Estonia e-residency + Portugal NHR

[European]

We could go on and on speculating, i know that there are people that are getting away with a US LLC + NHR. Don't know if it's because PT tax administration doesn't care or they are preparing a giant mousetrap at the end of their NHR 10 years.

I also know people that are UK LTD directors and only shareholders receiving tax free dividends while living in PT. Now it's less attractive of a solution because ot the UK CIT increase to 25% but until yesterday they paid 19% total tax and the LTD was 100% managed from PT.

Great. And that is a single-member LLC and they spend most of the time away from PT as you were describing?

 

[Marzio]

And that is a single-member LLC and they spend most of the time away from PT as you were describing?

Yes, that's what i know. They were spending most of their time between Brasil and Asia.

 

[European]

Yes, that's what i know. They were spending most of their time between Brasil and Asia.

Did the PT tax authority came asking questions and was fine with the arrangement because they spent most of the time abroad or it's just that nobody asked so far?

 

[Marzio]

nobody asked so far

Nobody aked questions so it could be either good or bad news.

 

[European]

Nobody aked questions so it could be either good or bad news.

What kind or taxable net income are we talking about for these companies, ballpark? $500K? More?

 

[Marzio]

I really can't tell you, i know they were dealing with crypto stuff but don't know much more.

 

[ska]

If you don't live for 183 days in PT then you could pair your NHR with a US LLC.

You only need to rent an apartment in PT t be considered tax reisdent there so If you don't stay long enough in PT to trigger a permanent establishent then it could work but you have to double chck with a Portuguese lawyer.

In theory it works.

are you sure about that?
US LLCs don't pay divideds, they are transparent... So technically it doesn't matter the 0% NHR divided tax rate

 

[Marzio]

US LLCs don't pay divideds, they are transparent... So technically it doesn't matter the 0% NHR divided tax rate

I don't understand what's your point.

Under NHR foreign income source is tax exempt so it doesn't matter if you receive dividends, royalties or something else if the income is passive.

The point here is to not trigger permanent establishment in Portugal so if you manage your US LLC from outside Portugal it can't be considered local sourced income.

 

[bandanna]

Here is the answer from the Estonian tax authorities regarding the tax treaty with Portugal:

Thank you for contacting us.

Tax treaty does not reduce the level of taxation on Estonian corporate dividend distributions from the standard 20% rate to 10%, because it is the corporate income tax paid by the company. Tax treaty applies to income tax withheld from the beneficial owner, from you as the Portugese resident.

Please find next explanation on our website: Tax liabilities of companies established by e-residents | Estonian Tax and Customs Board

If an e-resident owner of an Estonian resident company receives a dividend, it necessary to draw a distinction between the income tax applicable to a dividend of an Estonian company and income tax withheld on a natural person’s dividend income. If an Estonian company pays income tax on dividends at the normal rate of 20/80, no further income tax withholding will apply for the dividend distribution to a natural (e-resident) person. An e-resident natural person in most cases will not be able to use income tax paid by an Estonian company for the purposes of double taxation relief in their own country of residency because the Estonian income tax was paid by a different person.

From the year 2019, dividends paid regularly by an Estonian company are subject to a lower rate of 14/86. In the latter case the Estonian company will withhold a further 7% on a non-resident natural person’s dividend income upon making a dividend distribution. Income tax withheld on dividends (7%) is an income tax rate applicable to natural person dividend recipients in Estonia that can be used for double taxation relief in the dividend recipient’s country of residency, depending upon such country’s rules and the tax treaty for the prevention of double taxation of income.

Best Regards,

Katrin Kullamaa
Consultant

Curious which solution you went for at the end? How’s it going?

 

[bandanna]

I was under the impression that due to the double taxation agreement between Portugal and Estonia, I would be able to pay taxes in the residency country (Portugal in my case). Since I qualify for the NHR in Portugal, one of the benefits is tax exemption on foreign income, including dividends from companies registered abroad. I was wondering if by combining these two elements I can actually pay 0% tax on the dividends from my Estonian company.

I didn't understand what you meant by managing my company from Portugal.

Do you mind sharing a contact of the accounting service you use in Portugal, I actually heard similar case from other entrepreneurs and thought it might just worth checking

 

[JustAnotherNomad]

Yes, Xolo Go was my next question

Xolo Go does not give you a company. It's about the same as billing through PayPal. Their fees are ridiculous.

If you want to go ahead with this structure you have to analyze DTT between PT and the other countries where you plan to stay. Usually under article 5 it says how many days to permanent establishment

I think there's a misunderstanding here.
Domestic rules always come first. DTT's cannot create new tax liabilities, they only override domestic law.
And in case of a single-member US LCC (disregarded entity), the DTT can't be used at all.

Similarly, even with a Estonian company, in theory, if the company could be regarded as managed from PT, then it would be tax resident in PT only under the DTT, and again, the DTT becomes irrelevant, since it would simply be treated as a PT company.

Most NHR residents seem to be using companies in Cyprus or Malta as those come with much lower taxes than Estonian companies.
But as always, you don't know if/when the PT tax authorities might change their stance on these companies that have no economic substance where they are incorporated and are essentially run from Portugal.

Under NHR foreign income source is tax exempt so it doesn't matter if you receive dividends, royalties or something else if the income is passive.

That's not correct, there are additional criteria. I don't remember all the details, but for example, if 50% or more of the income the company that pays the dividends is passive, then there may be PT tax after all. It only works with operative businesses. I believe this was due to PT CFC rules, but I don't remember exactly.

 

[Marzio]

there are additional criteria.

The only additional criteria i'm aware of is if the income comes from a country included in Portugal's black list or subject to taxation lower than 50% of Poruguese CIT then CFC rules apply.

 

[JustAnotherNomad]

I'm 100% sure there was something about active vs. passive income as well. But maybe that has changed since I last looked into this.

Alright, so it was about new CFC rules that came with the implementation of ATAD.
Did some googling:

The CFC rules are deemed not applicable when the sum of the income coming from certain passive categories does not exceed 25% of the total of their income. This includes the items from the categorical approach, namely royalties or IP income, dividends and capital gains from shares, financial leasing, operations specific to banking activities, intra-group trading entity and interest or other financial income. If jointly or isolated any of such income is deemed to be more than 25% of the total income the CFC entity may not fall out from the income attribution.

https://www.linkedin.com/pulse/revamped-portuguese-controlled-foreign-company-rules-cassiano-neves
https://www.ey.com/en_gl/tax-alerts/portugal-transposes-the-eu-atad-into-portuguese-tax-law
I don't remember all the details, but it was important to make sure that CFC rules don't apply, and as you can see, active vs. passive income is an important criterion for that.
I didn't look more into this now, but there you have a starting point in case you want to do more research yourself.

 

[Marzio]

as you can see, active vs. passive income

Ok but isn't active vs passive income only taken into account if foreign CIT is 50% lower than PT CIT? That's why Malta, Cyprus, Estonia are all valid options.

 

[JustAnotherNomad]

That's possible, I haven't looked into this in a long time. Just mentioning it, so anyone really interested in it knows what to check...

 

[bandanna]

How to be protected from CFC rules being triggered if I’m distributing dividends from a company in Dubai where I hold 60% shares?

I should be able to export a Corporate TRC in a few months, but understood it doesn’t detail the director/manager details, which is good for me. I don’t have a local manager yet sadly, but looking to hire one, possibly a nominee too. And I do have an office.

Is that enough?

I still don’t understand why would Malta/Cyprus/Romania/Bulgaria/Estonia work, but not UAE. After all, they all got DTAs with Portugal, and supposedly international agreements overrules domestic CFC rules. But I might be wrong here.

 

[JustAnotherNomad]

UAE does work, there was a case a couple years back where a NHR resident won in court over the PT tax authorities.

Guess it could be more risky still than EU countries because of reputation as a tax haven, sticking out among everyone else with Cyprus/Malta companies, etc.
Having a local director shouldn't be relevant for CFC rules, but for corporate tax residency/permanent establishment.

 

[European]

UAE does work, there was a case a couple years back where a NHR resident won in court over the PT tax authorities.

Guess it could be more risky still than EU countries because of reputation as a tax haven, sticking out among everyone else with Cyprus/Malta companies, etc.
Having a local director shouldn't be relevant for CFC rules, but for corporate tax residency/permanent establishment.

Can you tell us more about that case? Was that resident the sole owner in the UAE company or a minority shareholder? Was there a director and substance in UAE?

 

[bandanna]

UAE does work, there was a case a couple years back where a NHR resident won in court over the PT tax authorities.

Guess it could be more risky still than EU countries because of reputation as a tax haven, sticking out among everyone else with Cyprus/Malta companies, etc.
Having a local director shouldn't be relevant for CFC rules, but for corporate tax residency/permanent establishment.

Yeah that case from 2017 I guess?

Only thing is hiring a local director in Malta would cost 1-3k a year, whereas in Dubai it’s a good 15k a year at least.

I know some entrepreneurs living in Portugal and distributing dividends from non-EU jurisdictions like Singapore, HK, and Colombia. Not sure why that’d be better than UAE in the sense of less risky.

Is UAE more likely to be considered a CFC comparing to Malta/Cyprus? Why is that?

 

[JustAnotherNomad]

Yes, I guess the case could have been from 2017 (should be possible to find on Google quite easily).
As far as I know, you will always need substance with NHR, as you can only be a passive investor in the company.
I don't think there is a big difference with regards to CFC rules between UAE and other non-EU countries, but I'm not sure. You should ask a Portuguese tax lawyer about this stuff if you're seriously considering it.