Best Jurisdiction / Setup & Bank for Marketing Company

[tibor]

Hello, I already browsed this forum a lot but decided to open an account to ask about what the best solution for this could be. We operate marketing solutions for one group of companies in the EU. We do practically everything related to promotional activities of the company and have a pretty unique agreement with them regarding the payments.

Each year, we are given access to their dedicated expense account with approx. 500-750K USD (depending on expansion plans). First, the employees are paid with that, then we use money for the doing the activities themselves, and according to the contract we are given the remainder of the expense account at the end of the year as payment. This usually amounts to about 200K USD. Currently, the funds are received in a company registered in the place of business, but it means that it needs to pay an income tax rate of around 20%.

All funds are received as 1 or 2 lump sum payments at the end of the year. The business does not need any transactional banking. It would only use the funds for investing in a reliable fund or at some point purchasing & holding real estate.

The jurisdiction should have a closed registry for the privacy of the director & shareholder. The director and shareholder is the same, and EU citizen & resident. It would also preferably have little to or no tax rate to avoid having to dish out 20% of profits here in the EU.

Is such an option available? Is it bankable - if so, what jurisdiction and what potential financial institution?

 

[Sols]

Currently, the funds are received in a company registered in the place of business, but it means that it needs to pay an income tax rate of around 20%.

And that won't change just because you incorporate a foreign company. At least not legally. Look into tax residence, permanent establishments, and CFC regulations. Unless you live in one of EU's tax havens (which judging by the tax rate, you don't), there's a very high probability that any company you form and maintain effective control/management becomes tax resident where you're based.

 

[tibor]

And that won't change just because you incorporate a foreign company. At least not legally. Look into tax residence, permanent establishments, and CFC regulations. Unless you live in one of EU's tax havens (which judging by the tax rate, you don't), there's a very high probability that any company you form and maintain effective control/management becomes tax resident where you're based.

Here, a company becomes resident if its main place of business is in the country for more than 6 months of the year. Surely, if the company is not directly doing any services, because the employees are being paid out by the group of companies completely unrelated to this company and this company just gets paid out at the end of the year, it hasn't really had any place of business?

How would the country go about finding out what the place of business is? And how would they make that decision? Just because the director & shareholder resides here? That wouldn't really make sense. Am I missing something here?

 

[Sols]

Here, a company becomes resident if its main place of business is in the country for more than 6 months of the year. Surely, if the company is not directly doing any services, because the employees are being paid out by the group of companies completely unrelated to this company and this company just gets paid out at the end of the year, it hasn't really had any place of business?

Do you effectively control the company? If you do, that's where the company is tax resident.

A company can be tax resident in multiple places, and/or can end up having multiple permanent establishments, each of which is taxable.

It's good to have a place of genuine tax residence for a company. That way, there's much less of a risk of remote workers creating PEs. If you're an EU national, the easy options are relocation to Malta or Cyprus and set up headquarters there.

How would the country go about finding out what the place of business is?

If your structure relies on secrecy, you're 10–20 years too late to the party. Whether it's initiatives like CRS, FATCA, intra-EU/EEA data sharing, or just people yapping too much, a structure should not be reliant on secrecy. It's a very, very weak link in a chain.

And how would they make that decision? Just because the director & shareholder resides here? That wouldn't really make sense. Am I missing something here?

Tax authorities don't work like that. If your tax man is sufficiently aggressive and/or competent that they catch wind of your "Beginner's Guide to Tax Evasions" level scheme, they shoot first and let you ask questions after.

All they need is enough evidence for a reasonable suspicion. Then they drop an invoice in your letter box and now you have 30 days to pay and begin dispute procedures (or take them to court). Have seen it happen multiple times. It's brutal. And if there is VAT fraud involved, they get really antsy.

Not saying you're guaranteed to get caught, just that your plan is outmoded and similar structures fall apart frequently. 20% CIT is not a bad deal, especially if you optimize deductions, incentives, and other whatnots.

 

[tibor]

Do you effectively control the company? If you do, that's where the company is tax resident.

A company can be tax resident in multiple places, and/or can end up having multiple permanent establishments, each of which is taxable.

It's good to have a place of genuine tax residence for a company. That way, there's much less of a risk of remote workers creating PEs. If you're an EU national, the easy options are relocation to Malta or Cyprus and set up headquarters there.


If your structure relies on secrecy, you're 10–20 years too late to the party. Whether it's initiatives like CRS, FATCA, intra-EU/EEA data sharing, or just people yapping too much, a structure should not be reliant on secrecy. It's a very, very weak link in a chain.


Tax authorities don't work like that. If your tax man is sufficiently aggressive and/or competent that they catch wind of your "Beginner's Guide to Tax Evasions" level scheme, they shoot first and let you ask questions after.

All they need is enough evidence for a reasonable suspicion. Then they drop an invoice in your letter box and now you have 30 days to pay and begin dispute procedures (or take them to court). Have seen it happen multiple times. It's brutal. And if there is VAT fraud involved, they get really antsy.

Not saying you're guaranteed to get caught, just that your plan is outmoded and similar structures fall apart frequently. 20% CIT is not a bad deal, especially if you optimize deductions, incentives, and other whatnots.

What would be any kind of solution to avoid this? There are no workers so they can't cause PEs, the only thing that could is my existence but I can't necessarily do anything about that, even though the company practically won't have any activity.

If this is a beginners' method, what is an alternative?

And what is considered effective control of the company?

 

[Sols]

What would be any kind of solution to avoid this? There are no workers so they can't cause PEs, the only thing that could is my existence but I can't necessarily do anything about that, even though the company practically won't have any activity.

In your first post you mentioned employees. Are they not workers?

If the company has no activities, though, it's even more clear that tax residence lies with the owners/directors of the company.

If this is a beginners' method, what is an alternative?

Typically comes down to either relocation to a place whose tax laws are congruent with your wishes or setting up a genuine office and physical presence where the effective control and management sits.

And what is considered effective control of the company?

These laws are usually not very specific, so that the tax authority isn't hamstrung by technicalities. But it's isually defined as having or exercising control of the company in for example being bank account signatories, signing agreements, instructing sham/nominee directors to sign agreements, making strategic/economic decisions for a company, and other vague things.

 

[tibor]

In your first post you mentioned employees. Are they not workers?

To clear up with the employees, the money is first in the expense account of the company we manage marketing for. They are paid out and their social + healthcare taxes are covered by that company with the expense funds dedicated for our activities as agreed in the contractual agreement.

If the company has no activities, though, it's even more clear that tax residence lies with the owners/directors of the company.

The company is getting paid out for the remainder of the funds in the expense account dedicated to us for getting all of their marketing done, I am not sure what activity it can be classified as or how that affects the tax residence.

Typically comes down to either relocation to a place whose tax laws are congruent with your wishes or setting up a genuine office and physical presence where the effective control and management sits.

Understandable, I can't move to a different country though for more than 1-2 months a year, and regardless of if there is a genuine setup in the offshore country selected, as you said the company would still remain tax resident here since I am still living here.

Hypothetically, if I am from and living in CountryEU, and the company is registered in CountryA. If I do not conduct any management of the company and do absolutely nothing with it while in CountryEU, and go to CountryA for 1 month per year, and do all of the management the company needs and just receive that 1 payout of the remaining funds, is the company not no longer a resident in CountryEU since it has not conducted anything here? I want to get a grasp of how that residence system would work.

 

[Sols]

Hypothetically, if I am from and living in CountryEU, and the company is registered in CountryA. If I do not conduct any management of the company and do absolutely nothing with it while in CountryEU, and go to CountryA for 1 month per year, and do all of the management the company needs and just receive that 1 payout of the remaining funds, is the company not no longer a resident in CountryEU since it has not conducted anything here? I want to get a grasp of how that residence system would work.

You'd have to look at the laws of CountryEU. Best to ask a lawyer/licensed tax adviser there. All I can do is a description of how things work in general.

You mentioned 20% CIT and resident in EU. There are a few EU countries that fit near that description. Let's take Sweden as an example. It has strict but fair and easy rules. Other EU member states are typically either as lenient as Sweden or stricter.

Then let's see what PwC writes:

A company is considered to be a tax resident in Sweden if it is incorporated in Sweden.

The term 'permanent establishment' is defined in Sweden as a fixed place of business through which the business is carried on from a specific establishment, such as a place of management, branch, office, factory, or workshop

Effectively, this means that if you form a company outside of Sweden, income generated by that company is considered taxable in Sweden if the business activities were carried out in Sweden.

If you leave Sweden for one month per year, only work for that month, and don't work for the company the other eleven months of the year (and neither does anyone else), I suppose it's theoretically possible that you could claim the company doesn't have a permanent establishment in Sweden. I don't think the tax authority will see it that way. They would probably assume you work in Sweden some of those 11 months and leave it up to you to prove otherwise, including going to court to fight. Tax authorities often lose in court. Most people don't go that far, though.

They might offer you a deal where you only pay Swedish tax on 91.66% (11/12) of the company's taxable income, agreeing that one month there was no PE in Sweden.

All very hypothetical. Speaking with a good lawyer is cheaper than ending up on the wrong side of a tax crime investigation.

 

[tibor]

You'd have to look at the laws of CountryEU. Best to ask a lawyer/licensed tax adviser there. All I can do is a description of how things work in general.

You mentioned 20% CIT and resident in EU. There are a few EU countries that fit near that description. Let's take Sweden as an example. It has strict but fair and easy rules. Other EU member states are typically either as lenient as Sweden or stricter.

Then let's see what PwC writes:

Effectively, this means that if you form a company outside of Sweden, income generated by that company is considered taxable in Sweden if the business activities were carried out in Sweden.

If you leave Sweden for one month per year, only work for that month, and don't work for the company the other eleven months of the year (and neither does anyone else), I suppose it's theoretically possible that you could claim the company doesn't have a permanent establishment in Sweden. I don't think the tax authority will see it that way. They would probably assume you work in Sweden some of those 11 months and leave it up to you to prove otherwise, including going to court to fight. Tax authorities often lose in court. Most people don't go that far, though.

They might offer you a deal where you only pay Swedish tax on 91.66% (11/12) of the company's taxable income, agreeing that one month there was no PE in Sweden.

All very hypothetical. Speaking with a good lawyer is cheaper than ending up on the wrong side of a tax crime investigation.

Got it. Thanks for the explanation. I'll try discussing with a local lawyer to get a better understanding of how exactly it works. If I'd have to pay tax on 11 months of the revenue, it's definitely not worth the hassle. Probably easier to dish out that 20% to the government and let them stay happy. I guess if I just made some extra company expenses on things like new PCs for the team, phones, headphones (all which I'd say can be company activities and I can easily explain since it's digital & social marketing) then there wouldn't be as much to pay tax on. I don't think suing the tax office is on my list of priorities at the moment.

What would be the purpose of using offshore companies as a EU citizen? Other than privacy which you don't really get since UBO identifications are needed practically everywhere. Banking is more difficult and if you have to pay tax locally it doesn't really make financial sense.

What about Malta or Cyprus (5% final and 12.5% final if I'm right)? Would companies there still generally be subject to taxation here, or are there any exemptions for companies in the EU where everything is sort-of connected?

 

[Sols]

Got it. Thanks for the explanation. I'll try discussing with a local lawyer to get a better understanding of how exactly it works. If I'd have to pay tax on 11 months of the revenue, it's definitely not worth the hassle. Probably easier to dish out that 20% to the government and let them stay happy. I guess if I just made some extra company expenses on things like new PCs for the team, phones, headphones (all which I'd say can be company activities and I can easily explain since it's digital & social marketing) then there wouldn't be as much to pay tax on.

I know it's not the outcome you wanted but unless you live in a place with very unusual rules, this is the best path forward in your situation. Max out lawful deduction, see if there are incentives you can make us of (discounts/deductions for specific industries), and so on. You might be able to defer/reduce taxes by introducing a local holding company. Depending on where you live, if you work from, you might even be able to claim some of your home as an office space and claim some of your rent/mortgage payments as a business expense.

You have a good business. Focus on growing it. Get more money in your pocket through growth rather than tax evasion.

What would be the purpose of using offshore companies as a EU citizen? Other than privacy which you don't really get since UBO identifications are needed practically everywhere. Banking is more difficult and if you have to pay tax locally it doesn't really make financial sense.

In most cases, it's a waste of time and money. I see people dropping thousands to form an offshore company, often to evade rather puny sums of tax payments. And those whose structures don't fall apart are at an ever increasing risk of being caught.

You can still get privacy in that your name doesn't appear on public record and several EU countries (for example Cyprus, Malta, Luxembourg) have closed their UBO registers from the public (for the time being).

Other legitimate uses for offshore companies include holding IP assets and other assets, acting as investment vehicles, and so on. For the average person running an active SME business, though, it makes no sense.

What about Malta or Cyprus (5% final and 12.5% final if I'm right)? Would companies there still generally be subject to taxation here, or are there any exemptions for companies in the EU where everything is sort-of connected?

There would be difference. If we go back to Sweden as an example, there is nothing in their tax laws that make exceptions for EU companies. Best case what'd happen is you pay 12.50% CIT in Cyprus and then circa 7.50% (i.e. the remainder) in Sweden. Worst case, you'd pay 12.50% in Cyprus for no reason and still pay 20% in Sweden.