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Exploiting double tax treaties to pay yourself a salary without shifting tax residency AND not having to hire employees to create a substance

G

gnud

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Sep 21, 2021
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#1
If I want to keep tax residency in the current country while having a company in another EU country, the solution is to create an economic substance there. But it seems like it's a problem to hire someone if he/she already has a job, because of limits on work hours.

Due to double tax treaties, income attributable to a certain country is taxed only there and is not reported on the income tax return of the other country, even though the person has there his/her tax residency.
At the same time, typically to shift a tax residency one has to stay in the other country longer than in the original country, if centers of interest are equal in both.

So would it be possible to have a tax residency in one country, a company in another country, visit the country of incorporation to run the company from there and paying yourself a salary while being there, but not staying there long enough to shift the tax residency? No work for the company would be done in the first country, so no permanent establishment would be created there, and no company profit would be attributable there. It will remain fully taxable in the country of incorporation where all business takes place.

Would this work?
And if yes, how would dividends be attributable? To the country of tax residency or the country where the person is at the moment?
 
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#3
Of course you'd need to have a second home in the country of incorporation.
Once you pay yourself there, you'll get a local tax ID, which you can use to open bank accounts, brokerage accounts etc, without the first country being notified through the CRS.

If there's any tax residency information exchange system in place (I'm not aware of any), and the authorities will start having questions, you can claim having a double residence, with tax residency being in the first country according to the conditions in the tax treaty. You are committing no tax evasion since you duly pay your taxes to the particular country to which they're attributable. They may try to accuse you of running your company from the first country, and it's up to you to prove that all business is happening in the country of incorporation only. So collect evidence.

Dividends and all other capital gains from trading or investing are attributable to the country of tax residency, even if you do it in the second country.
 
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#4
gnud said:
Once you pay yourself there, you'll get a local tax ID, which you can use to open bank accounts, brokerage accounts etc, without the first country being notified through the CRS.
Click to expand...
that may be a issue, actually the key issue of the entire setup. Some need to relocate to a country with low or no tax to benefit from it.
 
#5
If it's possible to hire staff in country B where you don't live, I can't see where it is going to be possible to get the substance part! I wonder if the tax auth. in country A will accept it if the company has a real office and staff somwhere.
 
#6
gnud said:
If I want to keep tax residency in the current country while having a company in another EU country, the solution is to create an economic substance there. But it seems like it's a problem to hire someone if he/she already has a job, because of limits on work hours.

Due to double tax treaties, income attributable to a certain country is taxed only there and is not reported on the income tax return of the other country, even though the person has there his/her tax residency.
At the same time, typically to shift a tax residency one has to stay in the other country longer than in the original country, if centers of interest are equal in both.

So would it be possible to have a tax residency in one country, a company in another country, visit the country of incorporation to run the company from there and paying yourself a salary while being there, but not staying there long enough to shift the tax residency? No work for the company would be done in the first country, so no permanent establishment would be created there, and no company profit would be attributable there. It will remain fully taxable in the country of incorporation where all business takes place.

Would this work?
And if yes, how would dividends be attributable? To the country of tax residency or the country where the person is at the moment?
Click to expand...
It does not work, I have a real life story. I know that since Double Tax Treaty are all from the same template from the OECD, the following case would be valid for people living anywhere in the world (usa, germany, uk, japan, australia...) and doing real business in mauritius.

Some years ago, a man who was an intermediary between sellers and buyers of hotels and restaurants saw opportunities on the Mauritius Island. He created a mauritious company there but he was not a fiscal resident of Mauritius. He used to fly back and forth from France to Mauritius. Since he used to sign contracts in Mauritius he thought he was safe. This man paid his personal tax in France.
The French tax authorities investigated in his case and concluded that he had no fiscal substance in Mauritius. This man was sued for corporate tax evasion.
To assess the fiscal substance here is what they took into account:
  1. The said man hosted his company in a virtual office where many other companies were hosted. aka domiciliation address in the text below
  2. He didn't pay the local income tax in Mauritius (I guess they wanted to talk about corporation tax of GBC1)
  3. No employees in mauritius


Open this in chrome to get translation:
CAA de MARSEILLE, 3ème chambre - formation à 3, 25/02/2016, 14MA03214, Inédit au recueil Lebon - Légifrance

Here is the part that I found:
it results from the investigation and in particular information communicated by the Mauritian authorities as part of the administrative assistance, that the company did not have premises or human equipment in Mauritius and that it did not pay the "Income Tax" in force in this State; that the address which the company Mascareignes Consulting Ltd has in Mauritius constitutes a simple domiciliation address; that, moreover, it does not follow from the investigation that, as the company Mascareignes Consulting Ltd maintains, the operations carried out by MD.. would only constitute simple preparatory operations for the carrying out of prospecting operations which could not be developed only from Mauritius; that it follows from all of these elements that the place of operation of the company Mascareignes Consulting Ltd, within the meaning of article 209 of the general tax code, must be considered as being located in France, in Châteauneuf-le -Red ; that the company also had a fixed business establishment in France, characterizing a permanent establishment within the meaning of Article 5 of the Franco-Mauritian convention, which justified its being subject to corporate tax in France ;

So, his job was really legit there but he had no fiscal substance and he had to pay the French corporate tax following the judgement.
So, i guess he would have needed two things:
  1. A nominee director
  2. An Address In mauritius different from the virtual office address.
If you are interested in it, here is the double tax treaty between France and Mauritius:
https://orbitax.com/taxhub/taxtreat...497c95d27d/-Permanent-Establishment_ARTICLE-5
What do you think?
 
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#7
gnud said:
So would it be possible to have a tax residency in one country, a company in another country, visit the country of incorporation to run the company from there and paying yourself a salary while being there, but not staying there long enough to shift the tax residency? No work for the company would be done in the first country, so no permanent establishment would be created there, and no company profit would be attributable there. It will remain fully taxable in the country of incorporation where all business takes place.

Would this work?
And if yes, how would dividends be attributable? To the country of tax residency or the country where the person is at the moment?
Click to expand...
Yes, something like this can indeed work.
One example is if you would be hired in UAE where there are no taxes on employment.
Directors fees from UAE company are normally not double taxed based on the treaty. Likewise employment income will not be double taxed on certain circumstances. Normally if you would stay 183 days/year in UAE you could get away with it.
Sometimes even if you stay 183+ days in UAE you might still be a tax resident in another country, but that might not mean you pay extra tax.

In regards to dividends it again depends on the tax residence and relevant treaties.

For UAE you have multiple options:
1) set up a local UAE company and hire yourself
2) set up branch of a foreign entity in UAE and hire yourself
3) use EOR services in UAE (professional company that hires you)
 
#8
anotherone said:
What do you think?
Click to expand...
Could maybe have worked if he had more/better substance in Mauritius. But I think the key lesson is, don't be a tax resident in an aggressive tax hell. Even if he had more substance, French tax authorities could have come up with some reason it was still not enough. And if it goes to court you lose regardless of outcome.

Not a totally similar situation, but I have a friend who is from Mauritius and lives and works in a West African country. He gets a small part of his salary in the West African country and pays tax on it, and then he gets the bulk of his salary paid in Mauritius and since he doesnt live in Mauritius there is no tax on that part. No problems at all, since he isnt living in a high tax western country, but in chaotic West Africa.
 
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#9
Cloudbanck said:
Could maybe have worked if he had more/better substance in Mauritius. But I think the key lesson is, don't be a tax resident in an aggressive tax hell. Even if he had more substance, French tax authorities could have come up with some reason it was still not enough. And if it goes to court you lose regardless of outcome.

Not a totally similar situation, but I have a friend who is from Mauritius and lives and works in a West African country. He gets a small part of his salary in the West African country and pays tax on it, and then he gets the bulk of his salary paid in Mauritius and since he doesnt live in Mauritius there is no tax on that part. No problems at all, since he isnt living in a high tax western country, but in chaotic West Africa.
Click to expand...
What you say is right. I think that the said businessman who was a fiscal resident of france, declared his mauritius income as dividends because that was the cheapest way to do it tax wise. Consequently, in his income tax return, he had to mention the country of the income source. So, when the french tax authority saw "mauritius" as money source that was it. This triggered the tax investigation.
 
#10
gnud said:
And if yes, how would dividends be attributable? To the country of tax residency or the country where the person is at the moment?
Click to expand...
Are both counties EU?

Please note that salaries information will be exchanged:
https://www.bfdi.bund.de/DE/Buerger/Inhalte/Finanzen-Steuern/ABC_InternationaleSteuerdaten.html
Ok the other hand the issue with the French guy is not that big if both are EU as the two counties will work out the tax themselves under each other without you being part. Hence you won't be in the worst case where you pay tax in one country and then another claims it and then you won't get it back from the first one. Just in case you set up it disrupted.

https://www.bzst.de/DE/Unternehmen/...rüche,und Fortgang des Verfahrens informiert.
If you want to be on the safe side, you apply for a ruling in one or both counties. Then, there won't be any bad surprises. I would recommend this.

For the dividends, you need to read the treaty. You most likely pay on both counties and may be able to reclaim some. If you give us the countries, we can check.

Please note that the treaty text is fundamental and in case you spend send amount in both countries, the dividends will be taxed in the country of citizenship if part of the two.
 
#11
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