Peter Macfarlane presents an in-depth analysis of recent changes that have turned this EU country into a very attractive option for Permanent Travelers and Digital Nomads.
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By Peter Macfarlane
It’s very rare that a new offer comes along to obtain a residence permit to live tax free in a European Union country.
Such offers do exist. In Italy, for example, new immigrants can opt to pay a flat tax of EUR 100,000 per year on their worldwide income. Portugal has its non-habitual residence regime that allows new immigrants to be exempted from most income taxes, albeit with some fairly restrictive conditions. Malta has some tax benefits too – that are attracting crypto millionaires at the moment (more on that below).
But, in a very low key launch last month – seemingly almost by accident – a lesser-known EU member state launched a new type of residence permit with a complete exemption on foreign earned income for a grand total cost in fees of around $100, and it can be issued in just 1-2 months. The main criteria to qualify you plus your loved one and kids for this visa are:
- You must be working for a foreign company. You can own the company or just be an employee, and it can be from anywhere in the world, doesn’t matter – an offshore company will work fine. You just cannot be retired or unemployed.
- You must have around $30,000 in a personal bank account. This figure could even potentially be reduced if you can be bothered to submit slightly more complicated paperwork.
- You must not be an EU citizen. Why? Because as an EU citizen, well you just don’t need a residence permit to live in the EU, so you’re out of luck! Brits will be breathing a sigh of relief here that due to Brexit, they can qualify alongside Americans, Aussies, Russians, Asians, Kittitians, Ni-Vanuatu, etc. for this benefit.
You don’t need any expensive lawyers to do this. You can apply for it yourself, online in English, or in person at your nearest embassy. In this article I will explain how to do it.
You are thinking, there must be a catch, right?
There are a few other minor criteria: having health insurance is one, and a clean criminal record is another.
Then there are some other “catches” that are arguably pretty significant, and some other points that are not really clear, that we will get to in a moment… but, if a tax-free EU resident permit appeals to you, you probably should read on and see if you can work around these relatively minor inconveniences in order to qualify. I will also give you some practical examples of planning scenarios and structures that I think would work.
Before we get into the details, a caveat. This EU residence program may or may not be a way to reduce your overall tax bill. That depends very much on the rules of where you are coming from. Americans will still be liable to US tax on their worldwide income, though the foreign earned income exclusion might come usefully into play, depending on your particular circumstances.
Besides that, the program was only made law in February, and the online application procedure was only launched this month (March 2021). There are some things that are still unclear about how it will roll out in practice. Right now, you should consider yourself a beta-tester if you decide to sign up.
Frankly, I find this tax exemption surprising to say the least. I think it could easily be restricted in the future, but then again – the idea is clearly to attract wealthy foreigners who will spend money in the country, so maybe it’s a sign of things to come as the competition for wealthy residents hots up around the world.
I won’t keep you in suspense any longer! The country we are talking about is Croatia. And the program we are talking about is their new Digital Nomad Visa.
Although it’s colloquially being called a visa (just like the Portuguese “Golden Visa”) it’s actually by law not a visa but a Residence Permit because it allows you to reside in Croatia. This difference between a visa and a residence permit is quite significant. For example: EU residents have the right to enter the EU at any time, whereas the EU has been closed to tourism for months due to the Covid pandemic.
So, let’s get into a summary of the details of the Croatian Digital Nomad Visa.
- It is issued for a maximum period of one year. After that you have to leave the country and wait at least 6 months before applying again. If you are wondering what to do during this time, you could hop over the EU external border to neighboring Serbia and apply for a Serbian temporary residence visa. If you hold a passport from a non-EU country that does not need a visa to enter Croatia (like the UK, USA or Australia) you can actually stay up to 15 months in Croatia in one go – because you can enter for 90 days as a tourist then apply for a Digital Nomad visa once you are in the country.
- You can apply from outside Croatia if you wish. If your passport usually needs a visa to enter Croatia, you will have to take this route. If you don’t need a visa, you can also choose to do so. You can apply at a Croatian embassy in person and, if approved, you will receive either a biometric or an old-fashioned Croatian residence permit, depending presumably on the IT infrastructure at the embassy where you apply. This will allow you to enter Croatia as resident, even if you have never set foot on Croatian soil before. So, we consider this a quite attractive route. Local embassies will logically be able to serve you in the local language where the embassy is located and should be familiar with documents from your country.
- There is an online application form. However, this is not quite as attractive as it might at first seem. All it does is forward your application by e-mail to a local police station in Croatia, depending on the Croatian address you give. It will give you a bit of a head start perhaps, but you will still need to do the process in person at the local police station – where they may or may not speak English and may or may not be familiar with dealing with Digital Nomads.
- You need an address in Croatia to apply. However, they are not too fussy about this. An Airbnb or even a hotel should work. The government website says: if this is the first time you are applying and you do not have an address in the Republic of Croatia, you can provide a temporary address as the address of your intended stay (hostel/hotel if you have a reservation/confirmed reservation of accommodation).
- Your partner or family can join you. However, they have to apply at a second stage. First you have to be approved as a Digital Nomad, then you can apply for Family Reunification permits for your partner and/or family members. Croatia being a liberal EU country, you don’t have to be married to your partner and same sex partners are allowed.
- You will have to visit Croatia. Seems obvious, but there might well be PTs out there who would like to get a residence permit without actually visiting the country (some countries do allow this – but that is another topic). You will have to be there at least once, but if you are a real nomad you certainly won’t want to stay in one country for a whole year… so the good news is you can come and go completely freely. Anyhow, Croatia is a wonderful country to visit, with extremely friendly, relaxed people and a great Mediterranean-type lifestyle.
Now, there are some more specific details on how to apply, but I don’t intend to go into those in this article. If you do your research in detail online, you don’t need a lawyer to apply. The Croatian government site linked above is a good place to start.
If, on the other hand, you are the type who would rather delegate this kind of thing to someone who knows what they are doing already, and have your hand held through the process, I have carried out due diligence on a reliable law firm in Croatia who speak English and are willing to help out. Our Front Desk team can make the necessary introductions (only available for paid-up members of Q Wealth Report). These experts can walk you through the whole process starting from your home country, for a fixed fee of EUR 2,000, payable half up front and half on completion. This does not include the government fees or translation expenses.
What I want to focus on more here are the tax planning and EU banking opportunities because these have not been covered elsewhere on the internet. Here’s what I see, reading between the lines of the rules:
- In Croatia it is extremely easy to get a tax number. Even as a non-resident, you can walk into a tax office and walk out ten minutes later with a tax number – all you need is your passport.
- As the holder of a residence permit, you will have no problem establishing local substance such as opening a local bank account and obtaining utility bills in your name, etc.
- You will also be able to open accounts easily online in other EU countries, using banks like N26 or Revolut. Banks in other EU countries might well want to see your Croatian residence permit, utility bill and your Croatian tax number, and any automatic reporting they do will go to Croatia, which would clearly be considered as your country of residence under CRS reporting criteria. (This situation is slightly different if you are a US citizen – we’ll come to that below)
- Similarly, you will be considered an EU resident for the purposes of e-commerce: Visa and MasterCard have become very strict on having EU resident directors for e-commerce companies.
So what about tax? The Croatian tax code was updated in December 2020 to allow a tax exemption for digital nomads. The law, in Croatian, is here, but to make it easy for you we have translated part of Article 9 of the latest Croatian tax code as it refers to Digital Nomads into English:
(1) Income tax shall not be paid on:
- receipts of natural persons realized on the basis of performing non-independent work or activity for an employer who is not registered in the Republic of Croatia on the basis of the acquired status of digital nomad in accordance with a special regulation.
This clearly means that your income as a Digital Nomad in Croatia is tax exempt, and for practical purposes the tax authorities in Croatia will not expect Digital Nomads to file tax returns.
That said, it is important to note it is not technically speaking an exemption from reporting other forms of income: i.e. passive income that does not come from your work as a digital nomad.
The other question is whether you will actually be considered tax resident of Croatia.
This question remains open, and I will not attempt to answer it here from a technical tax lawyer viewpoint, so you have been warned! PWC’s website, which I consider a reliable source of information, says that someone who is “physically present in Croatia for at least 183 days in one or two calendar years” is a tax resident of Croatia under Croatian law.
We have established that you will have a residence permit and a tax number from Croatia, and under this program you might well be physically present there more than 183 days in a year. But if you actually need a formal tax residency certificate from the Croatian tax authorities, for purposes of claiming treaty benefits for example, the lawyers I spoke to off the record thought this would be more difficult to obtain.
When it comes to extricating yourself from the tax system of wherever you are coming from, different source countries have different criteria. If you say you are moving to Croatia, some countries might ask for a certificate of tax residence there – but I believe for most purposes the fact that you physically move out and have a one-year residence permit from Croatia would be sufficient. For the UK, by way of example, the criteria for non-residence according to the UK Government’s website is fairly simple:
You’re automatically non-resident if either:
- you spent fewer than 16 days in the UK (or 46 days if you have not been classed as UK resident for the 3 previous tax years)
- you work abroad full-time (averaging at least 35 hours a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working
The Croatian Digital Nomad visa demonstrates that you work in Croatia so I believe it fits the bill nicely – you could still spend up to 90 days per tax year in the UK. (Note that the UK tax year runs from 6 April to 5 April the following year).
What about Americans? US citizens are fully taxable on their worldwide income no matter where they live. However, they can claim double tax treaty benefits and Croatia has a tax treaty with the USA. To claim these benefits however you would require the above-mentioned certificate from the Croatian authorities, which might be hard to get. But then again, do you need it anyway? If Americans choose not to claim treaty benefits but are nonetheless working in Croatia for a whole year, can they claim to Foreign Earned Income Exclusion? That would be a question for a US tax attorney.
Finally, let’s talk about the foreign company that will be your employer under the Croatian Digital Nomad visa program.
The main criteria for qualifying for the Croatian digital nomad visa is found in this law. Specifically, article 3 (1) 43 describes a Digital Nomad as follows:
Digital nomad is a third-country national who is employed or performs work through communication technology for a company or his own company that is not registered in the Republic of Croatia and does not perform work or provide services to employers in the Republic of Croatia.
This is fairly clear then – it can be any foreign company, including one of your own, that has no other links to Croatia.
This might be an ideal opportunity for those looking to acquire an offshore company for the first time. Crypto traders might fit into this category, for example. You might work as a consultant, manager or investment advisor for a Marshall Islands, Nevis or Panama company that you own. Any clients or other income and gains would simply be managed through the offshore structure.
I might recommend (depending on the circumstances) putting other assets into a trust or a Panama Foundation, that would in turn be the owner of the offshore company.
The offshore trust and company would pay zero tax, and you are free to pay yourself whatever salary you like out to yourself in Croatia as earned income, completely free of Croatian tax.
In conclusion, there are certain unanswered questions about the Croatian Digital Nomad Visa program, particularly when it comes to more complex tax issues. I believe that over time, these doubts will be cleared up – but they might also limit some of the benefits.
I’ve talked to a number of people recently who made large crypto gains and are considering moving to Malta or Portugal for a year to realize these gains tax free. Could Croatia be an alternative? Possibly. It is certainly much easier and cheaper than acquiring a Golden Visa in Portugal or Malta – if you only want to move for a year in any case, this could save you a lot of hassle.
As I mentioned above, many people could in fact stay up to 15 months in total tax-free in Croatia under the Digital Nomad visa, by combining the 90 visa-free tourist days with the one-year residence permit. This extra 90 days gives you an extra margin during which you could easily set up an offshore asset protection trust, Panama foundation or offshore company plus a bank account, give yourself an employment contract, and then spend one whole year as a Croatian resident.
The money you save from your “employment” during your year in Croatia then becomes capital, that you can use to support yourself during a 6-month period of “unemployment” or “retirement” (as you prefer) in another country. Then, after 6 months you can return and repeat the process – or try a new country in keeping with the Digital Nomad lifestyle.
We would certainly be interested in any feedback from readers who try this strategy, either with or without professional assistance. I am testing it out right now with a couple of my personal consulting clients who have agreed to serve as guinea pigs. Watch this space for updates!
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