Question Cheapest EU jurisdiction for company maintenance and accounting

[kkein]

Considering to move to UAE. However i read many have issues with clients not wanting to do biz with UAE entities.
So i was considering to create a proxy company with the sole purpose of interfacing with customers. Proxy would not make any profit, simply relay the invoices to UAE company in form of service provided.
Does this sound feasible? If yes, what could be a viable jurisdiction for incorporating such a proxy, with low maintenance fees and accounting prices?

 

[Sols]

How broad is your definition of EU? Because UK is the cheapest in Europe. But if you want EU/EEA then it's probably Estonia or Cyprus, both which are significantly more expensive than UK.

You can find probably find cheap options in Romania, Hungary, and Bulgaria but, all things considered, I've almost never found them more compelling than Estonia, Cyprus, or Malta.

US LLC is also a popular option that you may want to explore. Tax neutral (pass-through entity), low cost, and easy to manage.

 

[JustAnotherNomad]

A tax-transparent US LLC is probably the simplest option by far, but if you want to be 100% compliant, it's not quite clear if the new UAE corporate income tax would apply to such a company under permanent establishment rules. If you want to be 100% compliant, you'd probably want to register a free zone branch of the US LLC.
If you use a "regular" EU company (Estonia, Cyprus etc.), you can run into issues with transfer pricing restrictions, so you may not be able to take all profits out via invoices. For Estonia, it might be better to take money out as a salary instead.
Also see this thread:

Looking for a pass-through company US LLC/UK LLP alternative, but in EU

Hello everyone, I have a following situation: I am an IT freelancer with multiple clients. I have a chance to have a 0% total tax setup. Simply put I would reside in a non-EU country with territorial taxation and create a pass through-entity to invoice clients from other countries. There is no...

www.offshorecorptalk.com

 

[kkein]

Thanks for the advice.
I might be too ignorant on the subject, but what is the definition of a pass-through, tax-neutral or tax-transparent entity?

And what would be the difference with a regular company that, for each client invoice it sends out, has a matching invoice it gets in from the service provider, ending up with 0 profit?

 

[JustAnotherNomad]

I might be too ignorant on the subject, but what is the definition of a pass-through, tax-neutral or tax-transparent entity?

It means the entity isn't taxed individually, but instead the revenue is taxed as if it was received direclty by the owner(s)/partner(s).
However, when the entity is registered in another jurisdiction, there can be some funny situations where one country sees an entity as transparent, while another sees it as opaque. Sometimes with positive, sometimes with negative consequences.

And what would be the difference with a regular company that, for each client invoice it sends out, has a matching invoice it gets in from the service provider, ending up with 0 profit?

For transactions between related parties (e.g. two companies you own invoicing each other), you have to respect transfer pricing restrictions (arm's length principle), and ending up with 0 profit would probably violate them.
In other words, you typically cannot pay more than the market price, the company should retain a realistic profit.

 

[kkein]

It means the entity isn't taxed individually, but instead the revenue is taxed as if it was received direclty by the owner(s)/partner(s).
However, when the entity is registered in another jurisdiction, there can be some funny situations where one country sees an entity as transparent, while another sees it as opaque. Sometimes with positive, sometimes with negative consequences.



For transactions between related parties (e.g. two companies you own invoicing each other), you have to respect transfer pricing restrictions (arm's length principle), and ending up with 0 profit would probably violate them.
In other words, you typically cannot pay more than the market price, the company should retain a realistic profit.

Thank you for the clarification!
So in essence, to use transactions and a regular company, i should probably leave some % in the proxy (i suppose it could be a relatively low margin), which would then either be taxed if issued as dividends, or used to pay services.
I need to research a bit more on this, because i wasn't even aware of pass-through companies, and so idk where and how to incorporate one

 

[JustAnotherNomad]

The "regular company" (entity of its own) is usually called a corporation.
How final decision for how low the margins can be is up to the tax authorities/a court of law. There are tax lawyers specializing in transfer pricing - they do nothing else but try to figure out and argue for what the "correct market price" for a transaction is. When you have such transactions (invoices between related parties), you should plan them well with a tax lawyer, you should usually prepare documentation, so that if there ever are questions from the tax authorities, you can show that you paid a fair market price and not too much.

Again, with pass-through entities, if you reside in another country you risk that it's not recognized as passthrough. For example, you form a US LLC and declare to the IRS that you want it to be taxed as a pass-through entity, but then the tax authorities in the country where you live could say they will tax it as a corporation. So for any international arrangement, you better consult with a professional, before forming any companies.

 

[kkein]

The "regular company" (entity of its own) is usually called a corporation.
How final decision for how low the margins can be is up to the tax authorities/a court of law. There are tax lawyers specializing in transfer pricing - they do nothing else but try to figure out and argue for what the "correct market price" for a transaction is. When you have such transactions (invoices between related parties), you should plan them well with a tax lawyer, you should usually prepare documentation, so that if there ever are questions from the tax authorities, you can show that you paid a fair market price and not too much.

Again, with pass-through entities, if you reside in another country you risk that it's not recognized as passthrough. For example, you form a US LLC and declare to the IRS that you want it to be taxed as a pass-through entity, but then the tax authorities in the country where you live could say they will tax it as a corporation. So for any international arrangement, you better consult with a professional, before forming any companies.

Thanks for the further clarification! What would happen if a regular corporation does not follow "correct market price" and makes no profit on the services it resells (after all plenty of companies do this, or even are in passive)? Are there legal consequences/fines? would the tax department "invent" some correct market price and demand the difference to be taxed?

 

[JustAnotherNomad]

Yes, as far as I know they would tax you based on what they think would be a fair price.
Example:
Your corporation A is in a country with 25% CIT rate and 10% withholding tax on dividends. This company invoices the customer C for digital marketing services. The client pays 100k.
You have another company B in a tax-free country and company A subcontracts company B for "providing digital marketing services for customer C", for a f
The question the tax inspector will ask is: "What was the role of company A, what value has company A added?"
Questions would be things like, if something goes wrong, which company is liable? What is the role of company A vs. B? You could say that the role of company A is to create trust with the customer, because A is in the same company as the customer. A has a good brand that the customer trusts. This has a value.
If company A instead bought the same services not from B, but from some random company (not owned by you), would A really pay 100k, so that there is no profit? Ok, the other company does the work, but it wouldn't make sense for A to have 0 profit - company A still has meetings with the client, still sends invoices and so on - certainly A wants to have some profit from this.
They could say that it's reasonable that A would have at least 20% profit for doing these things, that A would never have paid a third party more than 85k for this work.
So then they could say that only 80k are OK as a market price for providing the services and that 20k is "realistic profit". Since you paid 100k to your own company, they can say that this was a hidden profit distribution.
They can say that only 80k are deductible and on the 20k profit, you should pay 25% tax (=4k). Also, there is 10% withholding, so on the remaining after-tax profit of 16k, you have to pay 1.6k withholding tax.
In the end company A has to pay 5.6k tax in this example.
If they think that there was foul play, they could probably fine you on top of that.
So it's important that the contracts between A and B are designed well and that you have good documentation for everything, maybe you should even try to get an advance ruling from the tax authorities for such a setup.
Typically they would even say that you can only pay a little bit less than to a third party, because B doesn't have to do any work to get the contract with C - company A is handling all the business development, etc.
Whereas a third party company would first have to do work to get the contract with company A... And so on.

Or another typical example is that you have company in a low-tax country that owns the brand. Like Starbucks and you have a company in the Cayman Islands that owns the Starbucks trademark.
Then you have Starbucks US that pays $100M (10% of the revenue) every year in license fees to Starbucks in the Cayman Islands for being allowed to use the Starbucks brand.
In the case of Starbucks, the tax authorities may say that's OK because Starbucks is a well-known brand, so it's a realistic value.
But if it's the KKein brand - maybe they would say 10% of the revenue is not a fair price because no company would pay 10% of its revenue only for being allowed to use a brand that no one has heard about...

I guess you understand now why there are lawyers that do nothing else than design such contracts (expert lawyers for transfer pricing), make sure that everything is compliant and so on...

 

[kkein]

Thank you so much for the very clear explanation, much appreciated! So i suppose that even if B owns A, it's not OK to make A break even? would A have to be a branch or something?

 

[JustAnotherNomad]

Transfer pricing restrictions typically always kick in when A and B are "related parties". This could be A owning B, B owning A, A and B having the same owner, but even things like B being owned by a close relative of the owner of A. It could also apply to branches. You'd have to speak to a transfer pricing expert in the country where A is tax resident about the rules that country applies.
There is of course a chance that the tax authorities never look closer at such an arrangement, but I wouldn't count on it.

Only when the parties truly aren't related (completely different owners and so forth), then the price could be anything and the profit could be 0. That's because in such cases the price is the market price by definition.

 

[justanotherguy]

There are tax lawyers specializing in transfer pricing

Saw you mentioning a lawyer in Estonia that you have, would you be able to PM his name/details? Currently looking for one who has experience with US LLC & Estonian tax.

 

[Steven Lewis]

The UK is currently one of the least expensive options, followed by Bulgaria and Hungary, which have the lowest corporate tax rates in the EU, and then Romania or Estonia.

 

[Gediminas]

Considering to move to UAE. However i read many have issues with clients not wanting to do biz with UAE entities.
So i was considering to create a proxy company with the sole purpose of interfacing with customers. Proxy would not make any profit, simply relay the invoices to UAE company in form of service provided.
Does this sound feasible? If yes, what could be a viable jurisdiction for incorporating such a proxy, with low maintenance fees and accounting prices?

Hey,

Yes, such a company would allow you to benefit from a better reputation in the eyes of the customers and better banking solutions.

From a tax perspective, it can be either a commercial agent (which receives only small percentage of profits) or a service company/payment processing company. Actually, there are a few ways how to structure it. It also depends on the country where such a company is established.