by SoftwarePatent on 3/13/15, 10:46 AM with 55 comments
In Europe the national health care systems are tied to paying taxes in a country. How are nomads dealing with health insurance?
I'd really love to be completely above board w/r/t taxes and have health insurance, but all the advice I find online either sounds made-up or is "consult with your accountant". If I had an accountant I wouldn't be searching for this info!
by patio11 on 3/13/15, 12:35 PM
1) US citizens have unambiguous legal requirement to file and pay US taxes wherever you live.
2) The Foreign Earned Income Exemption will excuse you from taxes on the first 90k or so of profits, though not self-employment taxes. This makes it advantageous for many Americans to file and pay US only. This may or may not be kosher under laws of host country -- treatment of immigrants with unique situations varies WIDELY, sometimes even between clerks at same office.
3) You get a dollar for dollar tax credit against US taxes for foreign taxes. If you live in a high-tax country like most of Western Europe or Japan, you may choose to file and pay locally then take the foreign tax credit to extinguish your US liability. This is often useful for services/immigration status/etc. Foreign Tax Credit can't be double-applied over FEIE, so in practice only matters if you have high income or you generate capital gains (not subject to FEIE generally).
4) Read those tax treaties! Get competent pro advice! I overpaid US taxes by $10k prior to finding a single piece of paper existed that excuses Americans in Japanese Social Security from US self-employment tax. Front-line clerks in both countries were ignorant of it. (Edit: On the chance that there's one other self-employed USian here who or on a future Google search wondering how to demonstrate status under the US Japan Social Security Totalization agreement, where that status means because you're paying Japanese social security taxes either personally or through your employer then you don't have to pay US self-employment taxes or social security or medicare, the answer is ask for a J/USA 6 form from your local Japanese social security office. If they don't believe that exists, they're wrong -- have them call the International Affairs Desk at the (national) Social Security office -- we literally had to get word directly from the mouth of the 年金局の国際年金課長.)
by hluska on 3/13/15, 11:37 AM
There is a reason that so much of the advice is 'check with your accountant' - the U.S. tax system is incredibly complex and the IRS does not accept ignorance as an excuse for non-compliance.
In this particular instance, you will need information about tax treaties. Here is one page - http://www.irs.gov/Businesses/International-Businesses/Unite...
However, I cannot minimize how important an accountant is. Your last sentence seems to indicate that you think this is a joke. First, the IRS is not a laughing matter. Second, accountants are professionals and tax law is not the kind of thing you can pick up on a forum someplace.
Finally, the IRS filing deadline is April 15, you do not have an accountant yet, and it strikes me that you just started thinking about US tax. You need to get on this right away because again, ignorance is not an excuse for non-compliance.
by davidw on 3/13/15, 10:52 AM
http://en.wikipedia.org/wiki/International_taxation
It's the only country in the world that forces its citizens to do so (besides Eritrea), which is why record numbers of people who don't live in the US are giving up their US citizenship.
If you actually have residency in some country, then you probably need to pay taxes there. But if you're actually being a 'nomad', are you going to be anywhere that long?
> If I had an accountant I wouldn't be searching for this info!
Find one, then; ask your friends for recommendations. If you are a US citizen, then there is likely a tax treaty between the country you are a resident in and the US. You need an accountant that knows about this. I'd be happy to recommend one for Italy.
by davewasthere on 3/13/15, 1:22 PM
If you ever fancy renouncing your US citizenship, then you might be able to be not tax-resident anywhere... (see five flag theory: http://en.wikipedia.org/wiki/Perpetual_traveler) Or if not completely avoiding tax residency, you can at least minimise your exposure for the taxes you do need to pay.
Also, tax and healthcare mostly have nothing to do with each other... It's mostly your residency status (which is totally unrelated to Tax residency oddly). You can be resident in a country for tax purposes, but still not be eligible for Heath care or other social services...
Hope that helps somewhat.
by mellavora on 3/13/15, 9:39 PM
The IRS is very clear that you have to file with them regardless, though you may not have to pay anything (due to FEIE or similar).
What you haven't mentioned is your legal status in "Spain." Are you on a tourist visa, or do you have legal residency? Do you have a work permit?
If you are in Spain under a tourist visa, then you cannot legally be employed in Spain, which means you have no tax duty in Spain. If you happen to be employed by some US company and you happen to be doing work for them while you happen to be sitting in a cafe in Barcelona, well, you are in a legal grey zone-- you do not have the right to work in Spain. You cannot "come clean" with the Spanish government, as you have no right to work there without the proper residency permit. The best you can hope for is they ignore it, the worst is they prosecute you for visa violations.
European health systems are tied to legal residency, which can (but does not always) include some duty to pay taxes. If you have a Spanish residency permit, then you have rights to Spanish health care.
If you also have a Spanish work permit, the next question is if your employer is registered as a Spanish employer (most US startups are not). If not, again there are problems which make it difficult for you to pay income taxes in Spain.
Note that I'm only talking income from your employer. Interest/dividends/capital gains are a whole nuther thing.
I'm guessing you are on a tourist visa. Enjoy your time, don't stay longer than 90 days, and buy private insurance. Also, if you try to stretch the 90 days by a quick trip to England, this might only work the first time.
by bhuga on 3/13/15, 2:06 PM
Since US taxes were unescapable, I eventually went for tourist visas, moving every 3 months. The host country does not consider you taxable. I used this in Spain in particular. It worked out fine. I had a spanish lawyer and a spanish accountant, both were of the opinion that it was above board as long as I took longish trips every few months. As long as you're still working remotely and not using social benefits, there's no real legal category for you yet.
There is private health insurance explicitly designed for Americans living abroad. It's dramatically better (and cheaper) than regular american health insurance. Mine, for example, was $1700/year for 100% coverage outside the US and an extra $2900/year for 80% coverage if I wanted it active in the US too.
by kephra on 3/13/15, 1:22 PM
Most accountants only know B&M, M&D, and SBOs. Accountants who know international tax laws, are seldom seen in the wild, but mostly employed as specialist in big companies.
In Germany tax office is required to answer every question. They wont tell you how to reduce your taxes, so you need to ask the right questions. But you have a signed paper afterwards, that you can show, if your books are checked 10 years later, telling that a tax officer claimed you did it right.
I can only tell the other way round:
If you are a German, and have an LLC in Tennessee, then this LLC is a path through taxed company, so you have to pay US income tax on it. Germany and US has a double tax agreement, so I do not need to pay taxes on the US income, but the US income is added to my German income to calculate the percentage of my Germany income that I have to pay as taxes.
Its now a bit more complex for US citizen in Germany. You have to file your US taxes till 15. Juni, if living outside US at IRS Center, Austin, TX, 73301-0215, USA. And your German taxes 10th of Mai. I advise to file the German taxes as early as possible, if self employed. You dont need to worry about this, if you are employed in your own company with payroll tax. Just ensure that your German tax return is ready, before you need to file your US tax. The double tax agreement between US and Germany will cause IRS to look at German taxes, whine and laugh, because German taxes are higher, and tell you that you need not to pay additional taxes in US.
My advise is to ask IRS.Frankfurt@irs.gov to confirm this!
Coming back to paying low taxes, and getting good health care same time with an US/Germany combi: Regardless if you are German or US citizen, imho the best combination is being employed at your own uGmbH in Germany, for only €1000/month. The uGmbH is not funded and owned by yourself but by your LLC in US that owns the intellectual property of your business. File invoices from your LLC to your uGmbH regulary. Your LLC will have nearly no costs. File US taxes as early, and German as late as possible in this case. So you benefit from low US income taxes, and an incredible low health care and unemployement insurance based on your low German income. Add a PLC in Estonia if you need a tax free money sink.
Optimizing Spain/US might be totally different. But you likely will be paying US tax as happy as I do - even if I'm not a US citizen ;-)
by dmichulke on 3/13/15, 11:39 AM
The general rule is IMO (I'm not an accountant): You either are employed in the US and pay US taxes or you are a company or individual in Spain offering services to a US company, then you are taxed in Spain. The latter means you have no employment contract but a consulting contract.
I am European but I work also for American companies as consultant and as such I _have to_ pay taxes in my country of residence (Luxembourg).
The good thing in my case is you avoid VAT, the subjective thing (good or bad, depends on your perception) is that you are subject to the obligatory social security deductions ranging from 25% to 40% (in the countries I know).
Taxes must be paid as well if you pay social security but they shouldn't play the big role unless you earn big (>= 8k E per month)
Whether paying social security is good depends heavily on your country of residence and it is kind of up to you. I'd preferably not pay social security in Germany but in Luxembourg it's tolerable.
by markokrajnc on 3/13/15, 1:46 PM
by kokey on 3/13/15, 1:28 PM
by thatusertwo on 3/13/15, 12:04 PM
by collyw on 3/13/15, 1:16 PM
In the case of working from Spain for an American company, you pay American taxes, and if those add up to less than what you would have paid in Spain, you pay Spain the remainder.
by philiphodgen on 3/13/15, 9:06 PM
There are two taxes that you are talking about: income tax and Social Security tax.
First, income tax.
Because you live in Spain, you must pay income tax to Spain on your income. The source (a U.S. company) is irrelevant. You are a Spanish resident performing services in Spain.
Because you are a U.S. citizen you must pay income tax to the USA. The fact that you are living in Spain is irrelevant.
There are two ways to ease the pain:
- Foreign Earned Income Exclusion. See Form 2555 to determine if you qualify. If yes, the first $100,800 of earned income (be as careful with your definitions as you would be with the programming language of your choice) is not taxed by the USA, thus making the first $100,800 of earned income taxable only by Spain. You must file a U.S. tax return to get that benefit.
- Foreign Tax Credit. A dollar of income is at risk of tax twice: once by Spain, once by USA. The USA gives you a tax credit (see Form 1116) for tax you paid on that dollar of income. It isn't high precision math, but you can bludgeon the numbers to a close enough result.
- Use Both. You can use both. Use the Foreign Earned Income Exclusion for the first $100,800 of earned income, and the Foreign Tax Credit for earned income above that.
Second, Social Security tax.
Because you are working in Spain, you are supposed to contribute to the Spanish equivalent of Social Security.
You get around this by getting an exemption application via the totalization agreement between the United States and Spain. http://www.ssa.gov/international/Agreement_Pamphlets/spain.h...
This allows you to contribute to the U.S. system and not the Spanish system.
This exemption is typically good for 5 years with an option to extend to six years. Then you have to start contributing to the system where you live -- they figure if you've been camping out that long in Spain you must really be a resident there and therefore should contribute to the system.
Third, getting covered by the Spanish national health system.
Don't know. I did some stuff with Spain a little while ago and my memory is that if you contribute to the Spanish social security system you get the medical coverage and if you do not contribute to the Spanish social security system you don't get the medical coverage.
Fourth, what are you?
You are ambiguous about your relationship with the American startup. Are you an employee or an independent contractor? Either way the result should be the same (in the long run) but the paperwork required will be different (in the short run).
If you are an independent contractor, permit me to make a shameless plug: a recent blog post I did about how to be digital nomad, work abroad, and pay no Social Security tax. http://hodgen.com/how-digital-nomads-can-avoid-paying-social...
Fifth, talent and cost
There are very few people who know this stuff well. The ones that are out there tend to be (a) overworked; and (b) expensive. Sorry. Blame your government for emulating the Byzantine
Empire or medieval theologians for the complexity and burden imposed on you. If you do your tax work properly, you will probably only pay tax in Spain and pay nothing the USA. And to get there you will pay several thousand dollars a year in accounting fees.
My suggestion is that you practice Extreme Minimalism in your business affairs because you are far better off if you optimize for minimum tax advice expense first, then minimize tax second. :-)
Sixth, blowback
Let me just say that the biggest single part of our international tax law firm (and international tax is the ONLY thing we do) is expatriations. U.S. citizens giving up their citizenship.
This is especially true for Americans abroad and doubly true for American entrepreneurs abroad.
Disclaimer/warning shot/preemptive strike/we had to destroy the village in order to save it/etc.
I am an international tax lawyer. This is not legal advice to you because we've never met and I have no idea what is going on in your life. You'd be a damned fool to make important legal and tax decisions based on stuff you read on some random discussion board on the internet.
/Phil.
by rlmw on 3/13/15, 1:22 PM
by kcole16 on 3/13/15, 11:55 AM
As far as being above board, it really depends on how long you are planning to stay, and whether or not you are a permanent resident.
by chucksmart on 3/13/15, 1:31 PM