HK or USA LLC for a bulgarian resident ?

[Don]

Regarding creating substance in Bulgaria for Estonian resident owned company in Bulgaria. Would you recommend using a Bulgarian or some other nationality nominee director / or second nominee director in addition to Estonian resident who is the owner and director of the Bulgarian company.

This only works if you create an Estonian holding company with Bulgaria daughter company, or when Estonia company registers a branch in Bulgaria.

Its worth noting that a branch representative has less direct financial liability, compared to a director. This could make it easier to find a reliable person. If you want a local bank account then a local resident would help. Also foreign branches don't require a local bank account which at least was the case with local companies.

 

[Island Insider]

This only works if you create an Estonian holding company with Bulgaria daughter company, or when Estonia company registers a branch in Bulgaria.

Its worth noting that a branch representative has less direct financial liability, compared to a director. This could make it easier to find a reliable person. If you want a local bank account then a local resident would help. Also foreign branches don't require a local bank account which at least was the case with local companies.

Thanks for reply, I understand that if Estonian legal entity owns the Bulgarian entity it is a very solid structure, maybe it does not even need a nominee for Bulgarian company or branch this way. I think Estonian authorities will have no need to question substance.

What i dont understand is why this structure would be tax efficient. If Bulgarian company pays 10% corporate tax. And rest of the money flows to Estonian company as untaxed dividends. This profit is going to be taxed next year with their corp tax of 2% and for taking dividends out of Estonian company it will be 22%. So as I understand you would end up paying 34% in total.

While for example if Estonian tax resident person owns the Bulgarian company. He can proof that he has paid 10% corp tax and 5% dividends. This way he saves 9% compared to just owning an Estonian company

 

[Don]

Thanks for reply, I understand that if Estonian legal entity owns the Bulgarian entity it is a very solid structure, maybe it does not even need a nominee for Bulgarian company or branch this way. I think Estonian authorities will have no need to question substance.

What i dont understand is why this structure would be tax efficient. If Bulgarian company pays 10% corporate tax. And rest of the money flows to Estonian company as untaxed dividends. This profit is going to be taxed next year with their corp tax of 2% and for taking dividends out of Estonian company it will be 22%. So as I understand you would end up paying 34% in total.

This is not correct as those profits would be exempt from taxation in Estonia.

While for example if Estonian tax resident person owns the Bulgarian company. He can proof that he has paid 10% corp tax and 5% dividends. This way he saves 9% compared to just owning an Estonian company

This structure effectively helps to get rid of Bulgarian withholding tax

 

[ilke]

This is not correct as those profits would be exempt from taxation in Estonia.

Exempt from the 2% defence tax as well?

 

[Don]

Exempt from the 2% defence tax as well?

yes, this applies only to local profits. Holding companies dont pay this tax on their foreign profits.

 

[Island Insider]

yes, this applies only to local profits. Holding companies dont pay this tax on their foreign profits.

Thanks for sharing this ! It would be really interesting to know how does a company qualify as a holding company in Estonia. Is it still the OU or is it some other type?

As I understand there is no dividend tax for this holding company for its Bulgarian company profits, but does the owner of the holding company need to be an Estonian resident to benefit from this?

 

[JustAnotherNomad]

Thanks for sharing this ! It would be really interesting to know how does a company qualify as a holding company in Estonia. Is it still the OU or is it some other type?

Just an OU. There is no special holding company type.
But be aware that the company should probably also have some operative income in order to qualify for the WHT exemption (not sure how strict Bulgaria is about this).

As I understand there is no dividend tax for this holding company for its Bulgarian company profits, but does the owner of the holding company need to be an Estonian resident to benefit from this?

It has to be a "real company". If you live in Bulgaria and there is only a mailbox in Estonia, in theory Bulgaria could say the Estonian company is managed from Bulgaria and/or just a "shell", and then they would reject the setup. But I don't know how strict Bulgaria is about this and if they really have the resources to enforce this.
So if you want this to be 100% waterproof, you would have to hire a director in Estonia (or move to Estonia yourself) and have some activity there.

Then again, if you live in Estonia and run the Bulgarian company from there, the same thing could apply there: They could say the Bulgarian company is really run from Estonia, so it should pay tax in Estonia. So in that case you should have some employees in Bulgaria etc. But Estonia isn't very strict about enforcing this at the moment, as far as I know.

 

[Don]

Just an OU. There is no special holding company type.
But be aware that the company should probably also have some operative income in order to qualify for the WHT exemption (not sure how strict Bulgaria is about this).



It has to be a "real company". If you live in Bulgaria and there is only a mailbox in Estonia, in theory Bulgaria could say the Estonian company is managed from Bulgaria and/or just a "shell", and then they would reject the setup. But I don't know how strict Bulgaria is about this and if they really have the resources to enforce this.
So if you want this to be 100% waterproof, you would have to hire a director in Estonia (or move to Estonia yourself) and have some activity there.

Then again, if you live in Estonia and run the Bulgarian company from there, the same thing could apply there: They could say the Bulgarian company is really run from Estonia, so it should pay tax in Estonia. So in that case you should have some employees in Bulgaria etc. But Estonia isn't very strict about enforcing this at the moment, as far as I know.

on what basis do you think this could happen?

Its worth noting that Estonia and Bulgaria only consider companies their tax residents based on incorporation. Foreign entities can only have their PE (branch) there.
Secondly, there are CFC rules that apply to>750k annual profits.

With that in mind, I think branch setup is safest.. as you are already operating as a PE, and there is no local law for imposing withholding tax on profits repatriated by branches.

 

[JustAnotherNomad]

on what basis do you think this could happen?

On what basis what could happen?
That Bulgaria would impose WHT on dividends flowing from a Bulgarian subsidiary to the Estonian parent? EU "Unshell" directive?
If Bulgaria doesn't have a POEM rule, then probably the MLI or other BEPS stuff would limit the applicability of the treaty? GAAR?

If you live in Estonia and have a Bulgarian subsidiary, then the "Bulgarian" income could still be taxable under PE rules (but like I said, as far as I know, enforcement is rather weak at the moment, but I would expect this to change over time).

Its worth noting that Estonia and Bulgaria only consider companies their tax residents based on incorporation. Foreign entities can only have their PE (branch) there.
Secondly, there are CFC rules that apply to>750k annual profits.

With that in mind, I think branch setup is safest.. as you are already operating as a PE, and there is no local law for imposing withholding tax on profits repatriated by branches.

I agree, that could probably be a nice option - but then you would still need some substance in Bulgaria.