Best setup to avoid European withholding tax? Anything better than Malta?

[VanderbiltyMoney]

Since you were concerned about withholding taxes, perhaps you overlooked the (silent) partnership structure. At times, this can even be leveraged to achieve zero taxation, with jurisdictions such as Estonia. It seems that a silent partnership structure could be suitable for your specific case to build trust.

• A silent partner is a company that is a stakeholder in another company and is without visibility. The other company conducts business. The rights and duties of a silent partner are limited exclusively to the internal relationship.
• The silent partner contributes to the company in the form of capital, in-kind contribution, or service. As consideration, he or she shares in the profits and participates in the losses, but only to the extent of the contribution made or agreement. Disbursements to silent partners qualify as operating expenses for the company and are tax deductible.
• Silent partners have the right to review the annual financial statements. In the event of insolvency, their legal position is one of a creditor.
• In a typical silent partnership, the silent partners participate in the assets or management of the company under contractual arrangements.

This way, even jurisdictions such as Austria could be used to build trust and face the local market with relatively low effective tax if structured correctly.

Example:
An Austrian company has a silent partner (a company from a low-tax jurisdiction) who contributed the right to utilise a certain patent, a know-how, a software or any other intangible. For being entitled to utilise these rights the Austrian company entitles the low-tax company, by virtue of a silent partnership contract, to participate in its profits for 80%. In other words, 80% of the profit before taxes realised by the Austrian company has to be paid to the low-tax company (silent partner). The profit share of the silent partner is a fully tax-deductible business expense for the Austrian company (the principal). Additionally, Austria doesn’t levy any withholding tax when the silent partner is from the UAE, Hong Kong, Singapore, Malaysia, etc. One can conclude that the total effective tax burden of an Austrian silent partnership could be only 5%, since 80% of the profit before taxes flows to a low or zero tax jurisdiction, and an Austrian corporate income tax of 25% is due on the remaining 20% of the profit.

This is incredible!

 

[JustAnotherNomad]

I know this was an example but if you already have a subsidiary company in the place where you want to hire why don't you hire directly through the subsidiary?

That was the point of having the subsidiary. I didn't check France specifically, but in most high-tax Western countries, you would create a PE anyway by hiring locally, so you might as well set up a subsidiary and enjoy the better trust/reputation that comes from it.

I'd say a Swiss company would be best since it partcipates in the parent-Subsidiary directive, it has prestige and banking options.

The big downside is that there are only a handful of options to get dividends out of Switzerland tax free.

Yes, exactly, hence my question how to avoid the WHT. That's why I started this thread... Looking for other ideas.

 

[Houdini]

Have you considered looking into the Netherlands, which is known for such tax maneuvers? If I were you, I would try consulting a tax expert in the Netherlands. A one-hour consultation should be enough to clarify this.

 

[Marzio]

hence my question how to avoid the WHT

The question is not "how to avoid WHT" because the answer is "setup a [treaty country] holding" and you are done.

The question is "how to avoid WHT while having all the options to live wherever i please without changing company structure" so it's a little more complicated BUT by setting up an Estonian holding:
1. Dividends distributed are tax exempt from CIT if these are paid out of dividends received from your CH company
2. Individuals are considered residents of Estonia if they have a permanent residence in Estonia

This will allow you to nomad as long as you want and receive dividends tax free from the EE holding.

Then, when you'll make up your mind and decide where you want to settle, you'll see which options you have at your disposal.

Have you considered looking into the Netherlands

https://taxsummaries.pwc.com/netherlands/corporate/withholding-taxes
The Netherlands applies a conditional WHT on dividend, interest, and royalty payments (the Conditional Source Taxation Act). This tax is only levied on interest, royalty, and dividend payments to affiliated companies in designated low-tax jurisdictions and in certain (tax abuse) situations.

I wouldn't go with NL unless you are a multinational like Uber, Booking and so on that could afford top lawyers.

 

[JustAnotherNomad]

This will allow you to nomad as long as you want and receive dividends tax free from the EE holding.

As a tax resident of Estonia, there would be a PE risk in Estonia, but it might work.
But then there's the again the tax risk for the exit. I don't really see the benefit of Estonia over Cyprus or Malta for a holding company, except for better reputation?
Switzerland doesn't have any WHT with HK companies either btw...

 

[Marzio]

As a tax resident of Estonia, there would be a PE risk in Estonia

Didn't we talk about hiring highly skilled shiny happy people in the countries where you'll form subsidiaries? No staff in EE = no PE risk

I don't really see the benefit of Estonia over Cyprus or Malta for a holding company, except for better reputation?

Better reputation, relatively close to CH, as a resident you'll be able to open physical bank for your holding, easier and cheaper to manage than CY, MT & HK.

But then there's the again the tax risk for the exit

So go for HK but then be prepared to deal every year with HK to have your FSI exempt.

https://www.ird.gov.hk/eng/tax/bus_fsie.htm

 

[JustAnotherNomad]

No staff in EE = no PE risk

But you said I should move to EE (set up a permanent residence there). But yeah, if I only rent an apartment there, but never spend time there, maybe I could be tax resident, but still avoid the PE...

Better reputation, relatively close to CH, as a resident you'll be able to open physical bank for your holding, easier and cheaper to manage than CY, MT & HK.

But Estonia has the big issue with capital gains being taxable as corporate income. Also probably less interesting for hiring people. In MT/CY, you have good mix of nationalities to hire from. If I want French-speaking customer service agents, I could probably find them in CY/MT, but not in EE.

So go for HK but then be prepared to deal every year with HK to have your FSI exempt.

Not sure if it's such a good match, but there's also Luxembourg for example... it's just expensive. UK might also work.
But then you may need substance in those countries, and they are not attractive from a CIT perspective.

I'm still thinking Switzerland could be a good option if there is a good way to avoid both WHT and CGT upon exit. Maybe a pure holding company in CY could work? I'm thinking that CH would probably be OK with this, but CY would obviously be a massive red flag for many countries. Maybe the CH company could own the subsidiaries, so I wouldn't have to declare that the CH company is owned by a CY holding company, only the UBO?

 

[Marzio]

Maybe the CH company could own the subsidiaries

Man i'm telling you this since the beginning.

Final holding (HK, EE, CY, MT) > Intermediate company (CH) > subisdiary1, subisdiary2, subisdiary3, subisdiary XYZ.

Another option would be to use the Spanish ETVE instead of CH

You could setup the ETVE as a pure holding company (if you will not sell to Spain) or relocate the ETVE in the Canary Islands and benefit from ZEC taxation (4% tax up to 2Mln if you invest at least 50K in fixed assets and hire 3 people > this is your substance).

If you don't want to invest in the ZEC then you could benefit from RIC that states that up to 90% of company profits could be excluded from taxation if you invest in fixed assets in the Canary Islands.

A friend of mine built a freaking real estate empire in Gran Canaria by leveraging RIC.

The only thing is that you can't be tax resident of any country classified as blacklist by Spain.

 

[Marshal]

Canary Islands, looks interesting, not often we hear about them in this forum.

 

[JustAnotherNomad]

Holding location:
EE = capital gains are taxed, you can only reinvest, not take out profits
CY, MT = ideal from tax perspective, but bad reputation
HK = difficult political situation, on some tax haven lists, bad reputation, non-EU, probably not a good fit
LU = expensive
ES = forget it, no way I'm touching that country
UK = actually very interesting... PSD, participation exemption, no WHT on dividends

I actually think we might have a winner with the UK here...

 

[Marzio]

I actually think we might have a winner with the UK here...

Think again.

Post Brexit, as the UK is not in the EU, the PSD can no longer apply.

Czech rep, Estonia, Germany, Ireland, Italy, Latvia, Portugal, Romania, Slovakia all have 5% WHT on dividends.

 

[Don]

Think again.

Post Brexit, as the UK is not in the EU, the PSD can no longer apply.

Czech rep, Estonia, Germany, Ireland, Italy, Latvia, Portugal, Romania, Slovakia all have 5% WHT on dividends.

you need to check domestic rates as well.. 5% might be the case based on a treaty, but if there is no WHT based on domestic law, there will be no WHT.
UK also does not have WHT on dividends (if dividends are paid the other way around)
Afaik, CFC rules do apply if the CIT is less than 75% of UK tax which was recently increased to 25%.

Holding location:
EE = capital gains are taxed, you can only reinvest, not take out profits
CY, MT = ideal from tax perspective, but bad reputation
UK = actually very interesting... PSD, participation exemption, no WHT on dividends

I actually think we might have a winner with the UK here...

What if you combine them?

EE company with a PE in CY, MT? (overcome the CGT issue, and help alleviate the reputation
also UK company treaty tax resident in CY or MT with a PE in Estonia

For residency:
UK - high tax on personal level
MT - you are limited in terms of how much money you can remit to MT tax-free
EE - more flexible for tax residency compared to others, may require complex structuring
CY - 60 day rule

Or some kind of (cross-border) partnership structure could be used for owning the holding company to benefit from the exemptions.

 

[JustAnotherNomad]

Post Brexit, as the UK is not in the EU, the PSD can no longer apply.

The UK has a huge treaty network. Just because they left the EU doesn't mean all the treaties have suddenly become invalid. It may no longer be called "PSD", but the WHT is still 0%.
Switzerland isn't even an EU member, why would they care about whether the UK is in the EU?
The bigger issue is that then you would need some substance in the UK and it's another entity in the mix. In my example above, only two companies would be needed (e.g., FR+MT), both would have substance anyway.

Also, the Swiss CIT rate is still around 10% or so. Twice as much as MT...

What if you combine them?

EE company with a PE in CY, MT? (overcome the CGT issue, and help alleviate the reputation
also UK company treaty tax resident in CY or MT with a PE in Estonia

Hmmm, not sure how I follow. Wouldn't the CGT always be due where the company is tax resident, which would usually be Estonia?
Or do you mean an EE company resident in MT?
Why would that help with the reputation? If sending dividends from e.g. a French subsidiary to the parent company, surely I'd have to declare that the parent company is tax resident in MT?
Same with the UK?

And how would a PE in Estonia help? You mean to use a UK company, but make it tax resident in CY/MT, and then claim that operations are done from EE, so that operations would not be taxed? How would that help, then the profits would still be "stuck" in Estonia?

Also, I'd like to keep things simple... It must be possible to explain the structure in a simple way and give other reasons then tax if someone asks questions...

 

[Marzio]

Maybe the mighty HU will do?

PSD, participation exemption, no WHT ....

.... and according to Deloitte "capital gains realized by a non-resident shareholder from the sales of shares in a HU company generally are not taxable"

you need to check domestic rates as well.. 5% might be the case based on a treaty, but if there is no WHT based on domestic law, there will be no WHT.

You're right, Estonia and Latvia don't have WHT based on domestic law but all the others i mentioned have.

Just because they left the EU doesn't mean all the treaties have suddenly become invalid.

UK renegotiated all EU treaties and for some countries the treaty is 0% while for others is 5% as i mentioned.

If you don't care about selling in those countries or don't care about paying 5% WHT on dividends then UK could be a winner.

 

[JustAnotherNomad]

Afaik, CFC rules do apply if the CIT is less than 75% of UK tax which was recently increased to 25%.

Seems like this shouldn't be a problem if there aren't any key people in the UK and the subsidiary has proper substance (active trading income). But good point to check.

Maybe the mighty HU will do?

Difficult political situation.

If you don't care about selling in those countries or don't care about paying 5% WHT on dividends then UK could be a winner.

Didn't you say the CH company should own all the subsidiaries? CH still has 0%.

 

[Marzio]

Didn't you say the CH company should own all the subsidiaries? CH still has 0%.

Oh so you are talking about UK as the final holding.

I got confused when i wrote about the ETVE that was meant to replace the CH company.

Then i read about UK and thought about replacing CH with UK.

Nevertheless I would advise you to reconsider HU instead of CH as the subsidiaries cash collector because CH will give hard time asking you proof that whichever final holding you'll decide to use, it has substance.

By using a UK LTD treaty not resident in HU you would appear like a UK company but with the benefit of having access to the PSD and most importantly there aren't WHT so no need for a final holding which means less overhead.

If i remember correctly HU companies don't have CFC rules but even if i'm wrong to be considered a CFC should be taxed less than 4.5% so no worries about that point either.

If i were in you i would go with HU.

If political situation will worse you simply move the UK LTD to another treaty location.

 

[JustAnotherNomad]

I got confused when i wrote about the ETVE that was meant to replace the CH company.

No, ES is tax hell. CH is a compromise because they care about business and taxes are reasonably low and they have good talent (even if expensive).
But CH is still double the tax rate of MT...

Nevertheless I would advise you to reconsider HU instead of CH as the subsidiaries cash collector because CH will give hard time asking you proof that whichever final holding you'll decide to use, it has substance.

Yes, exactly, that's why I'm not necessarily a fan of going with too complicated structures.

If political situation will worse you simply move the UK LTD to another treaty location.

What about just going with a UK LTD treaty resident in MT then?
That's pretty much what you suggested in the beginning, even though I still don't believe it works the way you think.

UK Ltd resident, not domiciled in MT
|
CH company
|
+ subsidiary 1
+ subsidiary 2
+ subsidiary 3

So that would make it even harder to see that it's actually a MT company (fewer red flags) and CH has no WHT on outgoing dividends to neither MT nor UK.
Could be a good solution?

 

[clemens]

I hope you will post here what setup you go with once decided. It's an topic of interest for me.

 

[Marzio]

Could be a good solution?

It could but be aware that 5% will probably not last.

https://www.vacancycentre.com/blog/2024/04/corporate-tax-system-in-malta

 

[JustAnotherNomad]

Probably we will be seeing around 10% minimum CIT very soon...