do not have to create invoices.
Cyprus, Ireland and Malt, for example, have the disadvantage that they charge around 6,000 euros for the establishment.
However, if you set up a company in the United Arab Emirates, for example, you pay around 1500 euros to 2500 euros in fees per year. But you have the advantage that invoices from companies from the United Arab Emirates are recognized by tax offices in Europe. You can also use PayPal without any problems.
A Dubai or Abu Dhabi LLC (to be equated with the German GmbH) as well as an independent legal personality in a UAE free trade zone (e.g. RAK) is possible. You pay no corporation tax, no sales tax and no withholding tax on outflowing dividends abroad (such as Panama).
However, you would have to stay in the United Arab Emirates from time to time in order to be able to prove that you were in the UAE for necessary management tasks (e.g. at the business premises).
A permit or license must also be obtained before starting any business activity. It is advisable to set up the company, to leave the opening of an account and the application for licenses to an agent.
Step 6: move to Panama
If you, as a digital nomad, don't want to pay taxes at all, but still don't want to do without a home base and a place of retreat, then you can also move your residence to Panama. You only have to show up there every 2 years to renew your residence status and so that your “Friendly Nation Visa” does not expire. There is no minimum stay in Panama.
Territorial taxation in Panama offers tax exemption on income received from abroad (e.g. Dubai).
As a German, Austrian or Swiss you can get the “Friendly Nation Visa” relatively easily.
In a nutshell, you need to deposit at least $ 5000 into an account in Panama. However, you should be able to provide evidence of economic activity. These include investing, buying or starting a company, buying real estate or getting a job in Panama. As soon as you have been granted residence, you will get this money back.
Conclusion on the subject of "digital nomad taxes"
If you have deregistered from Germany and founded a company in a country with a system of territorial taxation, you can theoretically live tax-free even without a place of residence. This makes you extremely flexible. However, living in a country like Panama has the advantage that you can relax there and not have to leave after 3 months.
Remember that we are not tax consultants and that laws and circumstances can change at any time. Nevertheless, the route described is definitely a way of avoiding taxes as far as possible. But you should definitely consult someone who is familiar with international tax law to work out a strategy together. Because, as a rule, each case is individual and different.
The easiest alternative is to have your place of residence and your business in Germany and to legally pay taxes on your own income here - this is how we are currently doing it. All in all, it's a relatively relaxed method for us.
What was your experience of taxing income as a digital nomad?
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