Digital nomad visas may be giving remote employees and companies a false sense of security. Richard Leach, director at Global Tax Network, examines the often-hidden tax implications that come with digital nomad visas and how corporations can keep mobile employees tax-compliant.
As remote work continues to charge full steam ahead, digital nomad visas are popping up at an increasing rate around the globe. These visas allow remote employees to legally conduct business from within countries abroad.
However, HR and other corporate leaders often misunderstand how these visas work — and how little they protect the company from additional tax liabilities. As more countries offer digital nomad visas, HR leaders need to ensure their employees aren’t ignoring the tax implications that arise out of remote work.
To protect against tax violations, fines, audits and reputational damage, HR leaders need to understand exactly what these increasingly popular visas cover and what risks they expose the employee and company to.
How do digital nomad visas work?
Digital nomad visas are immigration tools that allow remote employees to work via the internet within a country for an extended period. Though relatively new, these types of visas are becoming increasingly common. According to the UN World Tourism Organization, nearly half of all global destinations now offer some type of remote work visa.
Although digital nomad visas give remote workers legal permission to work when they’re within a country, they don’t address tax liabilities that arise from remote work.
What digital nomad visas don’t cover
Many fail to realize that digital nomad visas are solely an immigration tool. Too often, HR departments, corporate leaders and employees assume these visas cover taxes abroad — and that mistake can be troublesome for all parties involved. Here are a few risks to consider if employees are working on remote work visas:
Social security and withholdings
Although some countries don’t require digital nomads to pay additional taxes within their jurisdiction, most do. In many cases, a mobile employee will be subject to pay social security or income tax within a country, and their employer may also have to meet withholding and/or reporting obligations in that country.
Global equity compensation
Global equity compensation can cause complications when employees work from multiple locations. Because these assets take time to mature, the tax and withholding obligations for equity compensation can change over the course of months or years. That means employees may end up owing tax on equity in a country abroad without realizing it.
Bonuses
Similar to global equity compensation, employees may be required to pay taxes on bonuses they receive while working in a foreign country. Not only is this a complicated tax situation for employees to navigate on their own, but it can also ruin an employee’s work experience, especially if they’re hit with a surprise tax bill that’s higher than they expected.
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Read moreDigital nomad visas may expose your company to additional risks
If employees are securing digital nomad visas on their own and working from overseas without the permission of the corporation, it could also expose the company to tax and compliance risks. Here are a few problems that can appear:
- Creating a corporate tax presence: In some countries, an employee can establish a corporate tax presence within a jurisdiction by working remotely there. That can cause significant problems for the business. When a company establishes a corporate tax presence in a new country, it may need to pay corporate taxes to that international authority.
- Lost employee compensation: If employees are hit with a surprise tax bill, they may feel as though the company should make up for their lost compensation. Overall, it’s a recipe for upset employees and HR setbacks.
- Angry, overwhelmed or dissatisfied employees: If an employee believes they’re allowed to work within a country and they run up against complicated tax situations, it can cause them to feel isolated and frustrated. In turn, they could end up quitting or making demands the company isn’t prepared to meet.
How to keep mobile employees tax-compliant
The best way to protect against remote work tax violations is to be proactive. Here are a few tips to help corporate and HR leaders navigate complicated mobility-related compliance issues:
Rework travel policies
The recent upswing in remote work has reshaped how employees work and travel. However, many companies haven’t updated their business travel policies to keep up with these changes. It’s important for corporations to revise their travel policies by adding clauses that state where employees can work, how long they can work there and what steps they should take to receive approval to work within that jurisdiction.
Pay attention to labor laws and contracts
Work with employees as they’re applying for digital work visas to make sure they aren’t agreeing to work under a local employment contract. This could disrupt your company’s ability to provide vacation benefits, handle 401(k) contributions or enforce hiring and firing policies. It is critical to understand local labor law requirements that can apply due to local work — even if a local employment contract hasn’t been signed.
It’s also important to understand home country rules and whether the employee will remain eligible for ongoing participation in any home country benefit plans.
Communicate with your employees about laws and benefits
Once you have reviewed and understand the payroll, labor law and tax considerations for the digital nomad scenario, it’s important that this information is properly communicated to your employees. This step will help to prevent misunderstandings that can lead to future frustration and will also allow your employees to identify resources that they may need to address any compliance requirements.
For example, in Brazil, by law, employees receive a bonus, the 13th month salary, every December. To avoid misaligned expectations, explain beforehand that employees will be receiving benefits under their home country’s labor laws.
Richard Leach joined Global Tax Network as a director in 2023, bringing with him more than two decades of international tax management expertise. Over the course of his career, Richard has worked with a diverse spectrum of clients, ranging from prominent global financial and pharmaceutical entities to smaller companies with limited experience in tax and payroll matters.
