Best setup for a royalty income company

[megaverseman]

Hello!
I've signed a contract with a publisher company to sell my software worldwide and I'll be earning royalties from their sales.
I want to keep developing software so I'll need to incorporate down the road.
My earnings will start low (20k-30k) but with scaling up development, they could reach very high numbers in a few years.

I live in Greece which has a corporate tax of 22% currently and for the first 3 years you also have to pay 50% of the tax for the next year in advance. (After the 3rd year this becomes 95%)
There is also social security that's 1632 euro per year, another yearly payment of 141 euro nobody knows exactly what it is for, and an additional 800 euro yearly payment for "being a corporation".

So for example in 2022 you pay taxes for 2021, and a 50% advance payment for 2022 based on what you just paid for 2021. Then in 2023 you do the same for 2022.

These laws change constantly, but accounting services are cheap- You can get good bookkeeping for as low as 70 euro per month. Forming a company is also only around 350 euro.
Another big plus in Greece is that I own my house where I could setup as my company's HQ. No rent or anything.

Also, if you form an "O.E." company with a partner, you don't have to pay dividends tax since all company income is automatically owned by the partners.


I'm also considering moving to Cyprus and opening a company there. Their IP Box system is perfect for me, with it I'll be able to reach effective tax rates lower than 2.5%!
However accounting costs are outrageously high! From looking around you need around 2k a year with a cheap firm! Yearly audit at 1200 euro and accounting services at 800+ euro.

I expect to have very few transactions so these prices seem too high for me.
I will also have to rent in Cyprus. The cheapest rents I'm comfortable with cost around 4400 euro per year.

I've done some math and it seems the first 2 years in Greece would be cheaper, but from the third year or so and with a significant increase in earnings, the Cyprus IP Box system starts to shine.

I'm wondering if there is anything I've missed. Please share your thoughts on my situation.

I've also thought of a plan to reduce accounting costs in Cyprus though I'm guess it probably won't work.
My idea is to form a company in Greece, and then move (myself) to Cyprus. Since I'm the head of the company and I live in Cyprus and all company decisions are made in Cyprus, my company is a tax resident of Cyprus, correct?
But the company would still be in Greece with a Greek accountant. Of course the Greek accountant might not have any idea how to pay the Cyprus taxes and that stuff...
Or worse, Greek law might have foreseen this.

What do you think?

 

[Martin Everson]

See how much real income you are making from sales for first and second year and only then consider your options. Things might not always pan out as you hope and its far better to be light weight structure wise in such a case.

P.S It's not an issue to pay Greece tax on no income if things don't go as expected . But it can be a pain to have moved and paying all unnecessary costs if things didn't work out as planned.

 

[megaverseman]

True, I might be jumping the gun a bit here. Nevertheless, I do love to plan ahead and know all my options...
So I'm open to any advice!

 

[megaverseman]

Yeah, year 1 will definitely be in Greece as a sole proprietorship (There are some new tax incentives for incomes less than 30k.)
I've only studied Cyprus so far as I have some relatives there that might be able to help. Should give Portugal and Estonia a look, though I imagine the rent costs would be even higher than Cyprus.

 

[megaverseman]

Hmm, seems risky, even with a virtual office, if I still live in Greece and manage the company here, won't the Estonian company be considered a tax resident of Greece?

 

[megaverseman]

Hmm, so that means that if I could establish "substance" for my Cypriot company, I could stay in Greece and receive dividends. Due to the Cyprus-Greece tax treaty, Greece would not be able to tax my dividends, since they would have already been taxed in Cyprus (12.5% CIT). This scenario would save me at least 3k per year. (Increased accounting costs in order to establish substance in Cyprus.)

But what would happen if I use the IP Box Regime and get a discount on the taxable income? (That would bring the effective tax rate to 2.5% or lower) I'm guessing that I would have to pay the difference in Greece?

 

[Martin Everson]

I guess your question is, "What happens if I pay myself profits from an Estonian company". In Estonia, you will be subject to 20% tax on any dividend profits split.

Its 25% tax in reality as its calculated as (Dividend * 20/80)

I don't know why Estonia advertises it as 20%.

 

[CyprusLaw]

Hmm, so that means that if I could establish "substance" for my Cypriot company, I could stay in Greece and receive dividends. Due to the Cyprus-Greece tax treaty, Greece would not be able to tax my dividends, since they would have already been taxed in Cyprus (12.5% CIT). This scenario would save me at least 3k per year. (Increased accounting costs in order to establish substance in Cyprus.)

But what would happen if I use the IP Box Regime and get a discount on the taxable income? (That would bring the effective tax rate to 2.5% or lower) I'm guessing that I would have to pay the difference in Greece?

This is not exactly the case. Your corp profit would be taxed ar 2.5%, however, when you pay dividend to yourself this would be a different story, in your case divided payment would be tax/SDC exempt in Cyprus but if you are a tax resident in Greece you would have to declare this as income in Greece. Best scenario would be for you to actually move to Cyprus. Accounting/audit fees depend on number of transactions so if this is small I am sure you can find firm that will be low cost. Would be happy to make suggestions.

 

[megaverseman]

This is not exactly the case. Your corp profit would be taxed ar 2.5%, however, when you pay dividend to yourself this would be a different story, in your case divided payment would be tax/SDC exempt in Cyprus but if you are a tax resident in Greece you would have to declare this as income in Greece. Best scenario would be for you to actually move to Cyprus. Accounting/audit fees depend on number of transactions so if this is small I am sure you can find firm that will be low cost. Would be happy to make suggestions.

Hmm,where am I wrong? I would declare it in Greece as dividends from foreign company and write how much tax was paid for in Cyprus. There is a double tax treaty that only allows for Greece to tax me the difference so I'll either pay the difference until it reaches 5% (What Greece taxes dividends) or nothing. What I have no idea is how much would the Greek social security be. The social security laws changed a lot last year, seems to be only 126 euro per month now, but I'm not sure, have to ask an accountant. From what I can find it used to be 20% until 2020, which is ridiculous.

According to a Cypriot accountant I spoke with recently, he told me that the Cypriot authorities are getting stricter with the "substance" part.
But there are still many firms that promote hiring local directors and nominee shareholders... Not sure if I it's worth the risk to use them.
Best case scenario would be to move since I do have some relatives there after all.

EDIT:I'm open to any suggestions you might have! I estimate I'll have around 4-5 transactions per month or less. Some months would have only 1 invoice.

 

[CyprusLaw]

The double tax has to do with the company as they would be taxed as corporate tax. Your personal tax is a different case - dividend income would not be taxed in Cyprus but would be taxed in Greece (I note however that I can only speak about the Cyprus part, you would need tax advice from Gree about your income tax in Greece).

About substance, please note that there have been no cases so far in Cyprus where tax authorities have aggressively challenged substance.

 

[megaverseman]

The double tax has to do with the company as they would be taxed as corporate tax. Your personal tax is a different case - dividend income would not be taxed in Cyprus but would be taxed in Greece (I note however that I can only speak about the Cyprus part, you would need tax advice from Gree about your income tax in Greece).

About substance, please note that there have been no cases so far in Cyprus where tax authorities have aggressively challenged substance.

So in the worst case scenario I would get taxed again at 5% and pay Greek social security. But double tax treaties have to apply to individuals too, I've already made use of one as an individual receiving royalty income.

Also, I didn't think of that on my own, making use of the double tax treaty like I stated was advertised in two different Greek accounting firm sites (those that can also set you up with Cypriot or Bulgarian companies) so they got to know something right?
I guess they could be overselling it?

By the way if you could suggest any reliable accounting firms I'm all ears, hehe.

 

[CyprusLaw]

So in the worst case scenario I would get taxed again at 5% and pay Greek social security. But double tax treaties have to apply to individuals too, I've already made use of one as an individual receiving royalty income.

Also, I didn't think of that on my own, making use of the double tax treaty like I stated was advertised in two different Greek accounting firm sites (those that can also set you up with Cypriot or Bulgarian companies) so they got to know something right?
I guess they could be overselling it?

By the way if you could suggest any reliable accounting firms I'm all ears, hehe.

Double tax treaties would apply where there is tax - in Cyprus you would not be taxed as an individual. Your company would be taxed just in Cyprus and then your personal income would be taxed in Greece. I would be happy to make a couple of suggestions - is it ok to PM you?

 

[megaverseman]

Double tax treaties would apply where there is tax - in Cyprus you would not be taxed as an individual. Your company would be taxed just in Cyprus and then your personal income would be taxed in Greece. I would be happy to make a couple of suggestions - is it ok to PM you?

Hmm, I see what you mean, I actually thought the same before reading that info on those sites... Feel free to PM me!

 

[kkein]

how about an HK company? why nobody consider those? I keep reading info about everything but HK company setups..

 

[5K1PP3R]

About substance, please note that there have been no cases so far in Cyprus where tax authorities have aggressively challenged substance.

That's good to know, because my legal adviser designed a following scheme for me:
- I declare that during the past year I was paying developers in cash to create a software.
- I create a company in Cyprus and transfer this software to the company
- I lease the software to a client and start collecting royalties
- get a 60 day tax residency and pay myself dividends

But some other guys told me there are stricter requirements nowadays to use IP box like 3 people on payroll on Cyprus and an office. Anyone can comment?

 

[kkein]

IP box is strict afaik, you need to show the actual work is being done in cyprus

 

[jkk]

Its 25% tax in reality as its calculated as (Dividend * 20/80)

I don't know why Estonia advertises it as 20%.

If your dividend is 80 and you pay 20, you have paid 20% tax on your earnings. In other words, you earned 100, out of which you pay 20%.

In my experience taxes are never calculated from the net amount. Otherwise you could call 55% salary tax in some countries 122% tax. Because from your 45, you pay 55 which would be 122%.

 

[Martin Everson]

If your dividend is 80 and you pay 20, you have paid 20% tax on your earnings. In other words, you earned 100, out of which you pay 20%.

If your dividend announced is 80 euros. You pay 80 * 20/80. So you pay 20 euros. 20 Euros from 80 euros is 25%.

 

[JustAnotherNomad]

If your dividend announced is 80 euros. You pay 80 * 20/80. So you pay 20 euros. 20 Euros from 80 euros is 25%.

It's a corporate income tax, not a withholding tax. Your math is wrong.

You really pay 20% on 100, then you can pay out 80 without any withholding tax.
The only difference is that the payment of those 20% is deferred.

 

[JustAnotherNomad]

If you live in Greece or any EU country, you are considered a tax resident as a person. But inside the EU, there is an equality principle between companies and citizens. Estonia cannot dictate rules for Greek companies while the Greek government has much to say over its resident citizens (183 days living there) but nothing over Estonian companies. The same happens with the principle of the EU of "Holding-Subsidiary.

I guess your question is, "What happens if I pay myself profits from an Estonian company". In Estonia, you will be subject to 20% tax on any dividend profits split. While in Greece, if you already paid taxes in Estonia, I guess they could tax you on your income. But I do not know the greek rules enough to give you an opinion. It's only a supposition. Probably someone will correct me.

Wish I had seen this nonsense post earlier. Everything in this post is completely wrong information. Should be a reminder to everyone to always check with licensed lawyers.