Canadian LLP for selling digital products - what about business expenses?

[wheelspin]

Hello guys,

my wife and I will set up a Canadian LLP and we are EU citizens. Our aim is to sell online products within the EU (non US / Canadian business). We plan to move out of EU in some month (hopefully after COVID).

From my point of view there's no audit/ accounting or reporting rule but only an annual report for the tax authorities and there's no income tax in my case. I know, I have to declare my earnings in my personal tax statement.

I issue in name of the LLP invoices to customers for sold goods. What if my LLP has expenses? For example, we use a cloud service and pay monthly?

Here's the point:

a) Is my taxable income = revenue - expenses? So I would have to use a business bank account to "declare" the expenses, right? Can't figure which amount I am given to declare and how to legally proof!?

b) What is the easiest solution to get a bank account for the LLP to use payment services like PayPal Business(?) with possibility to move the income into my personal bank account (in EU for savings)? The most customers (private persons) here in EU are familiar with Paypal. Don't know if they accept other solutions. Any tips?
Of course, if we live abroad, I have a credit card linked to my personal account to withdraw some money for daily use.

Just to be clear: best solution for us at the moment is to have a LLP because if we move out of EU we don't have to dissolve the company.

Have a great time

 

[JustAnotherNomad]

The taxation of the LLP depends on where you live. Your country may treat the LLP like a regular Ltd. company, for which you may even have to pay corporate income tax in your own country. In that case, you may also have to “dissolve” the registration in your country like for a local company.

 

[Martin Everson]

Seems a bizarre solution. You need to clarify what you mean by online products. You say digital products in subject title so you need to explain further.

Are you aware of EU regulation on selling of digital services into EU? You will need to register and file VAT returns in an EU state via the MOSS system. Then register in each EU member state where your customers are located. You may need also to register as a non-established taxable person.

https://ec.europa.eu/taxation_custo...information_microbusinesses_euvat_2015_en.pdf
Your better of with a low tax EU company or selling through a market place that will take care of this complication for you.

 

[wheelspin]

We are selling online courses.

I am aware of MOSS and indeed there are two solutions. You can either register in each EU member state or use MOSS in one country and they could distribute it. Ok, I see, not a preferrable solution.

What would be the best setup to live in Thailand, having EU Citizenship, and running an online business selling digital products -> sell automated online courses.

I thought the best solution is to open a LLP in Canada to avoid paying taxes on foreign income or corporate tax.

 

[JustAnotherNomad]

I thought the best solution is to open a LLP in Canada to avoid paying taxes on foreign income or corporate tax.

If you run your company from Thailand, how can it be foreign income?
Your chances of being caught are probably quite low, but it should be clear that that’s not a compliant setup.

 

[Martin Everson]

What would be the best setup to live in Thailand, having EU Citizenship, and running an online business selling digital products -> sell automated online courses.

Just register a Estonia company. Then when in Thailand continue to use it tax free.

I thought the best solution is to open a LLP in Canada to avoid paying taxes on foreign income or corporate tax.

You don't pay taxes on non-distributed profits on an Estonian company. Thailand has no CFC rules or any anti-avoidance rules. It also has a remittance basis tax system. So you won't be taxed on that income if you don't bring it into Thailand in the year the income occurs. So either a wait a year before bringing in the income or just pay tax free a salary from Estonian company offshore. You then have total tax free solution.

 

[wheelspin]

Just register a Estonia company. Then when in Thailand continue to use it tax free.



You don't pay taxes on non-distributed profits on an Estonian company. Thailand has no CFC rules or any anti-avoidance rules. It also has a remittance basis tax system. So you won't be taxed on that income if you don't bring it into Thailand in the year the income occurs. So either a wait a year before bringing in the income or just pay tax free a salary from Estonian company offshore. You then have total tax free solution.

Thanks, sounds great. What exactly means the term "wait a year before bringing in the income". Does it mean transferring to a Thai Bank Account?

In case of the Estonian company -> in which country would be my business linked bank account? And could I withdraw / transfer to my private account?

Just a last question: I saw some guys made a corp in Canada to do the same stuff like me. How would they handle the VAT / MOSS thing?

 

[Martin Everson]

Thanks, sounds great. What exactly means the term "wait a year before bringing in the income". Does it mean transferring to a Thai Bank Account?

Yes you cannot bring in offshore income in year you earned it. If you bring it to Thailand in following tax year then it is exempt from personal taxation.

In case of the Estonian company -> in which country would be my business linked bank account? And could I withdraw / transfer to my private account?

Wherever you choose to open an account or are able to. If your still resident in EU then start with Transferwise for ease of opening. Yes you can withdraw to your personal account as salary. You would pay tax on such income and establishing an Estonian company while still resident in EU would almost certainly be considered a CFC and will be taxed in your EU country or at least subject to a DTA. You may need to accept this tax hit until you decide to move or move first before starting is best.

 

[JustAnotherNomad]

You don't pay taxes on non-distributed profits on an Estonian company.

But you do pay 25% tax on distributed profits (20% on the gross amount).

Thailand has no CFC rules or any anti-avoidance rules.

That doesn’t really matter. Thailand does have PE rules (naturallt and will tax locally sourced income (=work done in Thailand).

Yes you can withdraw to your personal account as salary. You would pay tax on such income

Yes, where he is resident. In the EU country and likely also in Thailand, since it’s local work.

establishing an Estonian company while still resident in EU would almost certainly be considered a CFC and will be taxed in your EU country

No, not necessarily a CFC. The company would simply be tax resident where he is, and not in Estonia. At the very least, there would be a PE.

Long story short:
What you are trying to do is not legally possible. But it is possible that Thailand won’t catch you or investigate too much. If you are leaving soon, it is also possible that you will be gone before your home country has time to investigate properly.
We still don’t know where you are currently living and when you are planning to leave.

It can work with an Estonian company, but be prepared to pay exit tax when you leave the EU. It would be better to set up the company after you have left.
You can’t take a 100% salary from your Estonian company due to transfer pricing restrictions - that is, if you get audited. You will have to pay some money as dividends and thus have to pay Estonian corporate income tax.

It might also work with an LLP or something similar, since this all comes down to how much Thailand investigates your structure. If you pay a (close to) 100% salary, it doesn’t matter where you incorporate, as there will be nothing to tax. You could also simply open a company in your home country, then move your personal tax residency to Thailand and pay a 100% salary from there. But you would still have to pay the exit tax.

 

[John Andrews]

That doesn’t really matter. Thailand does have PE rules (naturallt and will tax locally sourced income (=work done in Thailand).

How would the Thai taxman know what is he doing on his laptop? It's not like the Estonian company would set up a factory or an office...

 

[JustAnotherNomad]

How would the Thai taxman know what is he doing on his laptop? It's not like the Estonian company would set up a factory or an office...

They will simply asks what he does for a living. It’s not like we’re talking about a 2 week vacation, so they will eventually ask where their money comes from and demand to see proof.
But yes, the chances of being caught are probably small. That just doesn’t mean it’s legal. A tourist visa also wouldn’t give you the right to work in Thailand. So realistically the question should be phrased as “What’s the best approach to fool the Thai tax and immigration authorities?”

 

[wheelspin]

Thanks for your detailed answers!

I am living in Germany. To avoid the exit tax I'd have to move first and then incorporate in "any" country - got it. In this situation, would I have any benefits opening in Belize, BVI oder Seychelles? There I could link a business bank account (TW?) and use a payment provider for my EU customers to collect the VAT things. Easy or not?

In Thailand I could use my business or private credit card - do I really need there a bank account? If yes, I would pay some salary to this account in perhaps in any case pay some tax.

For the visa in Thai I'll do a deep dive to avoid any tax or immigration failures.

"Basis – Thailand residents and nonresidents are taxed on their Thailand-source income. Thai residents are taxed on their foreignsource income only if the income is brought into Thailand in the year it is derived (repatriation in later years is exempt from personal income tax)."

So selling courses through a online plattform incorporated anywhere (not thailand) wouldn't be work done in Thailand and therefore I could run on low salary, tax it and payout the rest at the beginning of next year because it's not derived in current year?

 

[JustAnotherNomad]

It wouldn’t really matter, you could also use a Seychelles company. But of course banking could be more difficult. VAT registration would probably also be more difficult as I believe you always have to have a VAT representative in the EU. With an EU company, you don’t need that as you can represent yourself. Of course, depending on the sales volume, you could also simply not care about VAT, hide behind your offshore company and hope nobody will bother to find out who’s running the company for those very low VAT amounts. Not suggesting that, just pointing out the obvious.

Nobody can force you to open a Thai bank account, but using a credit card in Thailand might already be considered “bringing funds into Thailand.”
That’s the risk with territorial taxation, the practice of what is considered “foreign” income varies greatly.

If you own a schnitzel restaurant in Bavaria and that restaurant pays its taxes and you pay dividends from that business into a bank account in Singapore and spend it in Bali, then you can be quite sure that the Thai authorities won’t have a problem with that. For any other scenario, there’s always some uncertainty. Especially things like being allowed to remit funds tax free a year later - would you have to have some special structure in place to prove you didn’t remit the funds earlier? The UK is said to be extremely strict about such things. No idea how Thailand would handle this.
Simply incorporating in Belize probably won’t make a difference if you don’t have substance in Belize. It will probably also depend on the level of “passivity” of the income. Are you selling online courses that you record in your apartment in Thailand? Do you use a Thai video studio?
Or is it only written material that you could have produced elsewhere, etc.?

Long story short, your best bet will be to comply with any local rules until you have left the country. Then set up a company - wherever. US LLC’s seem popular since they are cheap, filing requirements are minimal, some states don’t have a public shareholder register, access to payment gateways should be relatively easy to obtain etc.
But as mentioned, for VAT purposes, an EU company might be a bit better. Estonia could work, but everything will be public (the opposite of the US anonymity) and you will have to file accounts, though this should be much simpler than in many other countries. Keep the money in a bank account outside Thailand and spend using a credit card only, stay in Thailand as a tourist/on a student visa (Thai classes are said to qualify), live a modest life, hope nobody will ask questions. That’s how thousands of Westerners live in Thailand and enjoy their lives. With an Estonian company, you could probably even claim deductions for travel expenses including dining, just talk to an accountant.
Or you could do it all by the book - then you should really pay Thai lawyers that are specialized in tax and immigration law. That’s especially important if you expect to have substantial revenue.

Of course one benefit with a UK Ltd. or Estonian company over a US LLC or UK LLP is that you would be able to obtain a tax residency certificate for the company, should the Thai authorities require it. I’m not sure if that would work with a company from Belize/Seychelles/Mauritius etc.

 

[Martin Everson]

But you do pay 25% tax on distributed profits (20% on the gross amount).

Salary is not distributed profits .

Yes, where he is resident. In the EU country and likely also in Thailand, since it’s local work.

Did you even bother to read what I wrote fully before replying?

No, not necessarily a CFC. The company would simply be tax resident where he is, and not in Estonia. At the very least, there would be a PE.

What I wrote was correct....lol. See below what I wrote :

You would pay tax on such income and establishing an Estonian company while still resident in EU would almost certainly be considered a CFC and will be taxed in your EU country or at least subject to a DTA.

 

[JustAnotherNomad]

Salary is not distributed profits .

Yes, but you (probably) can’t distribute 100% of the profits as a salary, especially when you sell products. As a shareholder, you’re subject to transfer-pricing restrictions. It may work for a while or even forever, but if they take an interest in you, they will most likely demand you take some profits as dividends.

What I wrote was correct....lol. See below what I wrote :

You wrote it would be a CFC. That’s not correct. An Estonian company that is used as an operative business won’t be considered a CFC by Germany as German CFC rules only apply to businesses with passive income, like in most countries.
Instead, the company will be taxable in Germany due to permanent establishment and its effective place of management. Exit tax will apply as well.

The result is of course the same as if it was a CFC, but there this epidemic of people believing that they don’t have to pay taxes if there are no CFC rules, which couldn’t be further from the truth. Switzerland doesn’t have CFC rules, but that doesn’t mean you can run your Seychelles-registered business from Zurich and not pay Swiss corporate income tax.

 

[Martin Everson]

You wrote it would be a CFC. That’s not correct. An Estonian company that is used as an operative business won’t be considered a CFC by Germany as German CFC rules only apply to businesses with passive income, like in most countries.
Instead, the company will be taxable in Germany due to permanent establishment and its effective place of management. Exit tax will apply as well.

He mentioned Germany after my post. So again what I said was 100% correct. In any case Germany's General Anti Avoidance rules (GAAR) does not allow for structures that leads to a tax advantage over German structures.

The result is of course the same as if it was a CFC, but there this epidemic of people believing that they don’t have to pay taxes if there are no CFC rules, which couldn’t be further from the truth. Switzerland doesn’t have CFC rules, but that doesn’t mean you can run your Seychelles-registered business from Zurich and not pay Swiss corporate income tax.

Even with CFC rules in some countries you do not have to pay taxes depending on the CFC threshold. You need to examine each country on a case by case basis and not use broad statements to cover the subject

 

[JustAnotherNomad]

Just trying to raise awareness.