The rise of remote work has popularized a term that until 2020 belonged only to a privileged few around the world: digital nomads. These are people with jobs that are 100% remote jobs, which allows them to work from any corner of the globe.
According to data from the 2023 Digital Nomads Trend report, 17.3 million people in the U.S. define themselves as digital nomads, a 131% increase from 2019. “Ironically, governments didn’t make the ‘nomad’ visa for nomads,” NomadX CEO Gonçalo Hall—a consultancy specializing in digital nomads—told the Financial Times.
Digital nomads and the profits they mean to states. As Hall said, some countries worldwide have worked hard to pass laws to give digital nomads a special type of visa, which provide many advantages for this group. Countries have been eager to host digital nomads because they pay taxes in the country, don’t generate social costs, and don’t take jobs away from locals. However, the primary purpose that countries offering these workers visas and “pamper” them so much upon arrival is because they want to try to retain them. Once they settle in the territory long-term, they’re no longer considered digital nomads.
They aren’t a threat to local employment. Some have a tendency of seeing digital nomads as a self-employed freelancers. However, the report data shows that, at least in the country with the largest population of digital nomads, the number of these workers employed by companies (10.7 million) exceeds those that are self-employed (6.6 million).
In other words, they’re professionals with high purchasing power who aren’t competing for the positions of local employees because they’re already working for a company abroad.
Collecting their taxes... These special visas allow digital nomads to live in one country and work remotely for companies outside that territory. They’re often taxed differently from other citizens, paying only a percentage of tariffs in their host country. In Spain, for example, those workers are taxed at 15% rate if their income is less than 600,000 euros (about $651,000), while in Portugal and the Netherlands, it’s 20% and 30%, respectively. (The U.S., besides not offering these types of visas, taxes Americans based on citizenship, not their place of residence. That means that if you’re an American digital nomad, it doesn’t matter where you currently live. You have tax obligations as a U.S. citizen).
…without paying social benefits. Since they’re taxed less than locals, digital nomads also have fewer rights and social benefits. Digital nomads must contract private health insurance with coverage equivalent to that of their national health system, not travel insurance. Because they don’t pay the same taxes in their host country, they aren’t eligible for social benefits such as retirement, unemployment, maternity, and other subsidies. However, they typically have strong purchasing power and contribute to the local economy.
Europe doesn’t want European nomads. So, how do we know that countries want digital nomads to stay? In Europe, for example, all visas for digital nomads are specifically for non-European citizens. If they are European citizens, they must comply with Schengen guidelines, which give people in the European Union freedom of movement, and comply with the EU’s intra-community tax agreements. Such compliance makes it less profitable for states to host these remote workers.
The collateral damage. Portugal, the Netherlands, and recently Spain have seen firsthand the impact of the massive arrival of digital nomads in their cities. In the destinations most prized by digital nomads, such as Lisbon in Portugal or Malaga in Spain, the most notable effect has been an increase in rental prices, which quickly adapt to the generous budgets of the newcomers. The situation has strained the local real estate markets and exacerbated the gentrification of these urban centers.
Strategies to attract talent. Countries that issue visas to digital nomads aim to attract highly skilled workers and have them settle permanently in the territory. The result is a new pool of highly specialized talent at no cost to the local education system.
PwC’s UK tax expert Giorgia Maffini told the Financial Times that countries offering visas to digital nomads tend to be “less competitive and have aging populations.” In this regard, these countries compensate for lacking a young and better-educated workforce.
A $40 billion tax problem. The departure of digital nomads from a nation represents a severe problem. “In most countries, the income tax is the one that brings in the most revenue. If you start to see many people leaving your country, that is a problem,” Crowe services company partner Dino Sagra said to the Financial Times.
A recent report by the International Monetary Fund estimated that digital nomads provided $40 billion in income taxes to the third countries where they worked. In other words, the governments of the territories where they live keep the taxes that their home countries should collect.
Image | Unsplash (Avi Richards)