Estonia, Lithuania and Latvia for a holding company

[22kay]

"All legal documents and⁢ company-related paperwork should remain in the Cyprus office or be accessible in the office at︀ any time if they are uploaded to cloud data systems." - wohoo...back to the eighties...︁🙂 So, if there is a laptop in the office that is always connected to the︂ Dropbox accounting and agreement folder, problem solved...or? 🙂 Just a funny writing... 🙂

It feels like the︃ article just shows different way's of proving presence and there are many ways of doing︄ that, some are more creative then other. The key point is that as long as︅ the corp taxes are paid locally, you don't try to outsource (too much) of the︆ administrative work (eg. keep it in the original country jurisdiction) you will be fine. Of︇ course, keeping an arms length is the best way in regards to management, which they︈ also mention in the article.

Yes, the presence requirement would need to be solved in︉ an adequate way...and of course, it only complicates it some more. But it's not like︊ you need to over complicate and hire a huge staff of employees and put them︋ in a big corp building to prove presence. On the other hand, if you would︌ hire a big staff and get a big corp building paid by the dividend that︍ was already taxed once...who will benefit from that? Exactly, the local jurisdiction 🙂 So, of course︎ they try to scare you. More money to the politicians (just because they missed a️ loophole the first time) thu&¤#

As always, laws change and as you already recommended; a local‌ tax lawyer is always a must as well as a local (good!) CA/CPA, I would‍ say.

ps. The article is written by a company that makes money helping companies pass⁠ the presence test...it's a little biased, I would say. Sounds just like an American insurance⁤ company..."if you don't do it like we say, and we are not saying you should,⁣ but who knows what trouble you might get into. Pay us, but we don't guarantee⁢ anything..." 😎

Regarding the article. The⁢ footer says:

Copyright © 2023 Aspen Trust Group | Privacy Policy | Cookie Policy | Legal Notice

Designed by Tenba Group

Click on the Tenba Group-link and you get to︀ a company doing Chinese SEO 🙂

 

[JustAnotherNomad]

The substance is something that the subsidiary country cares about, not the holding company country.‌ So you'd also need to get legal advice from any country where the subsidiaries are‍ located.
I'm pretty sure that Estonia won't care at all about substance for a company⁠ registered in Estonia. Substance is about making it harder to obtain a tax advantage by⁤ registering somewhere else - a company that is incorporated in Estonia is by default tax⁣ resident in Estonia and thus subject to Estonian tax.
(And I also think that it⁢ would be a bit ridiculous if they didn't accept a tax resident of an EU︀ country with a holding company in the same country as sufficient substance - but I︁ have no experience with this.)
I think everyone here agrees that you should only do︂ this with proper legal counsel.
I didn't make this up - a long time ago︃ I spoke to a successful entrepreneur with such a setup. He obviously had it all︄ checked in detail by lawyers in all countries involved. But he actually moved to Estonia︅ to live there full time - and receive dividends from his companies in different countries︆ tax free.
Btw, Estonia has some restrictions for this, the corporate tax paid has to︇ be at least 7% or so - not sure if there is an exception if︈ there is a tax treaty (such as for the UAE). So if you want to︉ receive dividends from a Seychelles company or something, there would probably be tax in Estonia.︊ But your lawyer will be able to guide you about that...

 

[Don]

For the purposes of a holding company its important to note the participation exemption:︌ Corporate income tax will not be charged on a redistribution of dividends if the underlying︍ dividends are received from a subsidiary that is tax resident in a European Economic Area︎ member state or Switzerland and the Estonian parent holds at least 10% of the shares️ or votes of the payer company. The participation exemption also applies to dividends received from‌ other countries if the EE company holds at least 10% of the shares or votes‍ and income tax has been paid on the underlying share of profit, or income tax⁠ on the dividends has been withheld in a foreign jurisdiction.

 

[Marzio]

https://www.fin.ee/en/taxes#corporate-income-tax
Estonia is great choice for a holding company.

 

[JustAnotherNomad]

Yes, but I believe there is also a minimum tax. If the subsidiary is located in︁ a country with a corporate tax rate of less than 7% or so, the participation︂ exemption also isn't applied. This should be checked with an Estonian lawyer.
And as mentioned,︃ almost more importantly, the conditions in the subsidiary country (economic substance of the holding company)︄ also have to be checked.
I'm really interested to hear how this goes.

 

[Don]

It might be applicable in certain cases in Estonia if its⁢ considered low tax territory:​

​

§ 10. Low tax rate territory​

(1) A low︀ tax rate territory is a foreign state or a territory with an independent tax jurisdiction︁ in a foreign state, which does not impose a tax on the profits earned or︂ distributed by a legal person or where such tax is less than one-third of the︃ income tax which a natural person who is an Estonian resident would (20%/3=7%), pursuant to︄ this Act, have to pay on a similar amount of business income, without taking into︅ account the deductions allowed under Chapter 4. If taxes imposed on the income earned or︆ distributed by different types of legal persons differ, a territory is deemed to be a︇ low tax rate territory only with regard to legal persons in the case of whom︈ the tax meets the conditions for low tax rate territories specified in the first sentence︉ of this subsection.

(2) A legal person is not deemed to be located in a︊ low tax rate territory if more than 50 per cent of its annual income is︋ derived from actual economic activity or if the state or territory of location of the︌ legal person provides the Estonian tax authority with information concerning the income of a person︍ controlled by Estonian residents.

(3) Without prejudice to the provisions of subsections (1) and (2),︎ the Government of the Republic shall establish a list of territories which are not regarded️ as low tax rate territories.

 

[22kay]

So if a dividend is received by a natural person in a low tax jurisdiction‌ (not taxed on foreign income) from the Estonian holding company, it should be taxed 7%?‍

Let me rephrase:
So if a dividend is received by⁣ a natural person in a low tax jurisdiction (not taxed on foreign income) from the⁢ Estonian holding company, it should be taxed 7%, unless there is a tax treaty stating︀ otherwise?

https://www.emta.ee/en/business-cli...taxes/taxation-dividends#how-is-taxed-the-div
The 7% is under the circumstance that the foreign dividend received by the︁ Estonia corp has had corporate tax applied on in the resident country for the subsidiary?︂

 

[JustAnotherNomad]

I'm not sure about personal taxation in Estonia.
In any case, Estonian tax residents can‌ receive dividends from Estonian companies tax free.
There is no capital gains tax and also‍ no WHT in Estonia, as far as I know. Instead, capital gains are taxed as⁠ regular corporate profits. That means that if an Estonian company sells shares for example, that⁤ counts as corporate profits. But there is no corporate tax on Estonian companies, as long⁣ as profits aren't distributed to shareholders.
Estonian corporate tax (20%) only kicks in when profits⁢ are distributed. It's 20% on the gross profit, which works out as 25% on the︀ distributed profits. If you pay out 100k, a profit of 125k is taxed 20%, which︁ is the same as 25% on the 100k.
This does not apply if the profit︂ was received as a dividend under the participation exemption.
It is my understanding that the︃ participation exemption does not apply if the dividend received from a "low tax territory".
So if you have a Seychelles company that paid 0% tax (assuming that the Seychelles is︄ classified as a low tax territory), an Estonian holding company would receive the dividends as︅ a taxable profit. But this profit is not taxed, as long as the money is︆ not paid out as a dividend (up to a certain degree, you may be able︇ to take out the money as a salary - but for an Estonian tax resident︈ this would be taxed as personal income at up to 40% or so).
If you︉ pay out the money as a dividend, then the worst case would be that the︊ Estonian company would have to pay 20% corporate income tax, and then the shareholder would︋ be able to receive the money without any additional tax. If the person receiving a︌ salary isn't an Estonian tax resident, then again, the salary should probably not be taxed︍ in Estonia.
But please double check this.
EU countries and most other countries shouldn't count︎ as low tax territories, so then the dividends should be able to flow tax free️ from the subsidiary to the holding company and from there to the shareholder.
But as‌ mentioned, the country paying the dividends to the Estonian parent might put restrictions on this‍ (economic substance).

Their general idea is that corporate profits should be taxed somewhere. Kind of⁠ similar to Singapore's "subject to tax" rule.

 

[Marzio]

I dont' see the "low tax territory⁣" rule anywhere, it only says that the underlying profits has been subject to tax.⁢

 

[Don]

It is‍ in the income tax act. Always refer to the law as even state websites can⁠ be misleading at times.
A notable difference compared to taxation of dividends from a subsidiary⁤ is for an Estonian resident company that receives already taxed profits from a foreign PE,⁣ in such case this "low tax rule" don't apply, and profits can be freely redistributed⁢ to the shareholders.

 

[22kay]

Bingo 🙂

 

[Don]

See my‍ earlier post with reference and link to the source.

 

[Cons Mark]

If you want to have a︍ Holding Company best solution for you is UK, USA (Delaware) and Hong Kong.

 

[Don]

Im sure these jurisdictions offer‍ various benefits so maybe you can name a few.

One of the often disregarded benefit⁠ of Estonia is that Property received as estate, such as real estate or money (including⁤ foreign currency, precious metals, etc.) inherited in Estonia are not subject to taxation upon receipt⁣ thereof. The exchange of inherited foreign currency into euros does not give rise to income⁢ tax liability either.

https://www.emta.ee/en/private-clie...not subject to taxation upon receipt thereof.

 

[22kay]

https://taxation-customs.ec.europa....entities-tax-purposes-within-eu-2021-12-22_enhttps://taxation-customs.ec.europa.eu/taxation-1/unshell_en
@Martin Everson , I assume this would be the actual issue, you were‌ warning about?

Not sure why it is called abuse, when the current legislation is followed.‍ I guess EU is becoming US :-(

What is left is either having a shell⁠ that is not a shell, which will just increase creativity from tax lawyers (and increase⁤ their income) to keep up with legislation or conform to the countries tax treaties and⁣ omit any shell setup?

 

[Martin Everson]

The later if you don't want the headache of revisiting your cross border⁠ arrangement in near future.

But hey.....I let people find out the hardway as I always⁤ say.

 

[Matrix observer]

One thing to have in mind for Estonia, in case it is relevant for you,‌ is that benefial owners are public on Internet. Any one typing your name in a‍ search engine will likely see that you own the Estonian company.

 

[22kay]

Thanks, good to know. Sometimes that can be a good thing, sometimes not.⁠

 

[JustAnotherNomad]

I don't see how this is relevant. As I mentioned, such rules already⁠ exist. Maybe they will become more formalized with this new EU directive, but setting up⁤ a shell company in Estonia already wouldn't have fulfilled the substance requirements that most EU⁣ countries have had for a long time.
That's why I suggested looking into residency in⁢ Estonia, as I would assume that an Estonian company that is being managed by an︀ Estonian (tax) resident would probably fulfill such substance requirements.
But like I said, you'd have︁ to talk not only to an Estonian advisor, but also advisors in each of the︂ countries where the subsidiaries are located.

 

[22kay]

The new directive, as referenced by︁ the EU, will have a "filtering system" with 3 levels.

1. is the companies income︂ passive, eg. through dividends, etc
2. is a majority of the transactions cross-border
3. is︃ management and administration outsourced

In my case the 1 and 2 are yes. The 1︄ is of course one of the reasons to have a holding company. No 2, yes,︅ since dividends will flow between two companies in different (EU) nations.
No 3 can be︆ handled, it's a matter of cost (as you already stated @JustAnotherNomad )

The following is︇ the folder text from the EU commission:
"If the answer is yes in all three︈ cases, the company will be subject to new
tax reporting obligations related to economic substance.︉ If a company
fails at least one of the substance indicators, it will be presumed︊ to be a
shell and will not be able to benefit from tax advantages intended︋ to
support real economic activity."

So, dead end, more or less.

What would need to︌ be is to have a company that makes it's own revenue locally AND THEN can︍ act as a holding company and have the profit's transferred from any subsidiaries (and be︎ aware of the share of the cross-border transactions, so they are minor of all transactions).️

But it will not be possible to have a company to only act as holding‌ company to "store" profits for future investments or to cover losses in the company group‍ or for payout to owners in a cross-border setup. I don't even see how a⁠ local holding company with a subsidiary would work in that case, since that would bring⁤ no 1 as a "yes"? But at the same time, this is one of the⁣ cornerstones the holding setup is used locally (eg. in a national setup), so not sure⁢ how they are thinking here.

References:
https://taxation-customs.ec.europa....5239f6af577_en?filename=Factsheet Unshell.pdf