Low tax burden life plan suggestion for freelancer

[JustAnotherNomad]

I see no way such a UK/Estonia setup would work without substance in the country the company is registered in. Of course it may work in practice because nobody takes a closer look, but that doesn’t mean it’s legal.
Common sense should also tell you that if it was so easy to drastically reduce your Polish tax burden, everyone would do it that way.

 

[Marzio]

I see no way such a UK/Estonia setup would work without substance in the country the company is registered in

It works because UK LTD is treaty non resident, there are no UK customers, he will be UK LTD not resident director managing the Polish branch and all the income will be taxed in Poland at the branch level at 9%.

You need substance in the country the company is registered in if you want to escape the tax burden in the country you are resident but in this case is exactly the opposite, you want to pay taxes in the country you are resident.

Poland is happy because you are paying taxes there, UK has nothing to pretend because the LTD is treaty non resident.

Where is the illegal part?

And for the record, we are not reducing Polish tax burden because he will pay exactly what he would be paying with a Polish LLC.

We are doing this setup only to avoid the exit tax and accumulate tax free profits.

 

[JustAnotherNomad]

Correct me if I’m wrong, but “treaty non resident” means that the company is not resident in the UK because it is resident in another country, as defined by the DTA.
So from a tax perspective it would be a Polish company. How would a Polish company have a branch in Poland? That doesn’t make a lot of sense to me.
So in order to be able to have a branch in Poland, you would need to make sure the company is actually tax resident somewhere else. With Estonia, the company would usually be tax resident in Estonia. But if Poland charges a lower corporate tax rate for branches, then you can bet they’d want to see substance in Estonia. Otherwise they’d simply move the corporate tax residency to Poland.

Edit:
Ok, if you don’t want to save corporate income taxes, then it could work. But there’s also most likely no benefit regarding exit tax. Because also foreign companies are usually covered by exit tax. I don’t know about Poland, but with other EU countries that is definitely the case.

 

[Marzio]

the company is not resident in the UK because it is resident in another country

Exactly, you need to register the UK LTD with Polish tax authorities and guess what they will tell you? That a company to be tax resident there must establish a PE which is the branch.

It's exactly the same concept we are talking here.

 

[JustAnotherNomad]

Except it’s highly unlikely you can avoid exit tax that way. So I see no benefit.

And I think you’re confusing to concepts:
As far as I know, a branch is when there is a PE of a foreign company. The corporate tax residency is not challenged, the branch country’s tax office agrees that the company is resident where it is registered.
But a company’s tax residency can also be moved completely per a DTA. Then there is no branch.

 

[Marzio]

This is exactly the same setup you said "that makes sense" nearly 3 weeks ago.

Quoting from Blockchain4ever

What I like about this setup is that while you have a real UK Ltd company and a real UK ltd company number, you do your business registered as a branch in another country

 

[JustAnotherNomad]

“Makes sense” was in regards to the technicalities. And basically using the UK Ltd. for reputation purposes only.
Anyway I don’t see how this would help in this case. The exit tax would apply to any assets being moved from the scope of Polish taxation, which would probably apply to this case as well.

 

[Marzio]

The exit tax would apply to any assets being moved from the scope of Polish taxation

It will help because if you start a Polish LLC but you don't take out all the dividends, if you move you'll be taxed on all the unrealized dividends.

Using the branch you'll be taxed on all the income BUT you can pay a minimal salary as a branch director that's taxed at 17% till 19K.

All the excess profits can be moved tax free to the UK LTD head without any withholding taxes and accumulate there only to be paid as dividends later when you'll move your tax residency in a territorial country.

In this way you are avoiding to pay unnecessary taxes on personal income.

This is an "exit tax" for me.

 

[JustAnotherNomad]

I don’t see that working at all.
Both because a UK company that is tax resident in Poland would be treated as if it was incorporated in Poland. So there is no UK head office to move profits to.
But also because a UK company controlled by a Polish tax resident would trigger exit tax when you move out of Poland, if not earlier.
And exit tax is not only about profits, but about the value of the company itself, taking into account expected future earnings.

I’d be willing to take a bet that it wouldn’t help the OP’s case at all. Couple beers? ;-)

 

[Marzio]

I don’t see that working at all.

Blockchain4ever said that he is using this exact strategy for more than 10 years.

I will shoot him a PM asking him to comment if this strategy could work or not.

Prepare the money for the beer you'll pay me

 

[JustAnotherNomad]

Just to be sure we’re betting on the same thing: I’m saying you can neither save Polish corporate tax nor avoid Polish exit tax without substance in the UK if you run the company from Poland.

 

[Marzio]

I’m saying you can neither save Polish corporate tax nor avoid Polish exit tax without substance in the UK if you run the company from Poland.

I already said that he will not save any taxes in Poland so we both agree on that part but hey i will take 9% taxes any day.

We don't agree on the exit tax without substance in UK if he runs the company from the branch.

 

[JustAnotherNomad]

Check the text in bold:

According to the new regulations, exit taxation will apply in case of any change in tax residency, or any asset movement, from Poland to another country, provided that such actions result in the loss of Polish right to tax any potential capital gains that would have been realized if the transfer had not taken place. The rules apply to both corporate and individual residents of Poland, subject to certain conditions being met. Movements of assets between head office and permanent establishments may also trigger exit taxation.

https://www.dlapiper.com/en/us/insi...duces-exit-tax-for-companies-and-individuals/
And I don’t think this would even work as a proper transfer if the head office wasn’t tax resident in the UK.

 

[Marzio]

Movements of assets between head office and permanent establishments may also trigger exit taxation.

We are obviously in an unexplored territory so i could only speculate on the term "assets".

Later the article says

the new law will affect foreign businesses having a Polish permanent establishment, especially those involved in construction and drilling activities that often move assets to be temporarily used by the permanent establishments.

Money are one kind of asset but i really don't think the exit tax will prevent moving money from the branch to the head office.

Why would they do that?

 

[JustAnotherNomad]

Without exit tax, somebody can build a successful business in France for example. Then they move to Dubai for a year and sell their company for a few million. As they are no longer tax resident in France, the French government cannot tax the income from the sale of the company. A year later, they move back to France, with a bigger bank account.
To avoid that, exit tax is introduced. Exit tax means that the moment someone moves out of France, a fictitious sale of the company is assumed, even if the company is never sold. The owner has to pay that tax when they move out because the French government knows they won’t be able to get the tax later.

The same logic applies to any other transfer:
If you could just move the money to the head office and then move away without paying exit tax, it would render the exit tax law useless. So usually all such transfers are also covered by exit tax.

 

[Marzio]

Without exit tax, somebody can build a successful business in France for example. Then they move to Dubai for a year and sell their company for a few million.

I don't know if you noticed but the big guys like Google, Uber, Facebook are doing just that. They are funneling profits using EU parent - subsidiary directive to subtract millions from tax administrations of the world. France will tax all the income they can made by your subsidiary but after that you can transfer all the profits to a Cyprus holding tax free and NOBODY will have anything to say about that.

Exit tax can't interfere with EU parent - subsidiary directive or branch-head transfers.

This is exactly the reason why you continue to be a German tax resident for 5 years after tax residency change, they are not willing to let you go with the money.

We are just having different prospectives on the matter.

 

[blockchain4ever]

Blockchain4ever said that he is using this exact strategy for more than 10 years.

I will shoot him a PM asking him to comment if this strategy could work or not.

Prepare the money for the beer you'll pay me

I haven't studied transfers from a branch to the head office wrt exit tax as it has never applied. I think this thread is about freelancer income, not unrealized capital gains. The exit tax would be on asset movements that include some sort of unrealized capital gains typically.

Moving your taxed corporate profits to the head office should only involve withholding tax (WHT), if any. The parent/subsidiary directive, the dta, and local tax laws regulate this.

If your branch office country does not levy a WHT for transfers to the UK, I don't see why you can't just transfer funds there.

The same logic applies to any other transfer:
If you could just move the money to the head office and then move away without paying exit tax, it would render the exit tax law useless. So usually all such transfers are also covered by exit tax.

The same logic doesn't apply because transfers of funds from a subsidiary to a parent company is the foundation of international trade and international companies in general. The exit tax is more narrowly trying to target persons that move, similar to targeting re-domiciled companies and similar "fringe" behavior in the corporate world.

For the transfer of profits, there is already WHT for this case and it's regulated in all DTAs that countries negotiate.

 

[Marzio]

I don't see why you can't just transfer funds there.

Thanks for stepping in.

While you are here i'll ask you straight if the strategy outlined could work in this case: UK LTD + Polish Branch.

UK LTD where the OP is the non-resident director managing the Polish branch.

The UK LTD is treaty non resident with no UK customers and the Polish branch will pay all the taxes in Poland at 9% (reduced rate for small taxpayers)

Is that right?

 

[fshore]

The UK LTD is treaty non resident with no UK customers

A side note, I think you are wrong that a UK Ltd needs to not have uk customers to be treaty non resident. It's similar to that a polish company won't be tax resident in the UK just by having UK customers.

You might be thinking of a llp that is taxable on uk source income (which also doesn't necessarily mean uk customers).

If a UK

 

[JustAnotherNomad]

I don't know if you noticed but the big guys like Google, Uber, Facebook are doing just that. They are funneling profits using EU parent - subsidiary directive to subtract millions from tax administrations of the world

What they are doing isn’t about exit tax though.