Tax-free residency in Estonia

[khinkali]

how would you open bank account for such company?

If you have a Georgian office paying Georgian salaries for the work that produced export services, then I don't see a reason for Georgian banks to have a problem, even if the owners and customers are offshore.

If the work is done offshore, the customers are offshore and the owners are offshore, then Georgian banks are less likely to be interested in that business.

Georgia has "virtual zone companies". Same tax concept as Estonia - no CIT until dividends are paid out, and only 5% in that case.
So it should be possible to have a company in Georgia, be a resident of Estonia and pay only 5% tax on dividends that are paid out.

Surely this could be taxed as an Estonian PE, unless the work is done and managed in Georgia? Or is there a DTA loophole?

 

[JustAnotherNomad]

Surely this could be taxed as an Estonian PE, unless the work is done and managed in Georgia? Or is there a DTA loophole?

Yes, of course. Like I wrote, you absolutely have to make sure you meet the substance requirements and don’t manage the company from Estonia. But Portugal’s NHR scheme has the same rules, plus many additional pitfalls, and it’s extremely popular. While Estonia’s rules are quite straightforward.

The main idea would be not to spend a lot of time in Estonia. You would still be considered tax resident there, however, as long as you have your home there.

And of course you’d have to talk everything through with an experienced tax lawyer. This was only meant as an idea.

 

[Zuzuud]

Dear Community!

As you wrote it seems good, but the details matter, so I have asked directly the estonian tax office about DTT romanian corporatioin dividend to estonian resident taxation. This is what I got:

"Regarding to the Art 10 of the tax treaty between Romania and Estonia Romania can charge until 10 per cent of the gross amount of the dividends.

Income tax shall not be charged in Estonia on dividends if income tax has been paid on the share of profit on the basis of which the dividends are paid or if income tax on the dividends has been withheld in a foreign state."

I am not sure, but tell me if I am wrong. It says to me, if there is WHT in Romania on dividend, then there is no tax on that in Estonia. Is that true?
What about if there is no WHT in Romania, bc the romanian company just pay the microenterprise tax (3-1%), but pay dividend without any other tax, bc there is an option for that:
"For example, the distribution of bonuses in the amount to the share of each contributor is not subject to the dividend tax. The same thing is available for the distribution of dividends made in cash or kind in the case of share capital reduction, as established by the company owners and contributors." In this case dividend taxed in romania or not? It means, does it taxable on personal level at estonia or not?

What do you think? Do you see any option?
Do you recommend any other company instead of romanian one to make it low taxes with estonian residency?

Happy hunting for best low tax structure!

 

[Marzio]

I have asked directly the estonian tax office about DTT romanian corporatioin dividend to estonian resident taxation

You wasted your time asking the estonian tax office because there is not withholding tax as per EU parent subsidiary directive.

So if you create an Estonian holding that owns a romanian company then the romanian company can transfer profits tax free in Estonia and estonian residents will not be taxed at personal level because dividends were taxed at 1% in Romania.

You obviously need to rent an office in Romania, hire an employee and having a director there to have the minimum substance requirements but other than that you would pay 1% total taxes till 1.000.000 revenue (not profit).

 

[JustAnotherNomad]

I am not sure, but tell me if I am wrong. It says to me, if there is WHT in Romania on dividend, then there is no tax on that in Estonia. Is that true?

WHT has nothing to do with this. There is never tax in Estonia, once CIT has been paid (unless there is some sort of special exception due to the other country being considered a tax haven).

As @marzio explained, you can avoid the WHT by putting a holding company from a country that doesn’t charge WHT in between you and the Romanian company. Within the EU, there is never WHT between companies and their parent companies (parent-subsidiary directive), but there can be WHT between companies (including holding companies) and their individual shareholders.
Countries that don’t charge WHT and this should be a good choice for a holding company include Estonia, Cyprus, Latvia, probably others.

For the choice of a holding company, see this thread:

https://www.offshorecorptalk.com/threads/holding-for-assets-in-germany-eu.30839/
Estonia is nice and simple for a holding company, but you will have to pay 20% tax if you sell the operative company (subsidiary). So having the holding company in a different country might be preferable, unless you are sure that you will never sell the operative company.
The term you are looking for here is the participation exemption. Estonia has no participation exemption for the disposal of qualifying shares, most other countries do.

The critical thing here is that you don’t manage the Romanian company from Estonia and that there is substance everywhere. Please don’t do anything like this without consulting with the proper lawyers from all countries involved. I have not done this myself - I only discovered that it should be possible in theory. There will be many pitfalls you need to avoid.

If you get the green light from your lawyers, I’d be interested in hearing about how you set everything up in the end.

 

[Plavivoz]

Within the EU, there is never WHT between companies and their parent companies (parent-subsidiary directive), but there can be WHT between companies (including holding companies) and their individual shareholders.

This is not completly true.
There are some cases where there is WHT.
For example an european holding company owns 100% of the shares of a romanian micro enterprise.
5% WHT

 

[JustAnotherNomad]

This is not completly true.
There are some cases where there is WHT.
For example an european holding company owns 100% of the shares of a romanian micro enterprise.
5% WHT

Thank you. Then it obviously wouldn’t make any sense. One would probably be better off using a company in Malta or Lithuania where the CIT can be as low as 5%, and it’s only charged on the profits, instead of the revenue.

 

[Zuzuud]

Thank you for all. There was a structrue in this thread WITHOUT an extra holding company. Now it seems that doesnt work if the company is in Romania and estonian holding company is neccessery then.

Actually, be an estonian resident is clear and seems usable, but I think I need the best location for my company and maybe need an extra holding company to make tax low as possible.

ps: The company will do the job, so its clearly a substance and I am not going to manage it from estonia.

What country and DTT should I check to make a setup without holding company or which 2 country is recommended for holding company structure?

Thank you

 

[Marzio]

What country and DTT should I check to make a setup without holding company or which 2 country is recommended for holding company structure?

Use this site to check DTT

 

[JustAnotherNomad]

Thank you for all. There was a structrue in this thread WITHOUT an extra holding company. Now it seems that doesnt work if the company is in Romania and estonian holding company is neccessery then.

It does work, you’d just have to pay the WHT then. But why not set up a holding company then? It should be cheap.

 

[Zuzuud]

I just dont get you @marzio & @JustAnotherNomad
Does "EU parent subsidiary directive" is higher than the current convention ? what says:
"
1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State _may_ be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged _shall_ not exceed 10 per cent of the gross amount of the dividends."

Or "may/shall" doesnt mean they charge it?

 

[JustAnotherNomad]

I’m not a lawyer, but to the best of my knowledge:
The PSD is an EU directive. Like any directive, it is not a law, it needs to be transposed into national law by all EU member countries. I think this can be done both in the domestic tax code in the tax treaty, but it is probably more common to just do it in the tax treaty. The tax treaty always takes precedence over domestic law.

So when you read “the tax shall not exceed 10%,” what it means is “if the domestic law says we should take more than 10% WHT, the tax will be capped at 10%. If the domestic law says there should be 5% or 0%, that is what applies.”
The same goes for the word “may,” sometimes you will find that a treaty says “this money can only be taxed in this state, unless...” - when it says “may,” it means that “if one country’s domestic law says there should be tax (remember, the domestic law can change quickly and unilaterally, depending on elections), then that’s generally ok”. The tax treaty overrides the domestic law.

Typically you should find that there is no WHT under the PSD, either because it is mentioned in the domestic law (“no withholding tax applies when the dividends are paid to a company in another EU state that owns at least 25% of the shares” or something similar) or in the tax treaty (“The tax shall not exceed 0% if the receiving company is tax resident in the other state”). Tax treaties are usually not updated very frequently.

You always have to check both the domestic law and the tax treaty. The general rule is that there shouldn’t be any tax on dividends between EU companies, but countries can always define some details, like “but this only applies if the company owns at least 25%” etc.
The same goes for the participation exemption which deals with the sale of shares.
There is a brochure from one of the BIG4 companies that explains the details for all the EU countries, I’m sure you can find it on Google.

 

[Zuzuud]

Dear @JustAnotherNomad your'e the man! Thank you for the this nice explanation with examples. This is very helpful for me and I am sure for others too.

 

[JustAnotherNomad]

@Zuzuud Thank you for the kind words.
It’s important to understand that the tax treaty cannot create new or higher tax, it can only limit whatever is written in the domestic law.

 

[Zuzuud]

This is not completly true.
There are some cases where there is WHT.
For example an european holding company owns 100% of the shares of a romanian micro enterprise.
5% WHT

@Plavivoz than you for the heads up. Could you show me where can I check this? I have not found yet. Thank you

 

[Zuzuud]

Any idea where should I check this things above? I did my homework, but I did not found any trace of it. Just give me the right direction, bc it's important almost all of my considered low tax structure. Thank you

 

[JustAnotherNomad]

You just have to check it for every country individually. If you want to set up a company in Romania, google “Romania withholding tax” or “Romania parent subsidiary directive” and check what is written there. If it sounds good, talk to a Romanian accountant or service provider to confirm this.
Then also talk to an Estonian accountant or tax lawyer to make sure it will work on the Estonian side as well.
You should be able to get some basic information for free or for very little money. Then in the end you will have to pay to get a proper written legal opinion from them.
Finally, report your findings here.

 

[polonieth]

Where are you based now @JustAnotherNomad?

 

[CaymanCruiser]

As for company residence, I might be wrong here as I am still learning a lot but from what I understand Estonia does not consider a company incorporated elsewhere to be tax-resident, even if management & control is conducted in Estonia. I've reviewed the tax summaries from Big 4 as well as the domestic legislation and I can't really find anything that is contrary to this. See: Estonia - Corporate - Corporate residence

With this in mind, would it not be possible to have a Maltese company managed from Estonia and effectively pay only 5% in tax? The argument can be made that the DTA tie-breaker rule can result in a ruling whereby the Maltese company is considered tax-resident by the Estonian tax authorities, from what I understand this rule is only applied to resolve disputes with domestic taxation (like avoiding double-taxation) and is not used by the domestic tax authorities to provide a baseline on tax residency, especially when the domestic legislation has zero management & control provisions.

 

[dirtyharry]

If I understand it correct, you have to relocated to either Gerogia or Malta and then incorporate your business in Estonia to avoid any tax.

That's not possible for all, but sounds like a good solution for many.