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The following is designed to provide general tax information for Americans living abroad or contemplating a foreign move. As with all tax and legal issues, seeking tailored advice from qualified counsel is advisable.
The global pandemic has brought forth rapid advancement of technologies and resources designed to assist remote workers. These developments may quickly become the catalyst for a dynamic transition to a permanent remote workforce driven by the elimination of employee commutes and ease of transition from one meeting to the next. With return to office policies being widely met with resistance, the combined productivity gains for organizations and lifestyle enhancements for associates may prove too difficult for the draw of traditional in-office camaraderie to overcome.
For many Americans, the opportunity to relocate to another part of the world where the cost of living is manageable and a new cultural experience brings an exciting change of pace—all without sacrificing the stability of a current employment arrangement—will prove irresistible. With the proliferation of short-term vacation rentals and budget airfare options, the world truly has opened up to the remote worker. Breaking up the monotony of working from home every day by taking Zoom calls at the beach is becoming an increasingly desirable option.
Once the decision has been made to move abroad, the first issue to consider will be where to travel. American passports offer a tremendous amount of flexibility for short-term business and leisure travel. Nevertheless, every host country will have unique rules with respect to the length of stay and the kinds of activities that can be performed depending on the type of visa acquired.
Undoubtedly, short-term and potentially even extended visa avenues will be available to Americans wanting to spend some time outside the United States while continuing to work remotely. Whether this means that tax relief would follow in the U.S. or additional tax exposure will arise in the country where the remote work is being performed will depend entirely on the circumstances involved. The length of the stay, whether the United States has income and social security tax treaties in place with that country and the extent of the company’s activities within that country will all be important elements.
Short Visits Abroad
Short visits abroad will typically be neutral from a tax perspective. Pursuant to IRC Sec. 861(a)(3), income from personal services is generally sourced to the location where the services are performed. This means that even though wages are being paid by a U.S. company, the earnings would technically be classified as foreign source if earned while working remotely abroad.
Income earned during short-term visits to countries with which the United States maintains an income tax treaty will generally be protected from foreign taxation. The flip side of this coin is that even though foreign earnings are produced, limited visits abroad will not qualify a remote worker for the foreign earned income exclusion, which allows up to $108,700 (2021) to be excluded from U.S. tax if certain requirements are met. Eligibility for the exclusion requires at least a year outside the United States and these presence requirements cannot be accomplished with short-term travel.
Furthermore, as local taxes are not being paid in that country on account of the treaty protection, no credit for foreign taxes paid will be available. Though in rare instances, foreign tax credit carryovers from a prior year working abroad could still produce a tax windfall from the short trip overseas and the “foreign source” income generated.
Moreover, a temporary visit outside of a U.S. state will always be insufficient to break state residency, requiring state-level taxes to continue to be paid on the foreign source income. Short-term travel outside of Spain would also be insufficient to break established residency and discontinue worldwide taxation as a Spanish resident. Special relief may be available for employment outside of Spain when foreign tax is being paid while a tax resident. Contrary to U.S. policy, Spain does not maintain the same citizenship-based tax system, meaning that Spanish tax residency could potentially be terminated if sufficient time is spent outside the country. American expats in Spain who are able to terminate Spanish residency would still have American taxes to manage irrespective of where they move.
The experiences gained may be priceless, but a temporary trip abroad would offer no tax savings on the U.S. side to offset any duplicated living expenses. To complicate matters, in the absence of protection from a U.S. income tax treaty, exposure to foreign country taxation could conceivably arise, even in a short-term stay of only several weeks or months. For example, nonresidents visiting the United States from a non-treaty country are only afforded protection from U.S. income tax if present in the United States for less than 90 days during the year, earn less than $3,000 in compensation and are paid by a foreign employer.
Assuming 240 workdays per year, this would mean that a nonresident earning $100,000 annually would have U.S. income tax exposure after the eighth remote work day. Fortunately, if foreign income tax is triggered by the short visit abroad, the tax paid can generally be credited back against the U.S. liability for that year. Each country will have unique rules for how individuals working in the country on a remote assignment are classified and understanding the boundaries to stay within can go a long way to avoiding future hassles.
Impact of U.S. Income Tax Treaties on Short-Term Travel
The United States has executed income tax treaties with over 65 countries. The specific provisions will vary, but all treaties have the goal of promoting cross border business by allowing residents of one country to spend limited amounts of time working in the other, without needing to worry about local tax obligations.
If working abroad remotely for a U.S. company, the provision of the Treaty covering income from “employment” or “dependent services” would be operative. Article 16 of the U.S.-Spain Treaty explains that an American working in Spain would not be subjected to Spanish tax provided:
- The work is performed for a non-Spanish company;
- The employment is not operated through a permanent establishment or fixed base that company maintains in Spain; and
- Less than 183 days are spent in Spain during any twelve-month period beginning or ending during the stay.
Permanent establishment is a term of art, further defined in Article 7 of the Treaty to mean a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” The term specifically includes a place of management, branch, office, factory or workshop. The term is clearly not designed to cover a makeshift home office in a short-term Airbnb rental; but, given that it still leaves quite a bit of room for interpretation, ensuring that activities performed on behalf of the company within the country will not give rise to a permanent establishment is crucial. Client-facing associates or those in management positions would need to take even greater caution.
Accordingly, with the protection of the Treaty, spending up to half the year in Spain, working for an American company on a remote contract is possible without triggering Spanish taxation. And it should be stressed that continuing to stay in Spain beyond the 183 days permitted in the Treaty would potentially subject all U.S. employment income attributable to the time in Spain to Spanish income tax, irrespective of tax residency status.
The same would be true for a Spanish national working remotely from the United States for half the year, though the additional layer of state-level taxation would also need to be taken into account. Notably, California does not extend the benefits of income tax treaties to state-level tax. On the other end of this spectrum, Florida does not have a state-level personal income tax.
Income tax treaties do not cover related charges, such as unemployment, disability, or social security-type taxes. As a practical matter, this is typically not a concern if the company has no presence at all in that country and the employee has not spent enough time there to establish residency. But exceptions can always arise in this area and maintaining compliance with non-income tax obligations can be one of the more onerous challenges faced by U.S. remote workers with longer-term visas in a foreign country.
Foreign Social Security Taxes
The United States maintains bilateral social security agreements with 30 countries. The U.S./Spain agreement explains in part that an American employee who is working in Spain for a U.S. company for less than five years remains covered by U.S. Social Security. Neither the employee nor the company would be obliged to contribute to the Spanish social security system. Corresponding exemptions from U.S. social security tax would be available for a Spanish national working for a Spanish company remotely from the U.S. for less than five years.
With social security agreements in place with only a limited number of foreign countries, an extended stay in a country where no such protection exists can pose compliance challenges for both company and employee.
Longer Stays Abroad
While visitor visas will typically limit the stay in a foreign country to 90 or 180 days, many Americans will be able to extend the visitor visa, transition to visas for students or entrepreneurs, or apply for non-lucrative visas that do not grant work privileges. When remote employment from the U.S. is still carried out, income tax will generally be due in that foreign country once residency has been established.
Practical challenges can arise when the plan is to continue working on a long-term basis in a foreign country for a U.S. company. First, non-lucrative or similar visa types that might be appealing to the remote worker generally do not grant work privileges in that country. The remote work arrangement exists in a grey area that could make it difficult to comply with the formality and structure of income tax reporting responsibilities once tax residency is established. Moreover, compliance with social security, unemployment, disability taxes and similar charges often requires the participation of the employer and can make the project even more challenging for the employee to sort out independently. This element of the compliance can create challenges, not only for visa holders without a work permit, but also those who are permitted to work in that country but whose U.S. employer has no intention of complying with foreign employment and tax withholding obligations.
Yet some Americans will undoubtedly be able to thread the needle and find an overseas living arrangement offering both limited protection against local taxation and opportunities to take advantage of tax relief available for Americans residing overseas.
1. Relocating to a Country With No Personal Income Tax
The options in this category are limited, but countries with no personal income tax include The Bahamas, Cayman Island, Brunei, Kuwait, British Virgin Islands, Anguilla, Monaco, UAE, St. Kitts and Nevis, Bermuda and Qatar. Long-term visas and residency in these countries may be more difficult to secure but living in a foreign location with no income tax will greatly simplify the ability to qualify for the foreign earned income exclusion and ensure compliance challenges do not arise for a stateside employer.
2. Splitting Time Between Two Income Tax Treaty Countries
Each case will be unique here and the facts of the specific living arrangement and the domestic law of the foreign countries involved will drive the outcome. But a plausible strategy could be developed whereby time would be split between two treaty countries in a way that would effectively leverage U.S. income tax treaties to avoid local taxation without sacrificing eligibility for the foreign earned income and housing exclusion.
A long-term living arrangement overseas would also present an opportunity to break state residency if ties are effectively cut to the former state. This decision should not be taken lightly as severing state residency can make it difficult to secure U.S. banking options, obtain or renew a driver’s license, or vote in state-level elections. Complicating matters, several states have implemented “convenience of the employer” rules that can create additional state tax challenges in the home state of the company when the remote work arrangement is not much more than an employee perk.
If eligibility for the exclusion can be preserved, despite the split living arrangements abroad, meaningful tax savings would follow. The foreign earned income exclusion, combined with the standard deduction, can result in over $120,000 of earnings being protected from income tax in the United States. For someone who has moved from the State of California, this translates to over $25,000 in annual tax savings. Even if sufficient time can be spent outside the United States to satisfy the 330-day physical presence test, the lesser known qualifications of the foreign earned income exclusion, maintaining a “tax home” and “abode” outside the United States, can throw some additional nuance into the analysis.
Tax home is defined as the location of an individual’s main place of business or work. If the nature of the work is such that no main place of business exists, the personal home is considered the tax home. If a taxpayer has no main place of business and no main personal home, “itinerant” worker classification would arise. The tax home of the itinerant worker is wherever he or she is working. Abode is defined for this purpose as the location where a taxpayer maintains his or her family, economic and personal ties.
The tax home and abode analysis would be complicated for an individual splitting time between foreign countries while working for a home office back in the United States. If considerable ties are maintained back stateside or if even a few days are spent working in the U.S. during the year, eligibility for the exclusion could be undermined. Any such strategy will require careful planning tailored to the specific situation involved.
3. Taking Advantage of Special Tax Regimes for Foreign Nationals
Even in countries with high rates of income taxation, special provisions may be carved out for foreign individuals that can offer limited protection against foreign country taxation.
Portugal has enacted tax legislation covering “non-habitual” tax residents who relocate to the country. Under these guidelines, foreign income and earnings are not taxed in Portugal and income earned from specified professions from sources within the country is subject to a tax rate of 21% for the first ten years after having established Portuguese residency. Astounding tax savings could be produced by an American moving to Portugal from Spain or another higher taxed foreign country, bringing along ten years of foreign tax credit carryovers.
Taxes are unlikely to be the primary driver of any decision to leverage a remote work opportunity for an overseas move. Even so, American expats maintaining long-term remote work assignments in a foreign country will still need to be careful so as not to trigger incremental tax compliance headaches. Nonetheless, with careful planning and a bit of creativity, the possibility of spending some time abroad, funded by tax savings, could become a reality.
Expat Legal Services Group offers flat fee pricing for tax compliance in conjunction with a unique suite of legal services for American expatriates and foreign nationals with financial interests in the United States. Contact Expat Legal Services Group today at info@expatlegal.com or visit the website at expatlegal.com.
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