According to the UN, the world’s population has reached a staggering count of 8bn and yet appropriate ‘talent’ can still appear to be a scarce commodity in today’s job market. While many countries are seeking to address this via education and training programmes that boost their home-grown talent pool, they often address short-term labour needs by implementing incentives to attract individuals with the right combination of skills. Such incentives can manifest themselves as an easing of visa entry requirements, or a reduction of tax on income – or increasingly through a combination of both. 

Digital nomads

‘Digital nomads’ confuse matters as they are able to work remotely from one country performing the duties that would otherwise be conducted in the country of their employer. They therefore do not have a direct impact on the local labour market and do not directly address local talent needs.

Many countries (including the UK) continue to impose tax based on normal nexus rules. But several countries are actively attracting digital nomads or ‘teleworkers’ for the economic benefits of having an affluent socio-economic group living and spending in the host country. 

Working remotely in Spain

Spain offers a tax incentive to attract talent from both inside and outside the EU. Employees who come to work in Spain may be taxed as non-residents (even though they are considered tax residents) if they meet certain conditions. This means that they pay a flat rate of income tax of 19% if they are an EU national, or 24% if they are a national of a non-EU country. 

Until recently, this regime relied upon the employee transferring to Spain as a consequence of an employment contract. However, this condition will now also be met when the work activity is performed remotely from Spanish territory, even if there is no assignment ordered by the employer. 

A new ‘Law on Startups’ provides for digital nomad visas (or telework visas) to be issued in Spain to non-EU nationals. It is intended to encourage investment in technology-based emerging companies and, as part of that process, it allows for remote workers to work in Spain as ‘digital nomads’.

The visa will allow the non-EU national remote worker access to Spain for up to five years. They will be able to benefit from the right to be taxed as a non-resident at a rate of 24% for income up to €600,000 pa and 47% for income above that threshold.

BEATS visa in The Bahamas

With its reputation for being a tax haven, The Bahamas has embraced teleworkers by offering The Bahamas Extended Access Travel Stay (BEATS) digital nomad visa.

Foreign nationals working remotely for a foreign employer may stay in The Bahamas under such a visa for up to one year. Those individuals must prove that they are self-sufficient and they must have health insurance. They are, therefore, not treated as Bahamian employees as they do not impact the country’s labour market. To all intents and purposes, the BEATS visa is an extended tourist visa. 

Foreign employers do not have to suffer additional tax compliance requirements for individuals working under the BEATS programme.

The visa may be renewed to allow a maximum stay of three years. Initial application and subsequent renewal fees must be paid. The individual must provide evidence of foreign employment and sufficient foreign monthly income to be self-sufficient in The Bahamas. The individual cannot work for a Bahamian-licensed business under this visa.

Social security

The social security position of digital nomads may not be in sync with the tax incentives that are offered to them. In most countries, social security coverage is maintained in the county in which the employee works subject to reciprocal agreements that may allow for continued coverage in a home country on a time-limited basis. Digital nomads pose a problem for this approach as the place where the employee works is different from where their employer is based.

The Bahamas has simply taken the approach that employees who are eligible for the BEATS visa are not subject to social security in The Bahamas. This means that their access to social benefits is restricted and therefore a condition of the visa is that the employee must hold private health insurance.

The EU has recently responded to the phenomenon of teleworking employees. These employees often work for extended periods of time remotely in a country that differs from the country in which their employer is registered. It is therefore easy for them to reach the 25% threshold of substantial time that applies to multistate workers and maintain social security coverage in a country of habitual residence. This goes against the EU’s general principle that an employee should generally pay social security in the country of employment.

A new framework agreement under Art 16, Reg 883/2004/EC, applies a new threshold to teleworking employees. If they spend less than 50% of their total working time in their country of habitual residence, they will be subject to the social security system of the state in which their employer has their registered office or place of business.

This is an optional arrangement for both employers and employees. If desired, the employee can stay within the social security of the country of their habitual residence provided that an A1 certificate is requested.

The regulation applies from 1 July 2023 to those countries that sign up to it before that date. Countries invited to sign are the EU member states plus Norway, Iceland, Liechtenstein, Switzerland and the UK. The UK has declined to sign although it maintains its right to sign at a later date. For any country signing after 1 July 2023, the agreement will come into force from the date of signature.

Tax incentives for the assigned expatriate

Not all countries have embraced the teleworking digital nomad. Visas and immigration are an emotive subject that can be highly politicised. The potential economic benefits of offering tax incentives to a globally mobile nomad is not the only consideration.

Nonetheless many countries have a history of offering tax incentives to attract inbound expatriate talent in exchange for active participation in the local labour market to meet local labour needs.

Expatriate incentives in Italy

We all became acutely aware of Italy’s ageing population during the pandemic years. The demographic means that Italy has a shrinking domestic labour pool. To address this, Italy offers a concessional taxation scheme for workers who transfer their residence to Italy (para 1, Art 16, Legislative Decree 147/2015).

The scheme applies a reduction of 70% to the employment, and some self-employment, income produced in Italy for the tax period in which residence is transferred, and the following four (or sometimes even five) tax years.

The reduction is further increased to 90% if residence is taken in a specified region such as Sicily or Campania.

In addition, Italy offers tax beneficial treatment for:

• teachers and researchers returning to Italy (Art 44, Decree Law 78/2010);
• the return of workers to Italy (Law 238/2010); and
• new residents (Art 24-bis of the Consolidated Income Tax Act).

Expatriate incentives in Canada

Canada is a vast and sparsely populated country actively seeking to attract highly skilled employees through a long-established points-based immigration system. 

Canada’s largest province, Québec, offers an attractive tax incentive. A foreign employee is entitled to a full or partial income tax exemption for a continuous period of five calendar years if they come to Québec to work for an ‘eligible employer’ as a foreign specialist, researcher, expert, professor or researcher on a post-doctoral internship.

The exemption applies to the employee’s salary or wages, or to all of the employee’s income, as applicable. The exemption consists of a deduction in the calculation of taxable income.

To claim the exemption, the eligible employer must obtain a certificate for the employee from the government body responsible for issuing it. A list of eligible employers and the requirements for claiming a deduction for foreign employees is tabulated in section 10.5 of TP-1015.G-V.

The exemption is applied as follows:

• 100% for the first two years of the employee’s exemption period;
• 75% for the third year of the employee’s exemption period;
• 50% for the fourth year of the employee’s exemption period; and
• 25% for the fifth year of the employee’s exemption period.

However, the exemption does not apply to social security contributions in Québec.

Unexpected consequences

Employment tax does not exist in isolation. Remote workers – whether they are digital nomads or traditional expatriates – can trigger permanent establishment complications for foreign employers. Employment law can differ vastly from county to country and HR policies need to ensure that they cover legal, tax and social security from a truly international aspect. 

In an environment where employees can sometimes be working from holiday homes unknown to their employers, staying abreast of global compliance in a holistic way is vitally important.

Moniza Syeda, Global Mobility Content Manager, Tolley and member of the Tax Faculty’s Employment Taxes and NIC committee.