Zero-tax Everywhere with Estonian PE?

[justanotherguy]

Am I missing something? It seems that Estonian PE turns any company into zero-tax (until profits are distributed obviously).

https://www.emta.ee/en/business-cli...sidents-e-residents/taxation-profit-permanent

A non-resident's permanent establishment in Estonia pays income tax on profit and assets both in monetary or non-monetary form taken out of the permanent establishment.
Click to expand...

i.e. UAE company is run by EE holding/resident, with PE in EE, so in UAE no tax is owed until distributed? (otherwise 9% would apply?).

Can some DTTs ruin this? This is purely about CIT now.

 

[JustAnotherNomad]

No, this is essentially the same thing as with any other country.

Country A: Companies‌ that are incorporated in country A are tax resident and pay 30% CIT. PEs are‍ treated the same.
Country B: Companies that are incorporated in country B are tax resident⁠ and pay 10% CIT. PEs are treated the same.

Now some guy from country A⁤ thinks he is smart and can register a company in country B and only pay⁣ 10%. But he creates a PE in country A. So now any profit that can⁢ be attributed to this PE is subject to 30% tax in country A. But the︀ company is also resident in country B, where it has to pay 10% since it︁ is incorporated there. Now you have double taxation.
If there is a tax treaty, then︂ it should solve this solution. It would probably determine that tax is only due in︃ country A (30%) and nothing has to be paid in country B.

It's the same︄ with Estonia.
You live full time in Estonia and you register a company in the︅ BVI. No tax in the BVI, but Estonia says it should be treated the same︆ as a local company, so 20% on distributions.
There's no tax in the BVI, so︇ there is double taxation, but the BVI doesn't levy any tax.
That's it.

Now you︈ do the same thing with a country that has higher taxes. Say you incorporate in︉ a country that has 22% CIT.
You have to pay 22% in that other country︊ (whether you distribute or not), and in Estonia, the PE has to pay 20%, but︋ only on distributions. Double taxation.
If there is a treaty (or some other mechanism in︌ the domestic tax code), then this can be avoided, and then there should be tax︍ in only one of the countries.

So you'd have to look at what is written︎ in the UAE-EE tax treaty. Yes, it is possible that the value that can be️ attributed to the EE PE would not be taxed in the UAE. So?
Then you‌ could also simply register a company in Estonia?
Ok, so maybe your idea is to‍ split the profit, so that you have the maximum that is possible to take out⁠ tax free in the UAE (attributed to the UAE PE), and the rest attributed to⁤ the EE PE? That might work, but I guess it could be difficult.

@Don will have more input.

 

[Don]

It's correct that you can register any foreign company PE in Estonia (e.g., US⁣ LLC, UAE LLC), and the profits will not be taxed until you move the profits⁢ out of the PE. Moreover, you don't need to follow local accounting rules. Establishing economic︀ substance is cheap, and there are great opportunities for tax planning, banking, visas, residence permits,︁ etc.

In regard to the UAE-EE treaty what's notable is that Estonia would allow the︂ deduction of management fees from Estonian PE and as a UAE tax resident it would︃ be tax-free income for you:

Article 7 of the UAE-EE DTT: "In determining the profits︄ of a permanent establishment, there shall be allowed as deductions expenses which are incurred for︅ the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere."

Likewise, if you became an Estonian tax resident, your management fees from UAE directorship would not︆ be taxed in Estonia. Either way, you could be a winner.

It could also be︇ an interesting piece of a puzzle for certain cross-border structures, or you could just use︈ a foreign company to operate through Estonia.

• Hong Kong: Only taxes income that is︉ sourced in Hong Kong. Foreign-sourced income, even if remitted back to Hong Kong, is typically︊ not subject to tax, meaning profits from foreign PEs would be exempt.
  
• Singapore: Operates︋ on a territorial basis of taxation. Companies are not Singapore tax residents by default.
  
• Malta: Companies which are resident but not domiciled (or vice versa) in Malta are subject︌ to tax in Malta on all income and chargeable gains arising in Malta, and on︍ income arising outside Malta which is remitted back to Malta. No tax is payable on︎ foreign income which is not received in Malta and on capital gains arising outside Malta️ to a company which is not ordinarily resident and domiciled in Malta, even if remitted‌ to Malta.
  

 

[inector]

Thanks for the info!!! In order to⁠ do the whole PE thing, do these foreign companies (like US LLC / UAE LLC⁤ / HK) need to be 100% owned by a EE person / EE company.
My 2 cents about HK - heard you can tell IRD about PE during︇ tax filing + tax exemption. Sounds easy.

Would it work for a Swiss company (because︈ the banking choices would be amazing), or any EU company? Is it as easy as︉ some filings like HK to tell the Company B about the EE PE?

 

[Don]

There is no requirement for ownership by⁢ an EE person.
Normally we provide a substance package with a part time employee and︀ desk rental.
It works with absolutely any company as long as the jurisdiction is recognised︁ by Estonia.

Estonia is an interesting jurisdiction from the perspective that it offers two distinctive︂ type of registrations for foreign companies that is not the case in many other jurisdictions:︃
1) registering a PE - doesn't require you to follow local accounting rules and doesn't︄ need a local director.
You can hire local employee or get a part-time employee as︅ part of the substance package. Accounts are not publicly available.
2) registering a foreign branch︆ - Accounts must be maintained according to the requirements of the Estonian Accounting Act and︇ are publicly available.
The branch would need to hire a local director.

 

[JustAnotherNomad]

You did not understand what a PE is.⁠ It's not something that is unique to Estonia.

Do you need substance from the Estonian⁢ side? I guess not, only from the other country's side?
What if you just want︀ to be able to get access to EU services, say you want to use Stripe,︁ which isn't available in your country of registration, or much more expensive.
Can you register︂ a PE in Estonia and then sign up to Stripe through that PE?

This is︋ quite interesting.
So you could live in Estonia and have a UAE company that pays︌ a director's fee, which would be taxable in the UAE only, but where there is︍ no personal income tax.

But I don't see how it would work the other way︎ around? If you are UAE tax resident with a UAE company and a EE PE️ - the management fees that the EE PE pays should only be taxable in Estonia?‌ I guess the PE could pay a salary, but then since it's not a subsidiary,‍ but the same company, you could run into issues with GAAR/transfer pricing in the UAE⁠ if you already draw a UAE salary from the company?

 

[Don]

We should consider the whole structure in general.
You could of course create a EE PE simply by place of management and office

Yes, if you have EU presence with a⁣ PE then banks and EMI-s can accept you. With Stripe, simply your place of operation⁢ will be in Estonia when you create an account (separate for the PE) - it︀ could be one of the duties of the local employee to manage this account.

Expenses incurred in connection with︆ a permanent establishment, including expenses incurred in connection with management and administration, may be deducted︇ in determining the profits of a permanent establishment, regardless of the country in which the︈ expenses incurred.
Indeed the arrangement should be carefully analysed.
Note that the treaty refers to︉ "executive and general administrative expenses" not only management or directors fees.

https://www.emta.ee/en/business-cli...anent#taxation-non-resident-business-activity

 

[fshore]

Normally you have to follow local accounting rules if you run a foreign company from that‌ country. Do you have any source for the claim that you don't need to follow‍ estonian accounting rules?

 

[Don]

I actually already did if you⁠ look at the link in my earlier post, but Ill quote for you from the⁤ tax office website again:
In practice it means you only need to submit︁ the accounts of the PE to the tax office.

 

[lacomaco]

I have a trouble understanding the PE registration and accounting concept. In⁤ many countries a foreign investor can operate through a subsidiary, a branch or a representative⁣ office. These are company/legal person choices. On the other hand the PE exist only as⁢ a tax concept,, not a legal entity. Can you enlighten us?

 

[Don]

If a⁤ foreign company wants to operate in Estonia, it does not necessarily need to register a⁣ branch in the business register. (This is new EU regulation and should be available almost⁢ everywhere)

There are multiple possibilities:
1) register a PE and its treated as a PE︀ (you basically just get a tax number for a foreign company and need to report︁ directly to tax office)
2) register PE but actually its not treated as a PE︂ for income tax purposes (yes sometimes even having employees or a property that you rent︃ out in Estonia is actually not treated as a PE although you might need to︄ register as one)
3) register a branch office (entered into business register)

None of the︅ above is considered a legal entity.

In some cases with branches its possible to operate︆ in multiple jurisdictions at the same time while being exempted from submitting any annual financial︇ reports.
This should actually apply across the whole EU due to the following regulation:

https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32019L1151
Its indeed a bit complex as in some cases we need to consider foreign legislation︈ too, but there are some interesting opportunities.

 

[justanotherguy]

Amazing info, thanks a lot.

The only thing that's confusing is that emta.ee says
(I assume "non-resident" they mean obviously the‍ foreign entity, like a US LLC or HK company, etc, hopefully not wrong here)

1. Why do they say it is a business entity? Does a foreign entity have to⁠ register a company in Estonia in order to establish PE? Or can it be a⁤ simple substance, like an office, without the company in Estonia.
2. So the only filings⁣ to do for PE in Estonia is the Annex 3 of Declaration TSD? Seems like⁢ that's it...

 

[Konstanz]

having PE in Estonia can cause other problems. You will become subject to VAT declarations.‌ And VAT in Estonia is 20% and will be 22%

 

[fshore]

And if you're subject to vat then I assume you'd have to follow estonian accounting⁠ standards?

 

[Don]

PE has︀ slightly different definition in taxation act:

So doesn't need to be a business entity, it can as well be︄ a non-profit.

Income tax act says the following:

PE submits TSD and fills annex︍ 3

It can also be a benefit, e.g., you can do IOSS reporting through the‌ PE.

 

[JustAnotherNomad]

Why would VAT be an issue? Isn't VAT about where your customers are located? So‌ even a BVI company would have to pay VAT and file VAT reports if it‍ has EU customers...?

 

[peter55555]

Has anyone had any success opening a real bank account (not EMI) in Estonia or‌ other EU/EEA country for a US LLC or UK LLP that has a registered PE‍ in Estonia, whose owners are Estonian tax residents? Please share your experience.

 

[EliasIT]

want to ask the same question?

 

[blizz]

No one can ask the last question please?