Estonia Company + Cyprus PE + CY Residency

[JohnDones]

I stumbled upon this post by @Don

Quote: EE company with a PE in CY can redistribute the profits of the PE to the shareholders tax-free. And in the case of trading securities, there is no capital gains tax in Cyprus, so the overall tax will be 0%.

Do I understand this correctly:

• Estonia company with retained earnings (example: 100k)
• Director+Shareholder gets Cyprus residency
• Set up Cyprus PE (office with “analysts” who buy/sell equities)
• CY PE invests 100k into stocks
• CY PE liquidates assets and gets 200k (0% capital gains in Cyprus)
• EE company redistributes PE profit to shareholders tax free?

What am I missing here?

Why would Estonia not tax this amount as a regular distribution, hence 20%?

Thank you
JD

 

[Marzio]

That's why

https://www.fin.ee/en/taxes#corporate-income-tax

 

[JohnDones]

Good find appreciate it. So the exemption‌ applies for the second 100k (profit) in my example above. The principal 100k would still‍ be taxed at a regular CIT rate if distributed?

 

[Marzio]

Any income that flows from CY to EE is not be‍ subject fo further taxation when distributed.

 

[JohnDones]

Thank you for clarifying. Would be interesting to‍ know if anyone has ever done this in practice for years. I guess not every⁠ accountant/auditor would be able to do this properly.

 

[Marzio]

I would verfy with a CY accountant if ALL securities capital gains are tax exempt‌ because that's the critical piece IMHO

 

[Don]

No, its mostly capital‍ gains from trading shares in all types of companies that are exempt in CY. Not⁠ all securities are exempt or commodity derivatives.
Thats why this Estonia - Cyprus structure can⁤ be great as if you trade multiple types of instruments, those trades that might be⁣ taxable in CY, you could trade on the Estonian level, deferring tax indefinitely, and avoiding⁢ any tax exposure.
Also depending on your personal tax residency, it could be more advantageous︀ structure compared to CY non-dom with a CY company as you would pay 2.65% social︁ taxes on dividends this way.
I would consider Estonian tax residency instead as it doesn't︂ require 60 days (or any days for that matter) stay, and is more tax efficient︃ with such a structure.
Correct

 

[CyprusLawyer101]

Have you checked ATAD and how it would apply yo this?

 

[Don]

Estonia will not even check how much tax is paid in Cyprus. They only‍ want to know how much profit was repatriated, as this will be tax free in⁠ Estonia.

So far, EU member states have not reached an agreement on the highly controversial⁤ Atad 3 draft directive proposal and the final outcome is still uncertain.

 

[CyprusLawyer101]

I am not talking about ATAD 3

 

[Don]

The thing with‌ Estonia and ATAD is that even if the foreign profits are attributed to the Estonian‍ holding due to being qualified as a non genuine arrangement due to lack of substance,⁠ the profits would still not taxed until the distribution actually happens.
Always best to have⁤ some substance, and with such structure especially so if it involves Estonian citizens/residents.

 

[CyprusLawyer101]

What about exit taxes on chargeable assets?

 

[JohnDones]

I think the main question is has this been done in practice and survived an‌ audit. A lot of things work in theory.

Say you distribute 100k (PE profit) from‍ Estonia and don't pay corp tax. How's that not a trigger for an audit?

 

[Don]

Yes.
If needed you will be asked to show the tax⁤ declaration of the PE, to prove that the repatriated income was sourced from abroad. It⁣ works similarly as other jurisdictions which don't tax foreign sourced income like Singapore, Gibraltar or⁢ Malta.

 

[JohnDones]

Would the PE need to have its own set of bank/brokerage accounts? Is⁠ it required, good to have or doesn't matter?

 

[Don]

Yes you need it‍ for accounting, to keep things separate.
Its really simple to do with a broker like⁠ IBKR.

 

[JohnDones]

Appreciate all your answers here,‍ really helpful.

So when the PE opens a Wise account + IBKR, the main Estonian⁠ entity would fund those accounts? How is that accounted in Estonia, as a loan to⁤ a PE?

 

[Don]

Yes the head⁠ office can finance a foreign PE, but when moving assets to a foreign PE it⁤ is usually deemed as distribution, unless assets are returned within 12 months.

 

[JohnDones]

Right, so you would need to move the funds back⁠ on Dec 31 to close the year with the seed amount back in the main⁤ company? And profit (if any) remains in the PE.

 

[Don]

It is also an option for⁠ the shareholders to inject the capital directly into PE in the first place. In such⁤ a case, there is no "deemed distribution," as assets are not taken out from the⁣ Estonian headquarters.
Deemed distribution is a crucial concept for anyone managing an Estonian company to⁢ understand, as no tax must be paid before distributions.
Deemed distribution happens when assets, e.g.,︀ funds from undistributed profits of Estonian headquarters, are taken out and moved to a foreign︁ PE. However, as I mentioned, there is an exception to the rule that it's possible︂ to move assets out of the headquarters without tax implications if the move is temporary.︃

I recommend getting some advice to understand the full implications on personal and corporate levels.︄