Estonia e-residency + Portugal NHR

[JC1984]

Nice summary. Now let's interpret the Portugal-Estonia tax treaty. Take a look at Article. 10‌ on dividends:

http://internationaltaxtreaty.com/download/Portugal/DTC/Portugal-Estonia-DTC-May-2003.pdf

I'd like to understand this.

 

[Marzio]

It's 20% in Estonia + 10% WHT⁤ on dividends as stated in the EE-PT treaty.

Estonia doesn't levy withholding tax on dividends paid to nonresident︁ companies but since you will be receiving dividends under NHR you will likely pay WHT︂ according to the treaty.

 

[JC1984]

I will bring your point up with my accountant in Portugal. But he seemed to‌ suggest that instead of 20% in Estonia, I'd pay only 10%. Then receive the dividends‍ tax free in Portugal. Again, this is where I lack clarity. And it's your version⁠ that I am afraid of being true.

 

[Marzio]

I highly suggest you to not rely only on your accountant in Portugal but also‌ to ask EMTA about it because all the taxation will take place in Estonia: [email protected]

And BTW i would trust more EMTA than any PT accountant.

In my experience they‍ are quick to reply.

Please report back your findings.

 

[JC1984]

Thanks for the email address. I'll give them a try.

 

[Nikola]

Interesting! I was under the impression from my Tax Lawyer in Portugal that they already‌ have clients who have businesses in Estonia and they are paying 0% on dividends in‍ Portugal under NHR. They didn't mention anything about the 10%, but perhaps I misunderstood. Will⁠ check and report back! Thanks for the contact @Marzio !

 

[JC1984]

Paying the 0% on dividends in Portugal makes perfect sense. But the question is what‌ was their tax rate on the distribution from the company inside Estonia?

 

[lonizzita]

does this set-up work⁣ even if you reside in Malta?
is it necessary to create a substance in the⁢ USA? in order not to risk the PE

 

[Marzio]

Nope because Malta follow the 183 days rule

In case of Malta it could be beneficial to manage an offshore company from Malta⁤ making it tax resident in malta.

https://corriericilia.com/publications/resident-non-domiciled-companies

 

[Nikola]

Let me know if you find a definitive answer! Also looking into this.‍

 

[European]

@JC1984 What would︁ they consider a small fish? An annual profit of €100K? €500K?

 

[JC1984]

I imagine under 10 million. Just a guess.

Typo: 1 million not 10

 

[JC1984]

Here is the answer from the Estonian tax authorities regarding the tax treaty with Portugal:‌

Thank you for contacting us.

Tax treaty does not reduce the level of taxation on‍ Estonian corporate dividend distributions from the standard 20% rate to 10%, because it is the⁠ corporate income tax paid by the company. Tax treaty applies to income tax withheld from⁤ the beneficial owner, from you as the Portugese resident.

Please find next explanation on our⁣ website: Tax liabilities of companies established by e-residents | Estonian Tax and Customs Board

If an e-resident owner of an Estonian resident company receives a dividend, it necessary to draw⁢ a distinction between the income tax applicable to a dividend of an Estonian company and︀ income tax withheld on a natural person’s dividend income. If an Estonian company pays income︁ tax on dividends at the normal rate of 20/80, no further income tax withholding will︂ apply for the dividend distribution to a natural (e-resident) person. An e-resident natural person in︃ most cases will not be able to use income tax paid by an Estonian company︄ for the purposes of double taxation relief in their own country of residency because the︅ Estonian income tax was paid by a different person.

From the year 2019, dividends paid︆ regularly by an Estonian company are subject to a lower rate of 14/86. In the︇ latter case the Estonian company will withhold a further 7% on a non-resident natural person’s︈ dividend income upon making a dividend distribution. Income tax withheld on dividends (7%) is an︉ income tax rate applicable to natural person dividend recipients in Estonia that can be used︊ for double taxation relief in the dividend recipient’s country of residency, depending upon such country’s︋ rules and the tax treaty for the prevention of double taxation of income.

Best Regards,︌

Katrin Kullamaa
Consultant

 

[Marzio]

Well at least now you know that your⁠ PT doesn't have a clue.

 

[European]

Interesting.
1. Is the⁣ 183 days really the main factor here? Not sure about PT but other EU countries⁢ consider a company a local tax resident if it is effectively managed from the country︀ at any time during the year.
2. Assuming this structure works in PT, you would︁ have to make sure not to spend more than 183 days in any other country?︂ Plus there is still the risk that the other countries where you stay consider the︃ US LLC local and tax it

 

[Marzio]

Well, i said 183 days because usually it's the time after which you trigger PE.

If you want to go ahead with this structure you have to analyze DTT between PT‌ and the other countries where you plan to stay. Usually under article 5 it says‍ how many days to permanent establishment

For example in the DTT between Canada and PT⁠ it's 120 days.

In Switzerland otherwise it's 30 days.

The question here is: how would⁢ they know? Let's say you have EU passport and rent a Swiss holday home for︀ the entire year. You could spend up to 90 days every 6 months.

How would︁ they know that during that time you didn't work from your laptop?

They can't.

You have to make sure to not trigger PE︃ in the countries you plan to stay and you'll discover in the DTT between PT︄ and the countries you plan to stay after how many days the DTT is triggered.︅

See the answer above.︇

 

[European]

Thanks @Marzio
I think the first thing to get clarity on︅ is whether PT would consider the US LLC a local tax resident.
For that we︆ would need to check what PT tax law says. That piece of info I am︇ missing now
Now we'd have two scenarios:
1. PT does NOT consider the US LLC︈ local tax resident
2. PT DOES consider the US LLC local tax resident

Under scenario 1 you are fine with PT. If the US LLC is single member and︉ not ETBUS, no tax in the US and you would have to analyze what happens︊ with other countries you'll be staying during the year.

Under scenario 2, the DTT would︋ play a role, theoretically. I still have doubts on this since the DTT is relevant︌ when a (legal) person is liable for tax in both signing states; a single member︍ US LLC is however a pass-through and disregarded entity in the US and you will︎ not get a certificate of tax residence from the IRS. If the US LLC is️ not a tax resident of the US then the DTT cannot help and you are‌ on the hook in Portugal.
Even if the DTT were to be invoked, the PT-USA‍ treaty reads as follows for PE:

Then there's a clause similar to the one you⁠ cite for Canada-PT:

But in my opinion this clause 4 does NOT mean that you⁤ need any of the points in clause 2 for 9 months. It just describes another⁣ situation in which you would trigger PE. I.e., even if you do not have any⁢ of a) to f) in 2. in PT, you can still trigger PE if for︀ instance you have employees working in PT from their home for over 9 months.
The way I see it, if you stay for a couple of months in PT and︁ you manage the US LLC from there, you are creating a PE in PT. Another︂ discussion is what part of the US LLC profits would be taxable in PT.
This reasoning would generally be applicable to other countries you stay in, so you'd be at︃ risk of triggering (partial) PE in all of them.

 

[Marzio]

Any element from (a)‍ to (f) could trigger a permanent establishment.
Elements from (b) to (f) are physical in⁠ nature and they trigger a PE becase of their supposed fixed nature.

I mean you⁤ don't set up a mine for less than 9 months right? Or a branch, or⁣ an office, or a factory.

Place of management instead isn't fixed in nature so imho⁢ it can't trigger a PE immediately, there needs to be some "time to permanent establishment"︀

Imagine ths situation: you are tax resident under NHR because you rented an apartment for︁ the year and you spend 5 days in PT while the remaining 360 days you︂ spend 90 days in 4 countries.

Put aside the fact that the other countries could︃ claim you are creating a PE there, imagine that this wouldn't be the case.

Are you creating a PE in PT?

Clause 4 indeed means that if your situation doesn't︄ fit any of the elements from (a) to (f) you are creating a PE in︅ PT if you carry out a business from PT for a period of 9 months︆ in any 12 months period.

 

[European]

I agree it wouldn't⁣ sound very logical to have a PE in PT in that case but assumptions based⁢ on common sense are not necessarily aligned with what the law says. Check out the︀ example of Greece:
For determining a legal entity as being tax resident in Greece, the︁ exercise of effective management in Greece for any period during the tax year is sufficient.︂
https://taxsummaries.pwc.com/greece/corporate/corporate-residence
Again, I am not sure what the PT law says.
If the law of︃ the country does not clearly establish a minimum number of days for effective management to︄ trigger PE, I think there would be a significant risk of the company being liable︅ to tax in that country if you spend time there.

Additionally, CFC could be a︆ problem too for a US LLC not taxed in the US:
https://taxsummaries.pwc.com/portugal/corporate/group-taxationProfits or income︇ derived by an entity resident in a black-listed jurisdiction, or in a jurisdiction where it︈ is subject to an effective taxation below 50% of the taxation that would have been︉ applied if such entity was resident for tax purposes in Portugal, are imputed to the︊ Portuguese taxpayer, provided it holds, directly or indirectly, at least 25% of the share capital,︋ voting rights, or rights on income or assets of that entity. Upon distribution of the︌ profits, a deduction is available for previously imputed income.

I've both read that CFC rules︍ in PT are applicable
a) to both active and passive income and
b) only if︎ 25% or more of the company's income is passive
If b) is correct, CFC would️ not be a problem.

How likely this is to be enforced by the PT tax‌ authority is another matter.

 

[Marzio]

We could go on and on speculating, i know that there are people that are‌ getting away with a US LLC + NHR. Don't know if it's because PT tax‍ administration doesn't care or they are preparing a giant mousetrap at the end of their⁠ NHR 10 years.

I also know people that are UK LTD directors and only shareholders⁤ receiving tax free dividends while living in PT. Now it's less attractive of a solution⁣ because ot the UK CIT increase to 25% but until yesterday they paid 19% total⁢ tax and the LTD was 100% managed from PT.