Offshore setup with EUR credit card processing

[cryptoland]

Hi,
I would greatly appreciate your help finding the best tax optimization setup for my needs.

I plan to register a company in an offshore jurisdiction.
I'm a freelance IT programmer and I have clients from Singapore, USA and Europe.
I plan to use Wise as a bank account. I had a Seychelles company in the past and it worked great.

But now I need card payment processing, mostly for European clients, so Euro as a currency.
I considered Stripe but they charge around 3% exchange fee if my company is not from Europe.

I'm not looking for anonymity or privacy, I want to optimize the taxes.
I'm from Romania and I mainly provide services with not a lot of expenses. The 19% VAT reduces the profit margin considerably.

What are your recommendations for a jurisdiction where I don't pay taxes for services provided outside of their country + card payment processing provider?

Thank you!

 

[cryptoland]

Hi, I'm a bit lost.
I subscribed to the mentor group membership in order to get some insight.
Did I ask the wrong question or did I post in the wrong place?

 

[Sols]

It's more that your request is unfortunately very difficult to achieve and your expectations are a little unrealistic.

You write that you're from Romania. Under Romanian law, any company you form offshore becomes tax resident in Romania if its place of effective management is in Romania. So you're kind of just wasting time and money by setting up an offshore company, unless you also plan to setup a genuine, bonafide economic presence outside of Romania and have your role be that of exclusively a passive shareholder. Or unless you plan to build your business on outdated concepts of secrecy, hoping the Romanian tax authority will never find out.

Card processing is done by so-called card acquirers. Acquirers are licensed per region (usually country, but EU/EEA is considered as one region). So if you set up a company in Seychelles, that company could only work with acquirers in Seychelles. IIRC, there is only one and they don't really serve offshore companies. Their focus is local ecommerce and POS terminals at physical shops, resorts, and so on.

Acquirers can often process in foreign currencies but many can't settle in that currency. So even if you set up an offshore company somewhere offshore, the acquirers there might be able to process in EUR but you'll get settlements in the local currency or in USD. In some cases, a regional powerful currency like SGD or HKD might be an option.

Offshore companies that need EUR payment processing and settlement usually set up a European payment agent company (most often in Cyprus, Malta, or UK). This company opens bank/EMI accounts and merchant accounts and accepts payments on behalf of its parent company. You need a properly structured service agreement between the offshore company and the payment agent, so that the payment agent doesn't become liable for VAT on sales or CIT on group profits.

But if we go back to tax residence, all you're doing is setting up a bunch of layers that add costs, accounting complications, and other overheads. Not a single cent is saved on taxes, legally.

And if you're also adding VAT evasion to it, you're not only breaking Romanian law. You risk getting other tax authorities in EU/EEA coming after you. I know the Romanian tax authority can seem a little lacklustre and unorganized. Things won't be as much fun when it's the Germans or Scandinavians coming for you. Which I've seen them do. Not pleasant at all. They just fire off a VAT invoice to the contact details on your website and then wait for you to pay, or they start charging late payment fees and interest. It's brutal.

If you're a Romanian (or any EU) national, the easiest thing you can do is move to Cyprus or Malta and set up your business there. Much easier to get payment processing in EUR and you can get a very nice and low overall tax bill.

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This is the probably the answer to your question.

 

[cryptoland]

Thanks, Sols, for the detailed answer. It shed light on my situation.
I understand that if I want a merchant account with EUR payment processing my business needs to be based in the EU.
I will consider Cyprus and Malta.

I don't plan to practice any kind of evasion, just looking for a way to not pay 45% in taxes.
I'm meeting with a Romanian tax lawyer next week to see what's the best solution if I decide to open the company here.

But with the merchant account out of the question, I was advised that with a Seychelles company, I need to pay only the tax on dividends.
Since Seychelles didn't tax the foreign-sourced income, I would legally pay taxes the 5% on the dividends.
Are you saying that's wrong?

 

[Sols]

cryptoland said:
But with the merchant account out of the question, I was advised that with a Seychelles company, I need to pay only the tax on dividends.
Since Seychelles didn't tax the foreign-sourced income, I would legally pay taxes the 5% on the dividends.
Are you saying that's wrong?
Click to expand...

Yes, that is wrong. Let's do some quick fact checking.

Regarding corporate tax residence, PwC (one of the Big Four accounting/auditing firms) states (see Romania - Corporate - Corporate residence):

A company is considered tax resident in Romania if:

• it was set-up under Romanian law
• it has its head office situated in Romania and it was set-up under EU law, or
• it has its ”˜place of effective management' (POEM) in Romania.

POEM represents the place where a foreign legal entity carries out operations corresponding to economic, real, and substantial purposes and where at least one of the following conditions is met:

• The economic-strategic decisions necessary for the management of the activity of the foreign legal entity as a whole are taken in Romania by the executive directors/members of the board of directors.
• At least 50% of the executive directors/members of the board of directors of the foreign legal entity are resident.

Click to expand...

Your Seychelles company is tax resident in Romania because of the POEM check. Next up, regarding taxes on corporate income, PwC states (see Romania - Corporate - Taxes on corporate income):

The standard CIT rate is 16% for Romanian companies, foreign companies operating through a permanent establishment (PE) in Romania and foreign companies that are tax resident in Romania due to place of effective management. Resident companies are taxed on their worldwide income unless a double tax treaty (DTT) stipulates otherwise.
Click to expand...

In other words: your Seychelles company is a Romanian company for tax purposes.

I picked PwC as a source because their website is easy to navigate and link to but you can easily find other sources to verify this.

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This is the probably the answer to your question.

 

[cryptoland]

I got the confirmation from the tax lawyer and you are right.
If more than 50% of the company is owned by a Romanian tax resident, then it would be taxed as a Romanian company.
This can be avoided by having the management handled, at least on paper, by at least 3 people.

What are the risks of having 2 nominees that own 66% of the company? Besides owning the majority of it 🙂