Managing an offshore company from countries without PoEM rules

[JustAnotherNomad]

I think this is mostly a question for @Don :

If you register a company in a country that only considers companies tax resident if they have their PoEM in that country (for example: Gibraltar, Singapore, Hong Kong, possibly others), but then you manage this company from a country without PoEM rules, such as Estonia.
What will happen?
Clearly the company is not tax resident where it is incorporated.
But it cannot be tax resident in Estonia either because Estonia does not have PoEM rules.

Estonia could obviously claim that there is a PE (even though I have heard they are not very aggressive about this). So if you run the company from Estonia, probably 100% of the company profits would be taxable in Estonia.
But what if you have a remote team? If there is a PE elsewhere, this would probably be exempt from taxation in Estonia, but then you would usually have to pay tax where that other PE is located.
But what if you have a team in a place like Thailand that doesn't really apply PE rules?
Would Estonia really be able to claim that 100% of the profits are linked to the Estonian PE?
What if you are nomadic with a base in Estonia, so you are tax resident in Estonia, but you spend almost no time there?

Could there be a situation where the company ends up not being taxed because income cannot be taxed where the company is incorporated, but it can't be taxed where its management is located either?
And if yes, what would happen if such a company provides services to a company in a high tax jurisdiction? The company probably wouldn't be able to obtain a tax residency certificate? Could this lead to issues, such as clients not being able to deduct payments to this company as a business expense?

Just a thought experiment.

 

[Don]

I think this is mostly a question for @Don :

If you register a company in a country that only considers companies tax resident if they have their PoEM in that country (for example: Gibraltar, Singapore, Hong Kong, possibly others), but then you manage this company from a country without PoEM rules, such as Estonia.
What will happen?
Clearly the company is not tax resident where it is incorporated.
But it cannot be tax resident in Estonia either because Estonia does not have PoEM rules.

Estonia could obviously claim that there is a PE (even though I have heard they are not very aggressive about this). So if you run the company from Estonia, probably 100% of the company profits would be taxable in Estonia.
But what if you have a remote team? If there is a PE elsewhere, this would probably be exempt from taxation in Estonia, but then you would usually have to pay tax where that other PE is located.
But what if you have a team in a place like Thailand that doesn't really apply PE rules?
Would Estonia really be able to claim that 100% of the profits are linked to the Estonian PE?
What if you are nomadic with a base in Estonia, so you are tax resident in Estonia, but you spend almost no time there?

Could there be a situation where the company ends up not being taxed because income cannot be taxed where the company is incorporated, but it can't be taxed where its management is located either?
And if yes, what would happen if such a company provides services to a company in a high tax jurisdiction? The company probably wouldn't be able to obtain a tax residency certificate? Could this lead to issues, such as clients not being able to deduct payments to this company as a business expense?

Just a thought experiment.

Your thought experiment highlights a potential loophole where a company could avoid corporate taxation due to mismatched residency rules and lax PE enforcement.
Estonia wouldn’t automatically claim 100% of the profits unless a robust PE exists, and a nomadic setup with a remote team in Thailand could further dilute taxing rights.
In fact, if only assistants (and staff involved in other ancillary functions not doing sales) is hired in Estonia, then a PE could be registered in Estonia, but it will the type of PE which is not liable to CIT, but only payroll taxes on local staff.
Even if you consider a PE taxable with CIT, no tax applies until the assets are actually withdrawn from the PE, and even then there is a possibility to temporarily move assets out of the PE and avoid taxation if they are returned within 12 months.
That being said, tax treaties should also be assessed when considering what is treated as a PE, so it depends on various factors.

Practical challenges—TRC issues, client deductibility risks sometimes limit the benefits of such a structure, but it can still be useful for tax planning.

 

[CyprusLawyer101]

Also make sure you filter your planning through hybrid mismatch rules

 

[Don]

I think this is mostly a question for @Don :

If you register a company in a country that only considers companies tax resident if they have their PoEM in that country (for example: Gibraltar, Singapore, Hong Kong, possibly others), but then you manage this company from a country without PoEM rules, such as Estonia.
What will happen?
Clearly the company is not tax resident where it is incorporated.
But it cannot be tax resident in Estonia either because Estonia does not have PoEM rules.

Estonia could obviously claim that there is a PE (even though I have heard they are not very aggressive about this). So if you run the company from Estonia, probably 100% of the company profits would be taxable in Estonia.
But what if you have a remote team? If there is a PE elsewhere, this would probably be exempt from taxation in Estonia, but then you would usually have to pay tax where that other PE is located.
But what if you have a team in a place like Thailand that doesn't really apply PE rules?
Would Estonia really be able to claim that 100% of the profits are linked to the Estonian PE?
What if you are nomadic with a base in Estonia, so you are tax resident in Estonia, but you spend almost no time there?

Could there be a situation where the company ends up not being taxed because income cannot be taxed where the company is incorporated, but it can't be taxed where its management is located either?
And if yes, what would happen if such a company provides services to a company in a high tax jurisdiction? The company probably wouldn't be able to obtain a tax residency certificate? Could this lead to issues, such as clients not being able to deduct payments to this company as a business expense?

Just a thought experiment.

Deemed PoEM is very important. HK, for instance, is famous for deeming foreign income as local. I've heard of cases where even foreign income from hotels abroad was retrospectively taxed in HK, as the local director was not able to prove that the director was not involved in generating that income (decision to invest offshore). We are talking retroactively 15% p.a x 10 years.
The residency of the directors and proper documentation of management decisions are often critical.

 

[JustAnotherNomad]

Estonia wouldn’t automatically claim 100% of the profits unless a robust PE exists, and a nomadic setup with a remote team in Thailand could further dilute taxing rights.

What if the remote team members are hired as contractors (since you probably can't hire employees without registering a branch or subsidiary)?

In fact, if only assistants (and staff involved in other ancillary functions not doing sales) is hired in Estonia, then a PE could be registered in Estonia, but it will the type of PE which is not liable to CIT, but only payroll taxes on local staff.

But what if it's the owner's base? Wouldn't that be a "place of management"? And then if no other PE can be proven, profits would be attributed to that PE?

Even if you consider a PE taxable with CIT, no tax applies until the assets are actually withdrawn from the PE, and even then there is a possibility to temporarily move assets out of the PE and avoid taxation if they are returned within 12 months.
That being said, tax treaties should also be assessed when considering what is treated as a PE, so it depends on various factors.

But can tax treaties introduce new tax obligations?
For example, if domestic Estonian law says "X does not constitute a PE" and the tax treaty lists X as something that constitutes a PE - wouldn't domestic law still take precedence?

Practical challenges—TRC issues, client deductibility risks sometimes limit the benefits of such a structure, but it can still be useful for tax planning.

Yes, that's why I generally have been skeptical of structures like HK companies with no clear tax residency. How likely is something like that to happen? Are there a lot of countries that have such rules?

 

[JustAnotherNomad]

Also make sure you filter your planning through hybrid mismatch rules

Which country's hybris mismatch rules would apply? And how would it be a hybrid mismatch?
Aren't hybrid mismatch rules about where country A sees something in a certain way (for example, a tax-deductible expense), but country B sees it as something different (for example, a post-tax dividend)?

In this example, wouldn't something simply escape taxation because the tax code of neither country simply doesn't cover it?
For example, most countries only tax the income of foreign businesses if there is a PE.
If a Portuguese plumbing company sends a plumber to a Spanish customer for a one-off job (maybe there was a broken pipe and it's a public holiday in Spain), then the revenue would only be taxable in Portugal since there wouldn't be a Spanish PE.
Now replace the Portuguese company with a HK company that is managed by a nomad with a base in Estonia (unclear tax residency) - how could this suddenly be a hybrid mismatch? It's not like Spain gives any preferential treatment to one case vs. the other.

 

[JustAnotherNomad]

Deemed PoEM is very important. HK, for instance, is famous for deeming foreign income as local. I've heard of cases where even foreign income from hotels abroad was retrospectively taxed in HK, as the local director was not able to prove that the director was not involved in generating that income (decision to invest offshore). We are talking retroactively 15% p.a x 10 years.
The residency of the directors and proper documentation of management decisions are often critical.

I guess HK is a special case because Pwc writes that they don't really have a concept of "tax residency" - they only look at "source of income", which is similar, but not quite the same thing.
Anyway, tax treaties should probably fix this.
And in my example, I was thinking of companies that have been granted the offshore status.

 

[Don]

What if the remote team members are hired as contractors (since you probably can't hire employees without registering a branch or subsidiary)?

Hiring remote team members doesn't require any registration, nor is it taxable.
EU companies can do business anywhere across the EU without registering a branch or subsidiary.
Some countries like Estonia also allow foreign entities to do business locally without registering a branch or subsidiary - just as a registered PE.

But what if it's the owner's base? Wouldn't that be a "place of management"? And then if no other PE can be proven, profits would be attributed to that PE?

If it's clearly a "one-person company", then it would be hard to argue against it, so each situation is unique.
Most often, PE is not enforced unless they have clear evidence.
There was a case where Estonians were managing a Czech company with zero substance in Czech Republic for a few years. They were running a car dealership and all cars were sold to local market. Company had office in the same building like tax office. Even then tax authority initially said its not a problem, and they are not required to register PE, but years later they enforced the PE.
This was a 100% obvious case, and idiots tried to optimize VAT without any substance in the Czech Republic. https://www.aripaev.ee/suur-lugu/2024/10/20/maksuamet-vottis-ette-tsehhi-autoskeemi-eestisse-toojad

So I believe if its not so obvious case then there is very low risk of enforcement, especially with regards to active companies (not passive investment entity).

But can tax treaties introduce new tax obligations?
For example, if domestic Estonian law says "X does not constitute a PE" and the tax treaty lists X as something that constitutes a PE - wouldn't domestic law still take precedence?

If a resident of a tax treaty country does not have a permanent establishment in Estonia within the meaning of the tax treaty, taxation under Estonian rules will not apply, as the tax treaty does not permit this. The provisions of the tax treaty do not affect the obligation to register a permanent establishment, so in some cases, a PE needs to be registered, but its not treated as a PE for corporate income tax purposes.

Yes, that's why I generally have been skeptical of structures like HK companies with no clear tax residency. How likely is something like that to happen? Are there a lot of countries that have such rules?

This was actually more of a comment to HK-s tax systems "territoriality". If the management is not in HK then it's a different story. It should be possible to get offshore treatment status.