e-resident Estonia VAT Audit oÜ / burden of proof for salary

[questioneer]

Hi,

this is about an Estonian OÜ via e-residency, as a non-resident, non-citizen of Estonia, never set foot in there, no employees there, no office. Receiving salary. As part of VAT tax audit the estonian tax office ask where the employment taxes are paid. As a pertual traveller this salary is non-taxable. The question now: Do I need to prove that I was not in Estonia. Or does the tax office need to proof that the income is taxable in Estonia. Can it just be declared in the audit answers that one has not been in Estonia, etc... Or do i need to provide receipts where i was each month... I appreciate input from anyone with personal experience how this is handled.


Thanks a lot!

 

[daniels27]

Have you read this?

https://www.emta.ee/en/private-clie...on-residents/taxation-income-and-tax-treaties
Non-resident's taxable income in Estonia
In Estonia, a non-resident natural person has to pay income tax on the following Estonian sources of income:

• remuneration paid to a non-resident member of a management or controlling body;

and this

https://www.emta.ee/en/private-client/foreigner-non-resident/non-residents/income-employment
If an employer pays wages to a non-resident employee who is employed in the territory of Estonia, the employer has to pay social tax (33 %) and the employer's unemployment insurance contribution (0.8 %) and withhold the employee's unemployment insurance contribution (1.6 %) on the wages under Estonian law.

Are you the director of your company?

 

[questioneer]

yes, thanks, but the employee is not employed in the territory of Estonia. There is only 1 employer, no other person, living as perpetual travel outside of Estonia.

 

[daniels27]

yes, thanks, but the employee is not employed in the territory of Estonia. There is only 1 employer, no other person, living as perpetual travel outside of Estonia.

What is the function of the employee in the company? Director?

 

[questioneer]

Management board member

 

[daniels27]

Yes but look at this:

https://leinonen.eu/est/news/taxation-of-income-of-non-residents-natural-persons-in-estonia/
A non-resident taxpayer shall pay income tax only on the following profit:

• remuneration paid to a non-resident member of a management or controlling body; the place of work is not important (ITA § 29 (2));

 

[Houdini]

Sounds like you need some professional assistance should there come tax complications.

 

[questioneer]

yes it's true will get a professional for this. thanks everybody! appreciate it!

 

[JustAnotherNomad]

To the best of my knowledge:

1. A director's fee is always taxable in Estonia. So you'll want to make sure that there is an employment contract that explains that the salary isn't a director's fee, it's for actual work that you do for the company. Ideally you would have at least some kind of nominee director in Estonia to strengthen your case. There is a risk that they will say that at least part of your salary is really a director's fee, in that case there is no way around the Estonian tax, at least on that part of the salary.

2. If you have no clear tax residency (or at least other residency), this is a bit of a grey area. How long do you have to reply? I would try to give them some sort of residency. They won't care if you pay taxes there or not, but they probably won't have a box "the person is a full-time digital nomad without any fixed home" to check on their form. So where do they place you? They'll have to fill in a country. If you can't provide them with a residency country, they'll probably have no other choice but to write "Estonia" there, and then there will be tax by default. And then you can try to contest it and explain that there is no basis for taxation in the Estonian tax code, yada yada yada, but it'll be a PITA. Make it easy for yourself and get some kind of residency. What address do you use for your banking? Can you use that?

But generally, yes, you should work with a lawyer at this point, especially because of the director's fee thing. But try to find a lawyer who is familiar with nomads.

 

[Don]

To the best of my knowledge:

1. A director's fee is always taxable in Estonia.

Correct - the management board member fee is always taxed in Estonia, but if the company opens a branch abroad, the branch director's salary will not be taxed in Estonia but in the country where the branch is located.

So you'll want to make sure that there is an employment contract that explains that the salary isn't a director's fee, it's for actual work that you do for the company. Ideally you would have at least some kind of nominee director in Estonia to strengthen your case. There is a risk that they will say that at least part of your salary is really a director's fee, in that case there is no way around the Estonian tax, at least on that part of the salary.

It's not a bad idea; this would also help to solve the potential issues with VAT.

2. If you have no clear tax residency (or at least other residency), this is a bit of a grey area. How long do you have to reply? I would try to give them some sort of residency. They won't care if you pay taxes there or not, but they probably won't have a box "the person is a full-time digital nomad without any fixed home" to check on their form. So where do they place you? They'll have to fill in a country. If you can't provide them with a residency country, they'll probably have no other choice but to write "Estonia" there, and then there will be tax by default. And then you can try to contest it and explain that there is no basis for taxation in the Estonian tax code, yada yada yada, but it'll be a PITA. Make it easy for yourself and get some kind of residency. What address do you use for your banking? Can you use that?

But generally, yes, you should work with a lawyer at this point, especially because of the director's fee thing. But try to find a lawyer who is familiar with nomads.

It's easier to explain that your residence is in, e.g., Dubai compared to saying that you change your location every month.

The question is, is the OP an EU citizen/resident?

Where is the entity actually based / have permanent establishment, if nothing is in Estonia?

 

[JustAnotherNomad]

There's no need to prove PE etc.
They will only need to know the tax residency of the employee.
I'm not even sure if they'll want to see proof, but you better be prepared regardless.

 

[Don]

There's no need to prove PE etc.
They will only need to know the tax residency of the employee.
I'm not even sure if they'll want to see proof, but you better be prepared regardless.

Both residency of the employee and place and duration of work are important for tax purposes.
Best to have proper agreements in place for board member fee and employment contract or contract for services.

Shell companies with zero local substance commonly get VAT numbers revoked due to not being compliant. This might result in additional tax liabilities, e.g., you might not be able to claim input VAT, reverse charge mechanisms might not apply, suppliers might add tax, etc.

 

[questioneer]

If you have no clear tax residency (or at least other residency), this is a bit of a grey area. How long do you have to reply? I would try to give them some sort of residency.

I have two more weeks to reply. Yes, having a residency would make it easier, but I currently don't have one. My bank address is from the country where I was born and lived long time and paid taxes before (still have Tax Number there and pay for years prior), a central european country. But no more ties / business / substance / rental / anything.

And yes, the salary is for actual work, provable legit work. Not management. There isnt even anything to manage, a small outfit. And salary is a few k euro.

Thanks for everyone contributing here with their perspectives, I really appreciate it!

 

[Konstanz]

There is no such thing as perpetual traveler these days. You have to have some kind of official residence at some country if not , probably you are still tax resident in your home country
If it was so "easy" , everybody would do that. Why then people do Dubai, Monaco etc?

 

[JustAnotherNomad]

My bank address is from the country where I was born and lived long time and paid taxes before (still have Tax Number there and pay for years prior), a central european country. But no more ties / business / substance / rental / anything.

The bank account could be a tie. Unlikely if you only use it for your salary, but it could be. Definitely speak to an Estonian tax lawyer who has experience with nomads at this point.

 

[JustAnotherNomad]

There is no such thing as perpetual traveler these days. You have to have some kind of official residence at some country if not , probably you are still tax resident in your home country
If it was so "easy" , everybody would do that. Why then people do Dubai, Monaco etc?

Please... Not this debate again.
You can absolutely be a PT. Dubai, Monaco etc. are for people who are not nomads/PTs.
PT works for example when you have a transparent entity like a US LLC, where it is clear that the money is not taxable in the US. Then, since no other country can claim you as a tax resident, you are tax free.
But in this case, Estonia wants to know where OP lives since if it is a salary, social security, health insurance etc. may have to be paid, and it must be clarified if tax should be paid in Estonia (if the work was performed in Estonia) or in OP's residency country.
There is probably nothing in the Estonian tax code that says they can tax the salary if OP is not tax resident in Estonia and the money was not physically earned in Estonia.
But at the same time, if OP cannot give them any clear residency, then what will they write into the system to say the income is NOT taxable in Estonia?
Tax laws were not written with PTs in mind.
This is very much a grey area in this case.
I would work with a lawyer to try and find a solution.
Maybe you can explain to them that you live in e.g. Thailand, but on a tourist visa and that you just travel around, that's why you just stay in hotels when you are in Thailand.
But definitely work with a lawyer who has experience with how the Estonian tax authority works.

 

[JustAnotherNomad]

Both residency of the employee and place and duration of work are important for tax purposes.
Best to have proper agreements in place for board member fee and employment contract or contract for services.

Yes, I already wrote they should set up a proper employment contract.
But I meant you don't need a foreign branch etc. - the salary should be a deductible expense.

Shell companies with zero local substance commonly get VAT numbers revoked due to not being compliant. This might result in additional tax liabilities, e.g., you might not be able to claim input VAT, reverse charge mechanisms might not apply, suppliers might add tax, etc.

I guess that's a risk, I didn't think about VAT before. Anyway, they have to work with a lawyer at this point.

 

[churumbelo]

There's no need to prove PE etc.
They will only need to know the tax residency of the employee.
I'm not even sure if they'll want to see proof, but you better be prepared regardless.

They might request it. I do not know if they do it often or they even do it, but according to the Estonian tax agency, they might request proof of it. Source: I asked them about it a couple of years ago and they told me so.
But I also know people in that situation for years and the Estonian tax agency never requested anything like that from them.

By the way, they are nice and reply fast to the emails if any questions.