Low tax burden life plan suggestion for freelancer

[JustAnotherNomad]

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.

No, that’s not true. It’s 10 years and it doesn’t apply to income generated by a foreign PE, such as when a company moves to another country.

 

[JustAnotherNomad]

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.

Sure you can. You just can’t escape the Polish exit tax that way.

 

[Marzio]

You just can’t escape the Polish exit tax that way.

At this point i probably don't understand what you mean by "exit tax".

If you pay corporate taxes in Poland at the branch level and transfer funds outside Poland, what are they going to tax if there's nothing left to tax?

 

[Marzio]

No, that’s not true. It’s 10 years

Well, i admit i haven't verified so it could be 10 years.

 

[JustAnotherNomad]

At this point i probably don't understand what you mean by "exit tax".

Exit tax is a concept to tax the value of assets before they are no longer taxable because the taxpayer has left the country.

You have a successful Polish startup that makes $1mln a year in profits and you pay 19% corporate income tax.
You decide that the EU sucks and you can’t grow the company enough there, so you move your company with all its employees to the US and close the Polish office.
The EU doesn’t want to see their tax slaves leave, so the Polish tax office says: “Fine, but we think your company is worth $15mln if you sold it now. So you will pay 19% exit tax on those $15mln if you leave the EU.”
You’re not making a single zloti more than before. You just want to move. But they want their $2.85mln in taxes just to let you go.
That’s the reason many businesses are stuck in the EU, they simply can’t afford to pay the exit tax. Avoiding exit tax is tricky.

 

[Marzio]

This could be the case if somebody leaves the EU but what if he simply relocate to another EU state like Cyprus where dividends are tax free?

In any case i don't think he will need to worry about exit tax right now because his turnover is 100K per year.

 

[Untangle]

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

I think they use intellectual property rights to charge their branches in order to get funds back to more suitable tax jurisdiction like Ireland and others. Well that is one of the tricks they use I believe.

 

[JustAnotherNomad]

This could be the case if somebody leaves the EU but what if he simply relocate to another EU state like Cyprus where dividends are tax free?

I think EU law prohibits enforcement of exit tax in such cases, but as soon as you leave the EU, you have to pay.

 

[dziter]

Hi everyone,

Really interesting to read some interesting discussions. Thanks for your help and to study this case.

If your gf is Polish, then are you expecting to be living in Poland for foreseeable future? If so, set up the business there. They have low corporate tax IIRC and if you are wanting to stay in EU, then having a business anywhere apart from where you are living / resident / home country is going to be cause issues with CFC laws.

For now, my time in Poland is uncertain. I know first step is to know where you will live to properly determine the tax residency. Let's say if I can stay in Poland, it will be good. But if I have to move some time in a great country to save interesting tax amount, it shouldn't be a big problem. I am really thinking and able to relocate.

If you only want liability protection, you can look into opening a US LLC. It’s taxed like a sole proprietor unless you elect otherwise, so you don’t have to pay corporate income tax. But you need to make sure that your country of tax residence agrees with that view. Some countries simply charge CIT anyway when they see a LLC.

So what's the point here? I can have US LLC, controlling for another country and just pay Personal Income Taxes in my tax residency country?


It seems too simple, no relocation nothing.

If you don't have UK customers you can use the reputation of UK LTD to invoice your customers while working as a director in your branch in Poland which pays 9% CIT.

There's another benefit using this setup other than avoiding the exit tax.

Ad a director of your branch you'll pay only the minimum salary to live comfortably in Poland so that you pay minimum personal taxes.

The rest of the money can be transferred tax free from the branch to the UK LTD head company so that in the future you can move in a territorial taxation country with your girlfriend or in Cyprus where dividends are tax free and you can pay yourself all dividends that you have accumulated TAX FREE achieving 9% total taxes while staying legal.

This is tricky. LLC has a lot of disadvantages from my point of view.

First, if you want to save on social contributions, you need to have a second shareholder with at least 5%.

Second, if you want to move and close the LLC in future, it's almost impossible or a difficult progress. I mean really difficult. You need a lawyer, unregister the company at the National Court and at the end you spent 6 months and 10 000/20 000 euros just to close a LLC! My tax advisor already told me at beginning, in Poland people try to sell the company. It's common or if you want you just do nothing and the company stays frozen. But I am not comfortable with that. First, I am freelancer so I don't know how to find someone who would like to buy a company like that and why buy to someone and not build yourself (cheap setup and done in one week). Second, I am not comfortable to have "frozen" asset like that.

Third, you are not really free with the money you want to take off from your company.

Polish system for LLC is called Progressive Tax. It's 17% until 19k€ and 32% after. It's the same rule for dividends.
So, it's like having a french company from my point of view (a little bit cheaper only).

Last, don't forget it's a double taxation system. Self-employed in my own company with high rate and taxation on personal level with high rate (and need to pay ZUS there). Small example I had from tax advisor as attachment.

From 37k PLN monthly, you seems to finish with 12k PLN ..

 

[dziter]

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.

As it was pointed out before, I don't have a big turnover and my goal will be to cashout the maximum without thinking about to change tax residency again after just to take dividends in future. I can leave on savings without problem but I don't see the point to have money going in company during many years and live with a small salary. Except if it's to invest the money in something like real estate directly from company etc. But again, a way to be rich (time is limited in life) for me it to use the power of mortgages to build a real estate empire.

Some questions I asked to the tax advisor:

"Poland established exit tax starting from 2019 so in case in future you want to move with your girlfriend to another country, they will tax you."

"Not true in my opinion. You will have to add your income from LLC (outside Poland) to your annual declaration after 1 year. So for 2019 you do annual declaration until end of April 2020. Accountant will have to first calculate the % of the tax you should pay and the calculate the amount to pay (it may happen you will not have you pay any tax in Poland as your LLC paid already it in the country the LLC is based). You will provide your all income you made outside Poland.

Annual calculation is done based on two methods of avoiding double taxation: progression off method and the method of proportional deduction. In each of the agreements, the method of avoiding double taxation is set out in the chapter of the bilateral agreement entitled 'Avoiding double taxation'."

I know LTD/LLC UK companies are easy to setup, maintain, fast and everything can be done online.

"That is popular in UK and indeed easy to do – my brother has it in the UK, but you need to do that this year as that is the last year due to Brexit."

It's a question I forgot to ask you before. Based on Brexit situation, UK LTD is still a good solution?

So other possibilities (may be) :

1st option - Foreign company + soletrader Poland ?
Yes – quite popular option and we have a few Clients who do that option. Good in terms loans, mortgage in Poland etc.

Here it could really interesting for my case no?

It's like the LLC + soletrader solution I present in posts before without the disadvantage to have the LLC in Poland and use the easy company to maintain named UK LTD?

2nd option

- UK company + Polish branch ?
And for that, it could be interested to know if the small taxpayer regime (9%) can be used by branch too?


"Not really good option. Branches can be open only as LLC, which you are back to have LLC and all problems and issues with having LLC"

 

[dziter]

Concerning Malta, it doesn't really seems interesting/trending now and I had the quotation to maintain the company: around 5000€. With the refund risk for this turnover, it's not the best solution in my situation I think.

Concerning Cyprus, I took contact with Certified Accountant in Limassol. Here are answers to my questions:

1. Assuming you’re an EU national, you will have no problem coming and setting up a company in Cyprus;

2. Setting up a company in Cyprus is quite easy and it costs €2,000 plus 19% VAT.

3. Opening a bank account for the company will cost €800 plus 19% VAT.

4. You will be employed by your company and you will be paying Cyprus social insurance. Assuming that you will be employed at minimum salary i.e €850 per month, the company and yourself will be paying approximately €200 per month for contributions/deductions in the Social insurance and other funds of the Republic of Cyprus (including health fund).

5. Assuming that the €100,000 turnover is your net profit before your salary, this will leave the company with an approximate €90,000 profit before tax. This will be taxed at 12.5% i.e €11,250 tax. The remaining €78,750 is available to be paid to you from the company as dividends.

6. As you are not of Cypriot origin, you will not be paying tax on dividends for the next 18 years.

7. There are 2 ways of becoming a Cyprus tax resident: a) the 183 day rule, where if you stay 183 days in Cyprus in any year you are considered as Cyprus tax resident, and b) the 60 day rule, where if you stay in Cyprus for 60 days AND you are employed by a Cyprus company AND you have a permanent residence in Cyprus AND you earn enough to live in Cyprus, AND you did not stay anywhere else for more than 183 days in the same year…then you will be considered as Cyprus tax resident.

I didn't really get the 4th bullet.

Does it mean its:

Company level:
100k turnover
CEO minimal salary: 10 200€
Social contributions for CEO: 200*12 = 2400€
CIT 12.5% on the 100k? : 12 500

-> 74 900€ left in company

On personal level,
200* 12 = 2400€ for social contributions on the minimal salary
Dividends tax free

-> 72 500€ net of all taxes?

Poland doesn't seem so bad, something is wrong for sure. Thanks for your light here.


So right now, it seems that the discussion is around: UK Ltd, Polish "something" and Cyprus company only (no need for dual structures to take tax free dividends as she said right?).

Thank you for your help, I am looking to read you.

 

[dziter]

What do you think about the suggestion of @jscargo in this thread:
https://www.offshorecorptalk.com/threads/cyprus-non-dom-plus-hk-offshore-tax-strategy-opinion.28909/
US LLC/ UK LLP, it can be suitable for my case?

 

[Marzio]

Polish system for LLC is called Progressive Tax. It's 17% until 19k€ and 32% after.

I don't really know who you spoke to but the progressive tax system is not for LLC's. The LLC pays flat corporate tax at 19% or 9% reduced rate if turnover is less than 2 million euros (your case).

Also the part where you spend 6 months and 10 000/20 000 euros just to close the branch seems a bit unrealistic.

If your accountant said that the LTD + sole trader in Poland is a popular option i would definitely run.

If you follow that route sooner or later you will be in trouble because you are managing a foreign company from Poland and since you are not behind the shield of a LLC but a sole trader in Poland your liability is unlimited.

I already said earlier that accountants will always suggest the easier option for them and not the best option for you.

This is a clear example.

Try with another accountant.

 

[fshore]

Not true in my opinion. You will have to add your income from LLC (outside Poland) to your annual declaration after 1 year. So for 2019 you do annual declaration until end of April 2020. Accountant will have to first calculate the % of the tax you should pay and the calculate the amount to pay (it may happen you will not have you pay any tax in Poland as your LLC paid already it in the country the LLC is based). You will provide your all income you made outside Poland.

Exit tax would be on the increased value of your shared in a foreign company. If a UK company is not polish resident or a cfc then you don't have any income from the company (if no dividends), and your shares will increase in value as the company value grows.

Company level:
100k turnover
CEO minimal salary: 10 200€
Social contributions for CEO: 200*12 = 2400€
CIT 12.5% on the 100k? : 12 500

-> 74 900€ left in company

On personal level,
200* 12 = 2400€ for social contributions on the minimal salary
Dividends tax free

-> 72 500€ net of all taxes?

You would deduct the salary from the profit before paying corporate taxes.
And the salary is off course also your money.
So 2400€ + ((100000-10200)*12.5) is the taxes you should pay.

 

[blockchain4ever]

"That is popular in UK and indeed easy to do – my brother has it in the UK, but you need to do that this year as that is the last year due to Brexit."

It's a question I forgot to ask you before. Based on Brexit situation, UK LTD is still a good solution?

The parent/subsidiary directive makes it clear that no WHT will be applied inside EU. Brexit makes that more unclear, and Poland does have WHT so this is something you might want to check.

What I could find was somewhat incomprehensible

https://taxsummaries.pwc.com/poland/corporate/withholding-taxes
The UK-Poland DTA limits dividends WHT to 10% (from 19%), and 0% if the following holds:

"When dividends are paid to a company that is the resident of the other contracting state and that directly holds at least 10% of the capital, paying the dividends on the day they are paid and has done (or will do so) for an uninterrupted 24-month period from which that date falls."

I'm not sure if I can parse the bolded text. There seems that there is a condition where it can be 0%, but you need to talk to someone who knows this.

 

[dziter]

I don't really know who you spoke to but the progressive tax system is not for LLC's. The LLC pays flat corporate tax at 19% or 9% reduced rate if turnover is less than 2 million euros (your case).

Also the part where you spend 6 months and 10 000/20 000 euros just to close the branch seems a bit unrealistic.

May be I was not clear again (it’s not first term you told me that) and especially with the table. I am not an expert but I understand some basics.
LLC is paying 9% CIT because of smallpayer tax regime in my case (rather than 19%).We agree on that.
When I said progressive tax of 17% up to 85kPLN/19k€, and after 32%, I wanted to say for the CEO salary. Because I am self-employed in the company to be able to have salary and a health coverage.

And on personal level, PIT, I have same taxation again .. that’s why a Polish branch or a Polish LLC (Sp z.o.o) is the same for the disadvantages.

You spoke about keep money in company to pay yourself in future with dividends tax free, after changing tax residency. But for my turnover, I think it’s good to find a low tax solution to cash out the maximum.
I mean, I want to take now a good decision to improve my situation. I would like it’s not a temporary solution to move again my tax residency and never be able to get the dividends without moving ..

The matter here for me is more: what’s the cost efficient/tax saving system I can have and so where to be resident NOW?

Try with another accountant.

I am on it, yes. You already give me really good information.

So 2400€ + ((100000-10200)*12.5) is the taxes you should pay.

Ok perfect for explanation. Thanks.

If a UK company is not polish resident or a cfc then you don't have any income from the company (if no dividends), and your shares will increase in value as the company value grows.

But if the company is « treaty non resident », I guess it’s polish resident or the branch so ..?

Brexit makes that more unclear, and Poland does have WHT so this is something you might want to check.

This is an uncertain matter and I have doubts to find someone with good knowledges about it in Poland right now. Do we have other interesting option like UK? I saw some threads about Estonia and US LLC, what do you think?

If I want to stay in Poland, what’s the best solution do you think?

 

[fshore]

But if the company is « treaty non resident », I guess it’s polish resident or the branch so ..?

Then it would be equal to a polish company, tax wise. There should still be exit taxes if the company hasn't paid out dividends and are more valuable when you move out compared to when you started the company.

 

[reesek]

Totally support the fact that it just does not make sense to set up a company with this level of income but individually the same 5k euro per year will land you a dubai residency where you can set up individual accounts and get your clients pay you in eur/usd there.

 

[JustAnotherNomad]

Sorry for the late reply:
Polish policy makers aren’t stupid. Poland isn’t a third world country either where they are hoping to attract foreign investments through tax loopholes.

It is extremely unlikely that you would be able to legally save substantial taxes by simply registering a company somewhere else. That’s not how this works. Then nobody in Poland would be paying any taxes anymore.
For anything like that to work, you would have to pay a lot of money to create a structure with substance. That’s what the big corporations do. There’s no point in doing that in your case because you just don’t make enough money.
For all other legal tax savings, you can talk to different Polish accountants and hear what they recommend you. You already got one recommendation, maybe another accountant will have a different recommendation. If the tax savings are small, that’s because that’s how things are. It’s not because your accountant is an idiot or lazy.

Your only other option is to either move to a different country or to pretend that things are different from how they really are.

 

[dziter]

You would deduct the salary from the profit before paying corporate taxes.
And the salary is off course also your money.
So 2400€ + ((100000-10200)*12.5) is the taxes you should pay.

So 2400€ on personal level + this previous calculation on company level. Perfect.

From 100k€ turnover, to sum up:

Company: 2400 + 11 225€ = 13625€

-> Finally:
Salary : 10 200€
Dividends tax free : 100k - 13625 - 10 200 = 76 175€

-

Personal: 2400

= 73 775€

So turnover to money in pocket (without company maintenance fees), it's around 26%. Am I right?

Totally support the fact that it just does not make sense to set up a company with this level of income but individually the same 5k euro per year will land you a dubai residency where you can set up individual accounts and get your clients pay you in eur/usd there.

Is it legal to trade without a company, is what you say? I am really suprised.
May be you have in mind the freelance Dubai VISA?

By the way, I think I need to be tax resident in Dubaï and so live there, right?

Thank you in advance.