I think I've mentioned it before, but today I dove a bit more into the details.
The Estonian income tax act can be found here (in English).
Estonia has a relatively unique system where companies only pay corporate income tax when profits are distributed. Such dividends are only taxed at the corporate level (20% CIT), the shareholder receiving the dividends is not taxed again. But it gets much better than that. Estonia is one of those countries where residency triggers tax residency:
So you just rent an apartment there and register as a resident. A EU passport would certainly help with that.
As mentioned, there is no tax on dividends received, provided that the company that paid out the dividends has paid corporate income tax:
With an Estonian company receiving the dividends instead of an individual, the rules are a bit more complex (see § 50, I don't want to quote it all), but essentially it should be fine for an Estonian company to receive dividends from a foreign branch and re-distribute them to an Estonian tax resident individual without paying the 20% CIT. Provided that the foreign branch isn't in a "low tax rate territory", etc. etc.
Estonia has CFC rules:
So what is a "low tax territory"?
So usually, it would be a "low tax territory" if the tax is less than 1/3 of the Estonian tax.
But it's also not a "low tax rate" if the company is actually an operative business and not just receiving royalty fees etc.
And finally... there is a white list!
Even the UAE and Bahrain are on that list - but it would not work for our purposes, as corporate income tax must have been charged for Estonia to exempt the dividends from taxation. (And I assume that the DTA might ruin the deal as well.)
Other countries on that list are Romania, Georgia, Bulgaria, Hungary, ...
Georgia has "virtual zone companies". Same tax concept as Estonia - no CIT until dividends are paid out, and only 5% in that case.
So it should be possible to have a company in Georgia, be a resident of Estonia and pay only 5% tax on dividends that are paid out.
Romania has 1% tax on the revenue of "micro companies". Bulgaria and Hungary have 9-10% CIT. Same concept otherwise.
(I was too lazy to check if there is withholding tax at the source, but at least in the EU that should be avoidable thanks to the parent-subsidiary directive.)
What is generally important is that there must be economic substance. But in all those countries, it should be easy to build substance, thanks to low wages.
It should be relatively easy to prove that the "effective place of management" is not in Estonia and that there is no permanent establishment either, if you can show that you spend very little time in Estonia. After all, you are tax resident per your residence, not because of the number of days you spend in Estonia. So maybe the substance requirements would be even less in that case.
I am not a lawyer and I haven't had this verified by a lawyer either, but that's essentially how this should work.
Estonia has lots of DTA's, which reduces the risk of being taxed in another country.
The Estonian income tax act can be found here (in English).
Estonia has a relatively unique system where companies only pay corporate income tax when profits are distributed. Such dividends are only taxed at the corporate level (20% CIT), the shareholder receiving the dividends is not taxed again. But it gets much better than that. Estonia is one of those countries where residency triggers tax residency:
So you just rent an apartment there and register as a resident. A EU passport would certainly help with that.
As mentioned, there is no tax on dividends received, provided that the company that paid out the dividends has paid corporate income tax:
With an Estonian company receiving the dividends instead of an individual, the rules are a bit more complex (see § 50, I don't want to quote it all), but essentially it should be fine for an Estonian company to receive dividends from a foreign branch and re-distribute them to an Estonian tax resident individual without paying the 20% CIT. Provided that the foreign branch isn't in a "low tax rate territory", etc. etc.
Estonia has CFC rules:
So what is a "low tax territory"?
So usually, it would be a "low tax territory" if the tax is less than 1/3 of the Estonian tax.
But it's also not a "low tax rate" if the company is actually an operative business and not just receiving royalty fees etc.
And finally... there is a white list!
Even the UAE and Bahrain are on that list - but it would not work for our purposes, as corporate income tax must have been charged for Estonia to exempt the dividends from taxation. (And I assume that the DTA might ruin the deal as well.)
Other countries on that list are Romania, Georgia, Bulgaria, Hungary, ...
Georgia has "virtual zone companies". Same tax concept as Estonia - no CIT until dividends are paid out, and only 5% in that case.
So it should be possible to have a company in Georgia, be a resident of Estonia and pay only 5% tax on dividends that are paid out.
Romania has 1% tax on the revenue of "micro companies". Bulgaria and Hungary have 9-10% CIT. Same concept otherwise.
(I was too lazy to check if there is withholding tax at the source, but at least in the EU that should be avoidable thanks to the parent-subsidiary directive.)
What is generally important is that there must be economic substance. But in all those countries, it should be easy to build substance, thanks to low wages.
It should be relatively easy to prove that the "effective place of management" is not in Estonia and that there is no permanent establishment either, if you can show that you spend very little time in Estonia. After all, you are tax resident per your residence, not because of the number of days you spend in Estonia. So maybe the substance requirements would be even less in that case.
I am not a lawyer and I haven't had this verified by a lawyer either, but that's essentially how this should work.
Estonia has lots of DTA's, which reduces the risk of being taxed in another country.
