The Ultimate Tax Guide For Digital Nomads
You’ve finally done it. You’ve achieved your dream of being a digital nomad. Hoorayy! But wait..what about taxes?
Taxes are a complex issue when living in the same country, let alone when hopping from country to country over the course of a tax year.
We have good news for you! You’re not alone in figuring this out. Let experienced digital nomads share their knowledge with you in this ЕPIC guide. Here’s everything you need to know about filing your taxes as a digital nomad.
BIG DISCLAIMER: No part of this guide constitutes legal and/or tax advice. as tax regulations differ greatly from country to country, and this information is a general guide only.
MANAGING DEDUCTIONS, EXPENSES, AND INCOME
A majority of digital nomads are freelancers or entrepreneurs. Even if you have a remote job, if you are hired as a “contractor” you have to file your own taxes.
This might be scary if you’re new to the self-employment world, the excellent news for you is that working as a self-employed/freelancer means you can take advantage of many more more tax deductions than you can as a normal employee.
Digital Nomads & Tax Deductions
Expenses you incur because of your work are deductible. For most digital nomads/freelancers, this includes things like:
- Laptop, and computer related accessories
- “Office Expenses”, like paper, writing utensils, and other related supplies used for your work
- Communication expenses, including cell phone, as well as SIM cards and 4G
- Membership to a Co-Working space
- Payment fees incurred in the process of getting paid
- Accounting and legal expenses
- Fees for licenses or insurance needed to operate
- Courses or other education expenses related to your work
If you have a website as part of your digital nomad career, you’re in luck, as you can deduct even more expenses:
- Hosting & domain fees
- Email Marketing software (Mailchimp)
- Advertising expenses, including Facebook Ad expenses
- Educational expenses incurred to help you run your business
- Paying affiliates to sell your products
- Virtual assistants, employees
And if you’re a travel blogger or you travel as part of your work, your travel expenses are generally tax deductible as well
Tracking Your Expenses, Managing Receipts
Before considering filing taxes as a digital nomad, important to keep records of everything. This requires you to be organized and to have attention to detail, throughout the year. Don’t procrastinate, do it as you go.
Here are a few different ways to manage receipts and expenses:
Here’s a simple process you can use to track your expenses.
STEP 1: Collect Tax Deductible Receipts In A Secure Place
Every time you purchase something that’s tax-deductible, save the that receipt in your wallet or another place. After you’ve collected enough receipts, it’s time to…
STEP 2: Log Your Receipts
Open an expense spreadsheet and log down all receipts. Log the date, store, category, amount, and any other relevant details.
As a digital nomad, it’s important to also log the currency you incurred the expense in; if you’re travelling around, you’ll most likely incur expenses in a few different currencies. It’s recommended to also convert those expenses to your home currency so that you have an understanding of how much you’re spending.
The image below is a sample template you can use to keep track of your receipts and expenses.
You will most likely have expenses that don’t have a physical receipt, in those cases log them as well and keep the online receipt stored on your computer.
STEP 3: Save Your Receipts
Once you are audited, you’ll have to provide original receipts of your expenses. Some countries accept digital copies of physical receipts, however it’s best to not leave anything to chance.Therefore, you should store all your original receipts. Once the tax year ends, seal all your receipts in a secure place.
Receipts that are only issued electronically (such as for digital purposes) need to be stored securely, preferably on the cloud.
STEP 4: Organize Your Spreadsheet
When it’s time to file taxes as a digital nomad, prepare your spreadsheet by sorting all the information by category and sub-category. The more you can segment your information the better, as in that case the person preparing your taxes can work with the data better.
It’s recommended to also break down each expense by currency. Sometimes fluctuations in currency over the course of a year can make a difference. Some tax preparers like to use the currency the expense occurred in and then convert it using a uniform rate established by the tax authorities, while others prefer to use the converted rate in the first place. In any case, you should have as much information as possible to allow for the most efficient breakdown.
You don’t necessarily have to log all your expenses manually. Some digital nomads prefer to do it digitally.
There are many apps for your smartphone that can scan receipts and convert them into digital format. You also have the option of using software like Freshbooks, Quicken, Quickbooks, or other financial management software. Depending on where you are, foreign receipts may cause complications for some software.
Be aware that even if you store all receipts digitally you might still be required to produce original copies. Also, be sure to back everything up.
Tracking Your Income
Filing your taxes as a digital nomad is more complicated than just tracking tax-deductible expenses; you have to track and manage your income as well.
Many times as a digital nomad you might have a variety of different income sources. The responsibility is on your shoulders claim all of this worldwide income when it comes down to doing your taxes.
Be careful! Just in case you wanted to get clever and omit an income source (or five), remember that some of your clients/income sources file their payments to you as deductions on their own tax returns, this income can potentially be tracked to you, and if you get audited you will get in trouble.
Are you looking to escape the mental hassle and possible legal problems of having to do all of this yourself? Why don’t you incorporate? Incorporating a business removes liability from yourself and makes a clear distinction between you and your business. Not to mention the plenty of tax benefits that come into play.
Where Should You Incorporate Your Business?
There are a few top countries when it comes to choosing where to incorporate your business. Some countries that come to mind include Estonia, Ireland, Cyprus etc..
However when taking into account all factors (bureaucracy, tax rate, costs, transparency, ease of doing business, location), the best choice to incorporate is Bulgaria.
Great tax benefits
Bulgaria has the lowest corporate income tax, lowest personal income tax in the EU and the lowest social security contributions in the EU. Taxpayers benefit from flat tax rates – 10% corporate profit tax, 10% personal income tax or 5 % dividend tax without any exceptions or restrictions. VAT is 20%. On the other hand Bulgaria has signed agreements to avoid double taxation (AADT) with 80 countries (including USA) which is another benefit for business owners.
Less financial risk
Bulgaria is an EU member since 2007 and a NATO member since 2004. The country has the second lowest public debt in Europe and the Bulgarian lev has a currency board to the Euro (goes up and down at the same exact rate as the Euro). In its annual 2002 report, the European Commission assessed Bulgaria as a fully functional market economy, with a high degree of macroeconomic stability and working market mechanisms. This trend has been growing since then.
Political and financial stability
Bulgaria is a democratic country with more than 28 years track record of open and free market. It is home to a diverse family of races, ethnicities and religious traditions. In 2018 Bulgaria lives and thrives together as one big society without any tension. Currently there are no issues with immigrants from any country.
Stable and secure banking system
The largest European banks are represented in Bulgaria. Your funds are government backed up to €100k. The digital infrastructure offers perfect e-Banking facilities with multi currency accounts as part of the banking service. Bulgarian banks apply fast and easy procedures. In fact you can open your bank account in just a few hours. (With us you can do that remotely!)
Here’s how Taxes For Freelancers & Entrepreneurs Work In Bulgaria
What are the relevant taxes for a digital nomad in Bulgaria?
Depending on whether you have a registered entity or not different taxes will apply to you. Here are the relevant taxes in general:
- Personal income tax;
- Corporate tax;
- Dividend tax;
Let’s take a close look at each kind of tax.
Personal income tax
This tax will apply to you if you choose to operate as a freelancer. The personal income tax in Bulgaria is flat 10% regardless of the annual revenue. It is a tax which is applied to the revenue and not to the profit.
The actual amount of the tax is a bit lower since Bulgarian law takes into account the “legally recognized costs”. These costs are set to 25% of the revenue but in some cases may reach up to 60% of the revenue.
The tax base for the personal income tax is the total revenue deducted by the recognized costs. Let’s do some quick calculations. For simplicity we will assume that you make an yearly income of €10 000. From this you take off 25% which leaves you with a €7 500 tax base. The income tax rate is 10% so your annual taxes will be €750.
Effectively what this means is that the personal income tax will be 7.5% of the income. It is an annual tax but is actually paid on a monthly basis (in advance).
Corporate tax will apply to your business if you have registered an entity in Bulgaria. In most cases this will be a LLC (limited liability company) – popular across the whole of EU with different abbreviations – GmbH, Ltd, BV, sarl.
IMPORTANT: This tax is applied to the profit and not to the revenue of the company. It takes into account the actual expenses of the business and not the presumed ones (legally recognized costs). The tax basis is calculated by deducting the expenses from the revenues. If the end result is positive you have a profit. Most of the company expenses will qualify as deductible with some exceptions like donations to third parties.
Corporate tax in Bulgaria is set to 10% of the company profit. It is paid on an annual basis. If your company makes a profit of €10 000 the corporate tax will be €1000.
When your company makes profit it is still the company’s money. If you choose to withdraw it from the company as dividend – you must pay dividend tax. The dividend tax is applied to the company profit after the corporate tax has been applied. The rate of this tax is 5%.
Fundamentally, this tax is 5% of the remaining 90% of the company profit after taxes. This effectively makes it 4.5% of the profit.
VAT in Bulgaria has a fixed rate of 20%. As a digital nomad you will most likely invoice entities which are based in other countries in the EU or outside. When invoicing companies out of the EU you won’t need to apply VAT.
The general rule for the EU is that B2B transactions are taxed through the reverse VAT charge procedure, meaning that the vendor, in that case you, doesn’t charge VAT. Your customers will need to apply VAT of their country and pay it locally.
If your business involves B2B services you will most likely not need to charge VAT.
Filing and paying taxes
The local authority which collects taxes is the National revenue agency. Taxes are filed on a monthly (VAT) or annual basis (corporate tax). The agency has developed a reasonably user friendly platform for filing taxes with digital certificates but it is still recommended to use accounting services.
The personal income tax must be filed and paid until the end of April of the following year where the corporate tax has to be filed and paid before the end of March. Companies are entitled to deduct 1% of their taxes for early filing and payment.
VAT is filed on a monthly basis but is will only be applied to you or your company if you opt for a registration under the VAT act.
Social security contributions
If you choose to also reside in Bulgaria and not just incorporate your business in the country, you will need to pay social security contributions. These also cover health insurance and amount to a total of ~27% of the personal income. There is a threshold of the maximum income on which security contributions are due. For 2018 it is ~€1350. This means that if you make more than that on a monthly basis you will still pay social security contributions on the amount of €1350.
Which is better: Company or freelancer?
This one may be a bit tough to answer but let’s give it a go. The general rule of thumb is that of you expect the expenses of your business to be more that 30% of the revenue, you should register a company and pay corporate plus dividend tax. With a company you have a limited liability which is far better then doing business as a freelancer. In this case you will be liable with all of your personal assets.
Else, if you don’t really foresee major expenses, than making use of the 25% legally recognized costs may be the better option.
A combination of both options is also possible. You can have a company and pay yourself as a freelancer. This may be the most flexible options. It will allow you to achieve a good tax optimization but will present the option use the revenues without profit distribution procedures.
Comparison to other countries in the EU
Everything mentioned above sounds nice but how does it compare to other popular options?
Bulgaria shares the lowest income tax rate of 10% in the whole EU with Cyprus. However, as explained earlier, the flat tax for freelancers is reduced by at least 25% and up to 60% effectively making it as high as 7.5%.
The Bulgarian corporate tax of 10% is also among the lowest in the EU where only Hungary applies a lower tax rate of 9%. Other popular destinations for digital nomads like Estonia apply a 20% tax rate.
Overall Bulgaria can be considered a tax haven among with Cyprus and Luxembourg. This advantage of the country has also been stated by the government as a stable policy having in mind exactly the goal to bring more foreign investors and small businesses.
Are you interested in potentially registering your company in Bulgaria? You can contact us via email or book a quick consultation call to see if this is right for here.
Rights and obligations of shareholders and managers
Changes in the company
Trade representation office
Taxes for doing business in Bulgaria
Opening of a Bulgarian Trade Representative Office (TRO)
Liquidation of a Bulgarian company
Opening a company bank account in Bulgaria
Change to the company’s capital
Change of the company’s name