Latvian holding company

[JustAnotherNomad]

Actually there seems to be a massive difference when you sell the subsidiary.⁠
I am going to be a >10% shareholder in an EU company and when I⁤ sell my shares, I would prefer the sale to be tax free.
Turns out that⁣ while even socialist countries like Sweden or Norway would apply the participation exemption for the⁢ sale of qualifying shares, Estonia does not. In other words, Estonia would tax your exit︀ from a startup at 20% on the holding company level, while Sweden wouldn’t. Sure, as︁ long as you don’t pay out any profits from the holding company, there is no︂ difference.
But that makes Estonia utterly useless for such a case. It would only be︃ useful for receiving dividends.

Latvia and Lithuania on the other hand don’t tax capital gains︄ from qualifying shares, provided the shares have been held for 3 years or something. And︅ Latvia doesn’t apply withholding tax on dividends paid to a resident of most countries.

That’s the thing: Cyprus is a red flag︇ and I’m worried that the other country (not Cyprus) will have additional substance requirements to︈ recognize the holding company. But maybe that’s something to be aware of in general and︉ they may be just as strict with a holding company from Latvia?

 

[JustAnotherNomad]

Now I read that Latvia applies 10% personal income tax on‍ dividends paid out to individuals, even non-residents. That can’t be right...?

 

[Marzio]

source

 

[Martin Everson]

Yes distribution of income is subject to tax on sale of shares but⁤ this is not a concern. One can house profits in non-distributed form and draw down⁣ tax free as salary in tax free country. Perhaps I am missing something conf/(%.

 

[JustAnotherNomad]

Yes, that’s why I created this thread in the‌ first place. I hope that 10% thing that I found was simply outdated information.
I think Latvia does look quite interesting. Not quite as good as Cyprus, but probably not‍ quite as a red flag either. But then again, the regulation might not be as⁠ stable as in Cyprus.

 

[JustAnotherNomad]

I meant that an Estonian holding company would hold 30% of a⁠ startup for example.
A competitor wants to buy the whole startup. The Estonian company sells⁤ its shares in the startup: This will count as taxable capital gains in Estonia, which⁣ will be taxed upon distribution. It would not count as taxable capital gains in Latvia⁢ or many other EU countries, even socialist countries. And if the Estonian company was paid︀ €5M, then you can’t just pay out a €5M salary. Lol. That would definitely count︁ as a hidden profit distribution per transfer pricing restrictions.
What you could also do is︂ sell the whole Estonian holding company if it doesn’t hold any other shares. But I︃ believe even that would be a taxable transaction in Estonia.
Estonian holding companies really only︄ seem to be good to get rid of WHT on dividends.

 

[Martin Everson]

Capital gains︂ in Estonia are taxed only where there is a distribution. Your not distributing the profit︃ from sale held with Estonia holding company. You are sat in your tax free country︄ paying yourself a "salary" from holding company as normal which is not subject to tax︅ in Estonia at any level or in your tax free country. It is much smarter︆ way to get out your money slowly then a lump sum 5m and paying tax︇ unless you got something you want to buy for 5m right away...lol

 

[JustAnotherNomad]

You even wrote “salary” in quotes yourself. The Estonian authorities aren’t⁣ stupid and it’s very likely they would consider the “salary” a hidden profit distribution, especially⁢ if you didn’t pay such a “salary” before the sale of the shares.

Not really. With €5M in my bank account, I could︃ just retire in a nice place, even in a high-tax country. I would have full︄ flexibility.
And of course I might also want to buy a house or make a︅ similar bigger purchase.
It simply doesn’t make sense to use an Estonian holding company when︆ you could just use a company from a different country instead and pay no tax.︇ I’m going to do some more research on Latvia. I would also expect substance to︈ be cheaper there than in Cyprus.

 

[JustAnotherNomad]

I guess there is one other option that could work though: Using a holding company‌ in any other EU country that applies the full participation exemption (even a country like‍ Sweden, lol) and doesn’t charge WHT for EU residents, then move to Estonia to cash⁠ out the dividends from the holding company.
But I guess even then it would be⁤ easier to just go with a Latvian holding company as it simply offers more flexibility.⁣

 

[Martin Everson]

If salary is excessive then they can claim this. However if salary is inline with market⁠ wage then they cannot as in my case. Like anything in life you pay yourself⁤ a sensible salary commensurate with your duties that you continue to perform...cough cough.

I disagree. The last thing you want is any assets held in your name as you︀ don't gain flexibility you actually lose it for wealth management, inheritance planning and asset protection︁ purposes. Cash in your name is simply stupid thing to do in today's world.

P.s As you can see under my picture I am already retired.... 😉.

 

[JustAnotherNomad]

I didn’t say you need to keep it in your name.⁤ You could store it in a foundation or whatever. But you have full flexibility. You⁣ don’t have to live in a tax-free country to receive your “salary” without paying taxes.⁢
With a Cypriot or Latvian holding, you can keep the money in the company and︀ pay yourself a salary, just like with the Estonian company. In fact, Latvia even uses︁ deferred taxation (they’ve copied the Estonian system), but you can also get all the money︂ out at once without paying taxes, should you feel like it.
I think that’s vastly︃ superior to an Estonian holding company.

 

[AdamT1]

You are absolutelly right. In theory all supposed⁠ to work just like you say.
However in practice a lot depends on tax authorities⁤ attitude and wider tax environment.

In wider context you should be aware of various versions⁣ of "Carousel fraud" fraud re:abuse of intra EU VAT reverse charge mechanism and a lot⁢ of Easter European companies historically were involved in that.

Thus tax authorities in practice tend︀ to look suspiciously in to companies that only claim refunds of input VAT. There is︁ no problem with it in principle - it is only that they look much deeper︂ in to what is the nature of your business and its substance of local office︃ operations as well as client base.

They just wanna make sure that you dont participate︄ in "Carousel fraud" and your customers are genuine businesses that record invput VAT on your︅ sales in their country.

 

[JustAnotherNomad]

Thank you, that makes sense.
I guess unless there are very large amounts of VAT‌ refunds it shouldn’t be an issue then.