Best subsidiary location with substance for a Belgian company

[heaven]

I live and work in Belgium. I want to open a company in a low tax jurisdiction to decrease the tax bill of our Belgian operating company.
My business partner and I are currently not considering to leave Belgium.

Goal
My main goal is to save money on the companies tax bill in Belgium in a cost efficient way to increase our profitability.
Having access to cheap local labour is great. But I wouldn't consider it a must. If I could simply register a company for a couple thousands a year without the cost of local employees, I would. However, I don't think it will be possible with the money I'm planning on sending there.

Current situation

• Belgian operating company with business partner (+ personal management company: revenue not considered in this calculation)
• The business: B2B services, 90% local customers
• Two directors (= same shareholders), two employees
• 160.000 revenue and 45.000 pre tax profit but I expect to keep growing coming years with around 40-50% annually.
• 25% Belgian corporate tax rate
• I own the brand trademark personally

I find eastern EU countries interesting. Why?

• Low tax
• Low labour costs: Great to build economic substance (I think?) and to have actual cheap employees for our company is a big plus down the road
• Anti offshore rules don't apply with other EU member states
• Close by: 1h time difference, short and cheap flights
• EU Parent Subsidiary Regime = free dividend to our Belgian company

The setup I thought about

Company​

• Romanian Micro company: 1% tax on €1.000.000 revenue
• Owned by the Belgian company
• The Romanian company provides customer support to our Belgian clients for our Belgian company

Substance​

• Company is managed when I'm there
• Start of with 1-2 employees
• I fly there 4 times a year
• Local bank account, accounting, cheap office, bank in a great banking jurisdiction (≠ Romania or Belgium) to keep money,...
• After everything is setup and working smoothly. I'll buy an apartment to further decrease the salary cost for an employee and to show more substance.

Tax Optimisation​

• I'll invoice up to 70K yearly per employee/director to our Belgian company. Cause I think I'll need to invoice at arms length and this amount seems ok to me. Needs to be checked.
• I sell the brand trademark I own personally to the same or a second Romanian company. I make a trademark license agreement to pay 3% of the revenue of the Belgian company to the Romanian company.
• Extra, if it's not going to complicate things: I take a salary taxed at Romanian Personal tax rates for managing the company in Romania for when I'm there.

Romanian Profit​

• A percentage of the after tax profit should be payed out to Belgium to reinvest the lower taxed profits back into the Belgian company to keep growing
• The rest can be invested in trackers owned by the Romanian company

I like to focus on one other country. Not register a company in Cyprus to hold the trademark, a Romanian company to do customer support and a Dutch company as holding company. Cause I think it will be more difficult and more expensive to maintain to show economic substance. Unless you can convince me.

Questions

• What is the ideal location for the subsidiary location?
• What is the minimal substance required abroad in a EU country to pass the place of management tests for Belgium residents?
• Do you see other/better options to save on tax?
• Anything you wan't to add?

Thanks!

 

[blockchain4ever]

I haven't checked, but will a Romanian micro company allow company owners? Often these structures require one owner, and that it be a physical person.

 

[AMD]

Can you appoint nominee director to be physical person in Romanian Micro Company?

 

[Suzy Emerald]

As far as I know the subscribed capital of a micro company must be owned by persons who are not the state or territorial-administrative unities. Better ask these questions to a lawyer in Romania who sets up the SRL since the micro company rules change frequently.

 

[JustAnotherNomad]

How about Lithuania as an alternative, with 5% CIT on profits, available up to €300k (not sure if profit or revenue)?

 

[heaven]

I haven't checked, but will a Romanian micro company allow company owners? Often these structures require one owner, and that it be a physical person.

Can you appoint nominee director to be physical person in Romanian Micro Company?

As far as I know the subscribed capital of a micro company must be owned by persons who are not the state or territorial-administrative unities. Better ask these questions to a lawyer in Romania who sets up the SRL since the micro company rules change frequently.

I've no Idea.

I only see this requirement: Their shareholders or associates do not hold participation titles in other legal persons. But then it may only be for the reduced 1%. 3% might be fine?

Source 'EY Worldwide Corporate Tax Guide' under Romania, Micro Enterprise (I can't post links)

 

[heaven]

How about Lithuania as an alternative, with 5% CIT on profits, available up to €300k (not sure if profit or revenue)?

Thank you for your reply! I could live with 5% but it's more then 1% off course, the substance cost is also higher I belief and I am planning on growing our business a lot more so I want a more sustainable solutions for more years to come. So I want something that goes further than a preferable tax treatment on the first €300.000.

 

[JustAnotherNomad]

It’s 5% on the profit though, vs. 1% on the turnover. And there are also some limits in Romania, since it’s only for “micro” companies.
Bulgaria might also be an option. There’s actually a Belgian guy who’s specialized in helping people move to Bulgaria... But they have 10%, so quite a bit higher. Check out nomoretax.eu - maybe he can help you. Not an endorsement, I haven’t worked with him, I’ve just heard he’s popular.

 

[JohnLocke]

lawyer in Romania who sets up the SRL since the micro company rules change frequently.

Do you know a reputable lawyer in Romania?

 

[JustAnotherNomad]

I think someone recently mentioned a Romanian lawyer in another thread.

 

[JohnLocke]

I think someone recently mentioned a Romanian lawyer in another thread.

Very true Romanian micro-company no experience with them other then presales questions!

I can't find anyone with personal experience using some attorney or accountant firm in Romania.

 

[Suzy Emerald]

Check darie & manea for example. They deal a lot with micro entreprises

 

[Marzio]

How about Lithuania as an alternative, with 5% CIT on profits, available up to €300k (not sure if profit or revenue)?

Isn't the small partnership (MB) a pass through entity?

 

[JustAnotherNomad]

No, I’m talking about regular limited liability companies. But it’s revenue-based, unfortunately, so probably not such a good option:

“Entities with fewer than ten employees and less than EUR 300,000 in gross annual revenues can benefit from a reduced CIT rate of 0% for the first year of operations and 5% for the following periods if certain conditions are met.”

Lithuania - Corporate - Taxes on corporate income

Detailed description of taxes on corporate income in Lithuania

taxsummaries.pwc.com

The regular rate is 15% - still not that bad.

Maybe Estonia could be an option as well?
Estonia has 20% tax, but it’s not applied until dividends are paid out. So one could simply keep the money in the company (accumulating tax-free interest), then move to Estonia (no other taxes apply) and pay out the dividends and pay the tax.
Or one could even try to find some other way to get the money out at a later point, like royalty payments.

 

[Marzio]

Maybe Estonia could be an option as well?

This will trigger CFC rules in Belgium so all the profits of the Estonian company would be taxed as it would be a Belgian company,

 

[JustAnotherNomad]

I don’t know the Belgian CFC rules. But with an operative business with economic substance and a good business case in another EU country, it seems unlikely that CFC rules would be triggered.

CFC rules however could really be an issue in general of course, also with Romania. According to Google, CIT of less than half the Belgian rate would potentially trigger them. But that’s exactly where I think Estonia could be interesting: Estonia has 20% CIT, it’s simply paid later. 20% is almost as high as the Belgian CIT...

 

[heaven]

It’s 5% on the profit though, vs. 1% on the turnover. And there are also some limits in Romania, since it’s only for “micro” companies.
Bulgaria might also be an option. There’s actually a Belgian guy who’s specialized in helping people move to Bulgaria... But they have 10%, so quite a bit higher. Check out nomoretax.eu - maybe he can help you. Not an endorsement, I haven’t worked with him, I’ve just heard he’s popular.

I checked and the average salary in Lithuania is about 20K per year, I would prefer a lower cost if possible. Definitely if I need more then 1 employee to show enough substance.

I will thanks!

Do you know a reputable lawyer in Romania?

I think someone recently mentioned a Romanian lawyer in another thread.

Haven't used them myself but they are reputable: https://www.vistra.com/

No, I’m talking about regular limited liability companies. But it’s revenue-based, unfortunately, so probably not such a good option:

“Entities with fewer than ten employees and less than EUR 300,000 in gross annual revenues can benefit from a reduced CIT rate of 0% for the first year of operations and 5% for the following periods if certain conditions are met.”

Lithuania - Corporate - Taxes on corporate income

Detailed description of taxes on corporate income in Lithuania

taxsummaries.pwc.com

The regular rate is 15% - still not that bad.

Maybe Estonia could be an option as well?
Estonia has 20% tax, but it’s not applied until dividends are paid out. So one could simply keep the money in the company (accumulating tax-free interest), then move to Estonia (no other taxes apply) and pay out the dividends and pay the tax.
Or one could even try to find some other way to get the money out at a later point, like royalty payments.

The 300.000 revenue rule makes it a lot less appealing.
With a tax rate of 15%, Hungary would be better as well with 9% CIT. But I'm really looking on saving the most on tax while being in a country with low substance costs. So 9% would be too 'high' if lower is possible.

I like the Estonian tax system but I don't like the 20% tax on distributed profits in my scenario. I really need to get the money back to Belgium to reinvest the money back into our company.

I also heard of companies in special places in Poland or Bulgaria for example where you aren't taxed. For Bulgaria the requirements where to heave (too many employees if I remember correctly).

Another option I though of was a subsidiary in Georgia, it has a no tax zone and it has a DTA with Belgium, only 5% dividend tax.

This will trigger CFC rules in Belgium so all the profits of the Estonian company would be taxed as it would be a Belgian company,

I don’t know the Belgian CFC rules. But with an operative business with economic substance and a good business case in another EU country, it seems unlikely that CFC rules would be triggered.

CFC rules however could really be an issue in general of course, also with Romania. According to Google, CIT of less than half the Belgian rate would potentially trigger them. But that’s exactly where I think Estonia could be interesting: Estonia has 20% CIT, it’s simply paid later. 20% is almost as high as the Belgian CIT...

I'm pretty sure if I make a strong case CFC rules don't apply. What do you think?

Controlled foreign companies. As of the 2019 income year, Belgium introduced new controlled foreign company (CFC) legislation, which targets artificial constructions set up with the essential purpose of obtaining a tax advantage (that is, when profit is shifted from a Belgian entity for the benefit of the CFC [for example, profit that the CFC obtained based on assets and risks owned or assumed by the CFC while the significant people functions related to those assets and risks are actually performed by the Belgian taxpayer]). According to the new legislation, non-distributed profits realized by a CFC in the context of non-genuine arrangements (determined on a transfer-pricing basis — ATAD “Option B”) will be added to the tax base of the Belgian parent if it holds at least 50% of the CFC and if the CFC is subject to tax at a rate lower than 12.5%.

Sources:
- EY 2019 Worldwide Corporate Tax Guide
- Extra: Belgium Tax Highlights 2020 Deloitte

 

[JustAnotherNomad]

I would definitely look into Georgia if that could be an option. Though there is the risk of Russian aggression of course.

 

[fshore]

I'm pretty sure if I make a strong case CFC rules don't apply. What do you think?

This is not something you should speculate in. You need to hire professional Belgium lawyers that knows and understand the laws, including the background of the laws and also any court cases.
It's also not sure that flying to Romania 4 times a year will make any difference, even if you believe it will, and would make the whole plan fall apart

 

[heaven]

I would definitely look into Georgia if that could be an option. Though there is the risk of Russian aggression of course.

Georgia would be great. The advertised CIT is 15% on distributed profits but it's quit easy to get 0% in free zones. An average employee would cost about €5.000 a year! It's a little remote however.

Only downside atm, 2 hour difference and an almost 7 hour flight with a layover.

This is not something you should speculate in. You need to hire professional Belgium lawyers that knows and understand the laws, including the background of the laws and also any court cases.
It's also not sure that flying to Romania 4 times a year will make any difference, even if you believe it will, and would make the whole plan fall apart

I know, I am just looking for possible locations that are tax efficient and cost efficient to make sense for my (currently small) business. So I can efficiently build substance so I won't trigger CFC.
Malta would for example be interesting because of the effective CIT rate of 5% for example, however the cost of employees = substance is a lot higher. If you now of other locations or other ways of substance let me know! Thanks