Offshore company to held trading assets.

[Tr0nad0r]

My question is similar to Offshore company - Crypto - Canada but I prefer to not include it in the public forum.

In my case, I (Canadian resident) and my partner (Colombian resident) want to create a company (in Estonia) to held the crypto/forex/stocks assets that we trade as part of day-trading strategies.

We are quant traders, our trading strategies involve a lot of turnovers (e.g HFT - High-Frequency Trading) and we want to avoid being liable to paid capital gain taxes with every successful transaction, we reinvest all the gains so being able to defer taxes until the company dividend is distributed is ideal for us (that's one of the main reasons to choose Estonia as jurisdiction)

I'm not worried about paying taxes (at the company and individual level) on distributed dividends but I don't want the company to be considered a CFC and being fully liable with the local corporate taxes. I'm not sure if owning exactly 50% of the shares (splitting 50% - 50%) makes me a controller of the company and if the CFC rules can be avoided if I own a bit less than 50% (e.g splitting it three-way as 49,5% - 49,5% - 1%). Does someone have a clear idea about this topic?

 

[Sols]

CFC is just one part of the puzzle.

Another factor would be that management and control take place in Canada and Colombia by being controlled there (controlled here referring to business decisions being taken, not shareholding), or by having a PE (Permanent Establishment) there which your home offices could be construed as. To make things even more exciting, Estonia considers companies incorporated in Estonia tax resident there. So you risk creating a situation where a company is tax resident in as many as three jurisdictions simultaneously and you'll have to navigate tax treaties, tax credits, and laws of all possible combinations.

One possible outcome is the company must pay tax in Canada on your portion of the profits, in Colombia on your partner's portion of the profits, and nothing in Estonia if you can use the Canadian and Colombian taxes paid as credit to adequately offset your Estonian tax bill (if any). Another is the company must pay full tax in all three jurisdictions and you'll need to work out in what order the tax treaties apply.

Speak with a tax adviser. Or multiple ”” one per jurisdiction.

I'd also consider going back to the drawing board. What about setting up an LP in Canada? No corporate tax to worry about in Canada and you'd both be subject to personal income tax. Your friend in Colombia would have to check with a tax adviser in Colombia how this would work from a Colombian tax perspective, but that can probably be solved.

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This is the probably the answer to your question.

 

[Tr0nad0r]

Thank you very much for all the information @Sols, it's very valuable.

My partner located in Colombia has a background in accounting, taxes, and finance; she has experience establishing offshore companies for her workday job in a physical commodities trading company and is able to navigate the local tax laws successfully so she's in charge of doing all the pertinent research for Colombia while I do the research for Canada.

The reason we started considering Estonia (beyond it's easier to start a company remotely and have easier access to the ecosystem of brokers, exchange, banks, etc in Europe) was that the business service provider that we are planning to choose has been able to navigate similar situations in the past successfully (with companies focused in the same business activity and with people from LATAM). We will meet with their Estonian/International tax advisors this week to assess our case better.

I'm currently doing some preliminary research about Canada and found that exists a favorable Estonia-Canada tax treaty that might be useful for my situation. My partner has suggested relieving myself from managerial decisions, appoint some external directors in the company board, and getting myself hired by the company as a programmer (TBH I don't know much about management, my background is in programming and I got in the finance world working on my master thesis about quant algorithms); but you're totally right, I need to assess all my personal situation with a local tax advisor. I have already scheduled this meeting but I'll continue collecting some information to level up a bit on the topic and to be able to raise some questions to the advisor.

I'll consider the LP in Canada suggestion as well and I'll bring this idea with both, my partner and the local advisor.

Thanks for all.

Last edited: May 17, 2021

 

[Sols]

Appointing a local director in Estonia is fine, and will be fine ”” as long as you don't find yourself in a hostile situation with the Canadian tax authorities. I see similar arrangements mostly Isle of Man, Gibraltar, Cyprus, and Malta, where the UBOs appoint local directors. This establishes the company as tax resident there and the UBOs are left unbothered as long as they pay taxes on their dividends/income.

But this risks falling apart if the tax authority decides to take a closer look at you and your company. In your case, the CRA could in such a situation disregard the Estonian director as nothing but a nominee puppet and claim that you are the effective director. At that point, the company becomes tax resident in Canada and it's time to pony up for Canadian federal and local corporate income tax, social security contributions, and other taxes and fees. Retroactively, if they really want to squeeze you.

This is both about navigating laws and tax treaties, and about understanding the risks you take with different solutions.

Tax treaties are first and foremost meant for truly multinational companies with offices in multiple locations. Not for people who want to dodge local tax and trade crypto while hiding behind a nominee director.

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This is the probably the answer to your question.

 

[Tr0nad0r]

I forgot to mention in my previous comment that my partner is currently located in Colombia but is considering moving to Estonia after reaching the requirements for a residence permit for business (Residence permit for business ”” Invest in Estonia)

 

[Sols]

If you partner then assumes directorship and is resident in Estonia, it's a harder case for the CRA in a hypothetical, hostile situation to claim that you are a director. I'd make sure your partner is the only signatory on any bank accounts (you can have view access) and responsible for signing agreements.

In that case, you take away much of the risk associated with having a nominee director. It's not zero if you still are involved in calling the shots, but you can make the risk significantly smaller by ensuring your partner, now resident in Estonia, acts as a true director.

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This is the probably the answer to your question.

 

[Tr0nad0r]

Thank you for all the info and recommendations!!