Countries around the globe are establishing digital nomad visa regulations to allow foreign employees to enter the countries and work exclusively for foreign employers for short periods of time—generally, between six and twelve months. Although well-intentioned and advantageous in concept, these visas may not sufficiently address the myriad legal and socioeconomic issues that can arise for host countries, local employees, foreign employers, and foreign employees.
Quick Hits
- Digital nomad visas may miss the mark when countries fail to provide clear eligibility and application guidelines, omit to address how local employment, tax, and social security laws will apply to foreign employers and foreign employees in connection with such visas, or insufficiently account for the impact on local workers.
- While tools exist for engaging employees abroad, utilizing them creatively and properly can be done only on a country-specific basis.
A basic condition of a digital nomad visa is that the foreign individuals and their foreign employers never interact with the local employment market. Employees are the beneficiaries of these visas because they gain access to destinations attractive for their culture, weather, and cost of living. Benefits can also extend to host countries when they draw the greater spending power of foreign workers to their shores. Further, foreign employers may also benefit, as allowing workforces to work remotely under nomad visas can be an integral element of a larger talent attraction and retention strategy.
As remote work became popular during the COVID-19 pandemic, countries began to calibrate their immigration laws to capitalize on the remote-work trend through nomad visa regulations. Generally, absent a nomad visa regulation, local laws do not contemplate a foreign employee working for a foreign employer while in country. Nevertheless, newly adopted nomad visa regulations, have at times failed to cover corollary issues, such as employment, tax, and social security obligations, that can greatly affect individuals working for foreign employers.
Even the countries that did address these particular issues failed to anticipate the full impact on their own citizens of an influx of short-term foreign employees. As such, the benefits that foreign employees may obtain while working under nomad visas for foreign employers may not be accessed by local employees who work for those same foreign employers.
All told, digital nomad visas may miss the mark in several important ways, including by failing to
- provide clear guidelines with respect to what is required to obtain a digital nomad visa;
- delineate how the host country's employment, tax, and social security laws will apply to the foreign employer and employee; and
- take into account how nationals/locals will be affected.
Issues With Obtaining a Digital Nomad Visa
Some countries have announced the availability of digital nomad visas without the accompanying procedures or regulations regarding how to apply for and obtain a nomad visa. Basic guidelines, such as how long a stay the visa permits, may be absent, creating a gap between the idea and the reality of the digital nomad visa. Workers attracted to these countries are thus thwarted in their attempts to gain entry.
Impact on Local Employment, Tax, and Social Security Laws
Generally, employment, tax, and social security laws are territorial, meaning that when foreign employees work in a given country, the employment, tax, and social security laws of that country apply to them.
This standard framework, however, may not be applicable to individuals holding digital nomad visas because under such programs foreigners are not technically employees of companies in the host country and are subject only to the terms of the offer letters and employment agreements they signed in their home countries with their foreign employers.
A lack of clarity in nomad visa regulations, moreover, can leave employers and employees operating in a gray area. Left unanswered are important questions with potential impact on employers and employees, such as the following:
- Are foreign employees working in country on digital nomad visas subject to employment benefits under local laws, such as paid time off or time off for local holidays?
- Are they required to contribute to the local social security system? If so, under what mechanism, since in most cases enrollment in the social security system requires the existence of a local employer entity (a requirement that would disqualify the foreign employee from the nomad visa)?
- Are foreign employees required to report their income earned in country, and what, specifically, is considered foreign income within the local tax regime?
Effect on Local Citizens
While generally considered an advantageous option for foreign employers/employees and host countries alike, digital nomad visas may be a mixed blessing for local economies that are host to an influx of foreign workers. In such instances, locals may experience the dual whiplash of rising costs and lost earning opportunities. Portugal's popular nomad visa program, for example, attracted so many foreigners that the cost of local goods rose precipitously. More concerning, and perhaps more critical, are the potential lost opportunities for locals to earn as much as their foreign counterparts.
Local citizens, who already have the right to work in their home countries, are not eligible for digital nomad visas and arguably face an inequitable situation when working alongside foreign individuals for the same foreign employer. Indeed, an unintended outgrowth of the optimization of digital nomad vias is the distinct advantage sometimes conferred upon foreign employees with work authorization under such visas. They can work compliantly—arguably, unencumbered by the host country's employment, social security, and sometimes tax laws—while local employees are subject to local/national laws.
The discrepancy arises because most digital nomad visa legislation addresses only the idea of a foreign employee working for a foreign employer—not the legalities and subsequent effects associated with working for a foreign employer.
Considerations for Engaging Talent in Other Countries
Generally, a foreign employer must open a branch or subsidiary in a country to legally employ nationals. Some foreign employers, however, work around this cumbersome requirement, choosing instead (sometimes improperly) to engage nationals as independent contractors.
In the example directly above, an employer could have a foreign employee on a digital nomad visa doing the same work as a local engaged as an independent contractor. This arrangement has the opposite effect of protecting locals, which is the goal of most countries' employment laws. It limits their opportunities, while foreigner employees enjoy the best of both worlds: they earn money in U.S. dollars or euros and are free to spend their earnings in desirable locales with favorable exchange rates.
Foreign companies that embrace the independent contractor route risk being found noncompliant by their host countries for misclassifying workers. A potential solution is to find a third-party intermediary to serve as the employer of record (EOR). In certain countries, however, even this option has risks, as laws limit how long an employer can use an EOR and the types of individuals the EOR can employ.
In many countries, the EOR model is highly regulated, if not prohibited. In the Philippines, for example, labor outsourcing is unlawful in most cases, yet the country permits a similar model called "business process outsourcing" (BPO). The two options are intended to regulate quite different scenarios, which makes navigating the legalities complicated.
Even when an EOR seems like the obvious solution, it may require additional considerations, as EORs do not address the "permanent establishment" risk. Foreign companies using in-country talent—regardless of who is employing them and depending on the work the talent is performing—could inadvertently create a permanent establishment, thereby incurring corporate tax liability in that country.
Employers that want to enable their existing employees to work globally and/or leverage a global workforce will first consider the available options in each targeted country. While tools exist for engaging employees abroad, utilizing them creatively and properly can be done only on a country-specific basis—there is not a global, one-size-fits-all solution.
Key Takeaways
Digital nomad visas are a great option for digital nomads who want to work and travel abroad. Yet even where clear guidelines exist for obtaining a digital nomad visa and for how the visa holder will be impacted by the host country's employment laws, digital nomad visas may result in a degree of confusion and (arguably) inequity, compared with other approaches in countries where foreign employers intend to engage talent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.