The importance of a country of residence or establishment for tax purposes (Tax Domicile)

As a self-employed person, you have a lot of freedom in where and how you run your business. But did you know that your country of residence or establishment has a major impact on your tax obligations? The importance of a country of residence or establishment for tax purposes is therefore great for self-employed people. This principle is known as tax domicile. In this article, we will discuss what tax domicile means, why it is important and how it can affect your tax position as a self-employed person.

What is tax domicilie?

Tax domicile refers to the country in which you are officially established for tax purposes. This is usually the country where you live and work, but in some cases may also depend on where your business is registered or where your economic activities take place. Governments use tax domicile to determine which country may tax your income and assets.

The concept of tax domicile is particularly important in an increasingly global economy, with more and more entrepreneurs working online and internationally. Digitalisation makes it possible to work from different countries, which raises the question: where are you taxable? The answer is not always straightforward and depends on both national legislation and international tax treaties.

Why is tax domicile important for self-employed people?

For self-employed people, tax domicile has far-reaching implications. Below, we discuss some key reasons why it is important to think carefully about your tax domicile or establishment country:

1. Tax liabilities

The country in which you are tax domiciled determines what taxes you pay and to what extent you can enjoy tax benefits. Some countries have a progressive tax system, while others have low or even no income tax (tax havens).

Besides income tax, there may also be other tax obligations, such as VAT (sales tax), wealth tax and social security contributions. This makes it extra important to carefully consider the tax implications of your country of residence or establishment.

2. Avoiding double taxation

If you work or generate income in multiple countries, you may face double taxation. This means you pay tax in more than one country on the same income. Fortunately, many countries have tax treaties to prevent this.

Double taxation can not only be financially detrimental, but also create administrative complexity. You may need to file tax returns in multiple countries, taking into account different deadlines, rates and deductions. A tax advisor with knowledge of international tax laws can help a lot in this regard.

3. Social security and insurance

Your tax domicile may affect your social security and access to benefits such as pension, health insurance and disability benefits. Some countries require self-employed people to join national social security systems, while others do not.

In the Netherlands, for example, as a freelancer, you do not automatically build up a pension as you would as an employee. In some countries, it is even compulsory to take out a private pension scheme as a self-employed person. This may also affect your decision to establish your tax domicile in another country.

4. Operating expenses and deductions

Which country you are based in also determines which business expenses you are allowed to deduct. In the Netherlands, for example, self-employed people can benefit from the self-employed deduction and start-up deduction, while other countries have different schemes.

Moreover, some countries may offer attractive tax benefits for entrepreneurs. Think tax-free zones, investment deductions or favourable schemes for start-ups. This can significantly affect your net income.

5. Administrative obligations

Your tax domicile also determines in which jurisdiction you file tax returns, how often you file VAT returns and your administrative obligations. Some countries have strict accounting rules, while others impose less bureaucratic burdens on self-employed people.

For example, some countries have an annual declaration requirement, while an entrepreneur in the Netherlands submits VAT declarations once a quarter or even monthly. This may play a role in choosing your country of establishment, especially if you prefer to spend as little time as possible on administration.

How do you determine your tax domicile?

Your tax domicile is determined based on several factors. Among others, governments look at:

• Where you spend most of the year (usually at least 183 days a year in a given country).

• Where your economic activities take place.

• Where your company is officially registered.

• Where your family and social life are.

• If you own property in a particular country.

In most cases, the country where you live and work is considered your tax domicile. But for self-employed people who work internationally or are digital nomads, this can be more complex.

Additional concerns for internationally employed self-employed workers

As a self-employed person with clients in multiple countries, you need to consider not only taxation, but also local laws around invoicing, contracts and intellectual property. In some countries, for example, you need to apply for a local tax number if you regularly provide services there.

In addition, changing exchange rates and bank charges can affect your income. If you receive income from different countries, it may pay to consider a multi-currency bank account or use a payment service that offers favourable exchange rates.

Working abroad as a self-employed person: where do you pay tax?

Many self-employed people choose to work abroad (temporarily). Think of digital nomads or entrepreneurs carrying out assignments in different countries. But how does tax work?

1. In which country are you a taxpayer?

If you work abroad as a self-employed person, in principle, your tax domicile remains in your country of residence. This means you file tax returns there. However, if you stay in another country for a long time and carry out freelance assignments there, that country may consider you a taxpayer.

2. What if your company is based in another country?

Some entrepreneurs register their business in a different country from where they live, for example because of favourable tax rates. This can have advantages, but also entails additional obligations, such as a tax return obligation in that country.

3. Digital nomads and tax

For digital nomads, tax domicile is a grey area. Because they have no permanent residence, it can be difficult to determine in which country they are taxable. Some countries offer special visas and tax regimes for digital nomads.

How to avoid problems with the tax authorities?

Not having your tax domicile properly arranged can cause serious problems. Think unexpected tax assessments, high fines or even legal consequences. Many self-employed people do not realise in time that they are incorrectly registered or unintentionally liable for taxes in several countries. This can not only lead to financial losses, but also cause administrative hassle and stress.

If your tax domicile is not properly arranged, it could lead to problems with the tax authorities. Possible consequences are:

• High penalties for incorrect or incomplete tax returns.

• Tax assessments in multiple countries.

• Limited access to social services.

To avoid this, it is wise to:

• Consult a tax advisor if you work in multiple countries.

• Check tax treaties between the Netherlands and other countries in which you operate.

• Keep your records properly so you can always show where you live and work.

Frequently asked questions on tax domicile for self-employed persons

1. Can I choose where to pay tax?

No, you cannot just choose which country you pay tax in. This is determined based on where you live, work and carry out your economic activities.

2. What if I am registered in the Netherlands but work in another country?

If you are registered in the Netherlands but work elsewhere, in most cases you remain liable to tax in the Netherlands. However, you may face withholding tax in the country where you work.

3. How do I avoid double taxation?

You can avoid double taxation by using tax treaties. These treaties regulate which country can levy tax and how to avoid double taxation.

4. Should I deregister from the Netherlands if I am going to work abroad?

If you spend more than eight months a year abroad, you are required to deregister from the Basic Registration of Persons (BRP). This may affect your tax status.

Ensure a solid tax strategy

Tax domicile is a crucial aspect of tax obligations for self-employed people. It determines where you pay tax, what deductions you can use and how your social security is regulated. A misjudgement can have major consequences for your finances and legal position.

If you work internationally, it is essential to properly assess your tax status to avoid problems. This is especially true for digital nomads and entrepreneurs with clients or operations in multiple countries. By planning smartly and getting advice from experts, you can enjoy tax benefits while meeting your obligations.

Think carefully about your country of residence and establishment and make sure you always comply with the tax rules. This will avoid surprises and enable you to do business worry-free. When in doubt, always consult a tax advisor to make the best choices for your situation