Tax has always been an important matter for digital nomads—those individuals who work remotely from their homes while their income sources are based outside the host country.
They often find themselves confused about why they should pay taxes on income that doesn’t originate from the country where they reside.
Most of digital nomads want to avoid heavy taxes for this they are looking for a country where the tax of income is zero, or they manage it to not live more than 6 months in a single country, most countries have the regime for foreign nationals that if they reside in country for more than 6 months they will have to pay the income tax but if they live just 6 months do not exceed it they will not be considered as a tax resident.
So many digital nomads live for 6 months in a Country and than leav for another country, through this way they are pay zero income tax, additionally some countries like UAE don’t have income tax which is a best option for digital nomads who don’t want pay any income tax. it’s not easy to find country with zero tax so those countries who have very low income tax like Cyprus also can be a good option.
What about Brazil?
Brazil is a popular destination for digital nomads, since the country already offer a digital nomad visa for all nationalities it attract digital nomads from all around the world. rio de janeiro is a top destination in Brazil for digital nomads and all digital content creators. this City is famous for it’s colorful night life and carnivals.
Brazil is a big country it’s not limited to the rio de janeiro the country have multiple cities which are really worth to live as a digital nomad. Sao Paulo, fortaleza are very famous cities. So by living in Brazil you have more options big cities with beautiful beaches.
Brazil is not a cheap country but it’s not too expensive, with income of USD digital nomads can enjoy their stay in Brazil, tents are higher in Sao Paulo and Rio de Janeiro but affordable flats can be found with a little more search.
Digital nomad taxes in Brazil
In Brazil, residents are taxed on their worldwide income, which includes income from non-Brazilian sources.
The tax rates on non-Brazilian source income are the same as for Brazilian source income, and they range from 0 to 27%.
- 0%: Up to BRL 22,847.76 per year.
- 7.5%: BRL 22,847.77 to BRL 33,919.80.
- 15%: BRL 33,919.81 to BRL 45,012.60.
- 22.5%: BRL 45,012.61 to BRL 55,976.16.
- 27.5%: Above BRL 55,976.16.
It’s important to note that Brazil has tax treaties with various countries to avoid double taxation. If you receive income from a country with which Brazil has such a treaty, the amount of tax you owe in Brazil might be reduced by the amount of tax you paid in the source country.
How to avoid income tax in Brazil as digital nomad?
The guaranteed way to Avoid income tax in Brazil is to live in Brazil for 6 months per year, leave Brazil after 6 months and come back. This will cause that you are not considered as a tax resident.
You can live for 6 months in Brazil and 6 months in Colombia, Colombia is south American country and have a digital nomad visa which have 6 months duration of stay, you can read more about Colombia digital nomad visa.
There are other countries in south America that they also offer digital nomad visas you can consider them also as on opinion for 6 months stay.
Reduce tax as a digital nomad in Brazil
If you want to stay for more than 6 months in Brazil you will be considered as a tax resident and you have to pay income tax in this case as you are digital nomad and your income source is out of Brazil you can use foreign tax credits.
What’s foregin tax credit?
Brazilian residents are taxed on their worldwide income, which can lead to double taxation when income is also taxed in the source country.
To mitigate this, Brazil offers foreign tax credits (FTCs), allowing taxpayers to offset the taxes paid abroad against their Brazilian tax liabilities.
This system helps to prevent the double taxation of the same income and encourages international business and investment.
Legal Framework
1. Domestic Legislation: Brazil’s domestic tax law provides the basis for claiming foreign tax credits.
According to the Brazilian Income Tax Code (RIR/1999), residents can deduct taxes paid abroad from their income tax due in Brazil, subject to certain conditions and limitations.
2. Double Taxation Treaties (DTTs): Brazil has signed numerous DTTs with various countries to further facilitate the avoidance of double taxation.
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The procedures for claiming foreign tax credits and often include provisions for mutual agreement procedures (MAPs) to resolve disputes.
Key Elements of Foreign Tax Credits
1. Eligible Taxpayers: Only Brazilian residents are eligible to claim foreign tax credits. Non-residents, who are only taxed on their Brazilian-sourced income, do not qualify for FTCs.
2. Eligible Taxes: FTCs are generally available for income taxes paid to foreign governments. Other types of taxes, such as social security contributions or value-added taxes (VAT), are typically not eligible for credits.
3. Foreign Source Income: FTCs apply to income that is sourced from outside Brazil. This includes salaries, dividends, interest, royalties, business profits, and other types of income earned abroad.
Calculation and Limitation
1. Limitation: The FTC is limited to the lesser of the foreign tax paid or the Brazilian tax attributable to the foreign income. This ensures that the credit does not exceed the Brazilian tax liability on the same income.
2. Per-Country Limitation: In practice, Brazil applies the FTC on a per-country basis, meaning that the credits are calculated separately for each foreign country in which income is earned.
3. Valculation Example: Suppose a Brazilian resident earns $20,000 in the U.S. and pays $4,000 in U.S. income tax. If the Brazilian tax on this income is calculated to be $5,500, the FTC would be limited to $4,000, the amount of U.S. tax paid. The resident would pay an additional $1,500 in Brazilian tax on this income.
Claiming the Foreign Tax Credit
1. Documentation: Detailed documentation is required to support the FTC claim. This includes:
– Foreign tax returns and payment receipts.
– Official tax assessments from the foreign tax authorities.
– Proof of income earned abroad.
2. Currency Conversion: Foreign taxes paid must be converted to Brazilian Real (BRL) using the exchange rate on the date the taxes were paid. The Central Bank of Brazil’s official rates are generally used for this purpose.
3. Tax Return Filing: The FTC is claimed on the annual Brazilian income tax return. Taxpayers must report both their foreign income and the corresponding foreign taxes paid.
The Brazilian tax authorities (Receita Federal) provide specific forms and guidelines for this process.
Special Considerations
1. Double Taxation Treaties (DTTs): Brazil has DTTs with several countries, including:
– Argentina
– Canada
– China
– France
– Germany
– Italy
– Japan
– South Korea
– Spain
– United Kingdom
– United States
– And others.
These treaties may provide additional benefits or specific rules for claiming FTCs, such as methods for determining the source of income and mutual agreement procedures (MAPs) for resolving tax disputes.
2. Proportional Method: Some DTTs specify a proportional method for calculating FTCs. Under this method, the credit is proportional to the ratio of foreign income to total income.
For instance, if 30% of a taxpayer’s total income is from foreign sources, only 30% of the foreign taxes paid may be credited against Brazilian tax.
3. Excess Credits: Unlike some countries, Brazil does not generally allow the carryforward or carryback of unused foreign tax credits. Any excess credits that cannot be used in the current tax year are forfeited.
Practical Challenges
1. Documentation Burden: Gathering and maintaining the required documentation can be cumbersome, especially for taxpayers with income from multiple countries.
2. Complex Calculations: Calculating the FTC involves converting currencies, applying per-country limitations, and understanding the interaction between domestic law and DTT provisions.
3. Dispute Resolution: In cases of tax disputes or double taxation issues, accessing MAPs under DTTs can be a lengthy and complex process.
Professional Advice
Given the complexity of FTCs and the potential for significant tax savings, it is advisable to consult with tax professionals who have expertise in both Brazilian and international tax matters.
They can assist in:
– Ensuring proper documentation and compliance.
– Maximizing the benefit of FTCs.
– Navigating the intricacies of DTTs and resolving any tax disputes.
Conclusion
Foreign tax credits are a crucial tool for Brazilian residents to mitigate the impact of double taxation on their international income.
While the system is designed to be fair and prevent double taxation, it requires careful documentation, precise calculations, and a good understanding of both Brazilian tax law and international treaties.
Professional advice is often essential to navigate this complex area effectively.
