E-Residency: How to best close my estonian OÜ company?

[HappyFox]

Hi there,

I’m looking for some advice on how to close my estonian OÜ company.

The Situation:

1. The business operates in the digital travel-industry. My main job as the sole owner of the company is a combination of sales, customer-support and a lot of programming/design. I’m closing down the business because the global pandemic has reduced all income to zero.

2. After all expenses there are about 30k Euros left in the companies bank account.

3. The business structure is extremely lean. For 2020 there where barely any business expenses. (No employees, no payouts to myself, no investments and barely any recurring upkeep cost)

4. My personal country of residence is Germany and I currently live here. I’m adding this because any „profit“ I take out of the company will have to be taxed here as well, I guess.

The Questions:

I’m feeling a bit „left alone“ with this whole situation by my accountant.
So I thought I’d ask some questions here:

1. Since in 2020 so far the business didn’t have any expenses: Would it make sense to make some bigger purchases/investments I can label as „business expenses“ before closing the company? (e.g. new computer, office equipment, software etc.) Mainly things that I would also be able to use after the company is closed.

2. How would you go about this? Closing the company and paying out the remaining 30K to myself would probably not the most clever descision for tax reasons. Or would it?

3. Anything else that comes to mind that would help me in this situation?

Very grateful for any advice.

 

[Sols]

4. My personal country of residence is Germany and I currently live here. I’m adding this because any „profit“ I take out of the company will have to be taxed here as well, I guess.

I hope your company has been compliant with German tax law for its entire duration. That will make the dissolution a lot less dramatic and you won't have to worry about back taxes.

1. Since in 2020 so far the business didn’t have any expenses: Would it make sense to make some bigger purchases/investments I can label as „business expenses“ before closing the company? (e.g. new computer, office equipment, software etc.) Mainly things that I would also be able to use after the company is closed.

Consult with a German lawyer since that's where the company is tax resident but I would be surprised if there was any benefit to this. It might be considered abusive to avoid VAT this way.

2. How would you go about this? Closing the company and paying out the remaining 30K to myself would probably not the most clever descision for tax reasons. Or would it?

I'd start by contacting whoever it was that helped you create the company and inquire with them about dissolving the company. The steps aren't that complicated but it's important you do it correctly. It takes about six months in total to properly dissolve an Estonian company. A liquidator will be appointed who will take care of the process.

 

[HappyFox]

I'd start by contacting whoever it was that helped you create the company and inquire with them about dissolving the company. The steps aren't that complicated but it's important you do it correctly. It takes about six months in total to properly dissolve an Estonian company. A liquidator will be appointed who will take care of the process.

Thanks a lot for this. I'll start there.

 

[neweraoffshore]

If you were living in Germany the whole time and Germany was your tax residency and decisions were made in Germany, then you have to pay taxes in Germany. No way around it if you don't want to go offshore and shift the 30k as invoiced expenses to an offshore entity to spend the money anonymously.
Read § 7-14 AStG which will tell you that you fall under the "Hinzurechnungsbesteuerung".

Here is a very good link which explains your situation (source in German) : Hinzurechnungsbesteuerung nach AStG ⇒ Lexikon des Steuerrechts | smartsteuer

 

[JustAnotherNomad]

You can sell the company, instead of closing it. You were really stupid for incorporating an offshore company without proper legal counsel from your home country.

 

[JustAnotherNomad]

He likely has also broken the law by not informing the tax authorities in Germany that he has incorporated this company. Well done.

 

[NicolasMaduro]

He likely has also broken the law by not informing the tax authorities in Germany that he has incorporated this company. Well done.

Germany have laws that you have to disclose that you own a company overseas? Isn't it just to put it on the yearly tax returns?

 

[JustAnotherNomad]

Most countries do, yes. I’m sure Germany is no different.
Otherwise you could always claim to have substance in the other country, so you didn’t have to declare anything since the tax has to be paid in the other country anyway. By requiring you to declare your ownership, it’s easier for them to charge you with tax evasion: “If you were so sure you had substance in the other country and no tax needed to be paid at home, why didn’t you just tell us, as required by law? Obviously you were trying to hide something.”
And if you do declare it, of course they will start digging.

 

[Btraveler]

Most countries do, yes. I’m sure Germany is no different.
Otherwise you could always claim to have substance in the other country, so you didn’t have to declare anything since the tax has to be paid in the other country anyway. By requiring you to declare your ownership, it’s easier for them to charge you with tax evasion: “If you were so sure you had substance in the other country and no tax needed to be paid at home, why didn’t you just tell us, as required by law? Obviously you were trying to hide something.”
And if you do declare it, of course they will start digging.

There's a smarter solution. Contract some estonian guy/girl who earns a salary of about 250€+taxes a month to be a local director of you company + rent an office of 60€/month (there are near Tallinn). Then, if I'm not wrong, you'll have SUBASTANCE on Estonia (Local director + local office) that will allow you to NOT declare nothing to your home country = as your company is in Estonia and all workers and offices also in there.

Then, live with the 30K you have in the company account less that costs. It's a possible solution or pay yourself dividends from a "foreign" company

 

[JustAnotherNomad]

Contract some estonian guy/girl who earns a salary of about 250€+taxes a month to be a local director of you company + rent an office of 60€/month (there are near Tallinn). Then, if I'm not wrong, you'll have SUBASTANCE on Estonia (Local director + local office)

It is questionable if the authorities in your home country would believe that someone generates a couple thousand euro per month for a €250 salary. €250 is very little money, even in Estonia.

that will allow you to NOT declare nothing to your home country = as your company is in Estonia and all workers and offices also in there.

Substance has nothing to do with disclosure requirements.
Most/all high-tax countries will require you to disclose any significant ownership in foreign businesses. The moment you declare your ownership, it’s very likely that they’ll ask for proof of substance and then your plan will probably implode.

Then, live with the 30K you have in the company account less that costs. It's a possible solution or pay yourself dividends from a "foreign" company

Even with substance in the foreign company, there can still be an office (permanent establishment) or even management and control in your own country, which is taxable there.

To give an example: Say you are Spanish, you live in Spain and you do marketing. To lower your costs, you close your Spanish company and register a company in South America instead, where both taxes and salaries are lower. You have local people working from South America, even a “director,” and they actually do what you pay them for, i.e. run ads for Spanish clients. There is an office in South America, it’s a proper business. There clearly is substance. But you are not just a passive investor, you find clients for the company and you also still sometimes do work for Spanish clients, all on behalf of the South-American company.
Now the Spanish taxman can decide that you give all the orders from Spain and that all strategic decisions are taken in Spain: Management and control is in Spain. That can be enough to make the company tax resident in Spain. It will then depend on the tax treaty between Spain and the other country to determine how much of the company’s profit can be taxed in Spain, and how much can be taxed in South America. You basically have created a Spanish (!) company with a second office in South America. Usually, only the work directly connected to the office in South America would be taxable there, the rest would be taxable in Spain. If there is no tax treaty, the situation may even be worse.
The other (probably more likely) thing that could happen is that the Spanish authorities would accept the substance in South America, but they would rule that there is permanent establishment in Spain, i.e. a branch office. So they can tax all the work that is connected to Spain, only the rest would be taxed in South America.

It would probably look something like this:
You found a new client for the company and you bill them €100 per hour.
Your South-American company actually does the work: You say you work for free and €100 is what the South American company takes for their services (taxable in Spain). The Spanish authorities most likely wouldn’t accept that. They would say that €100 is too high for a company from South America and that the only reason you do it this way is because you want to save taxes. It doesn’t make sense for you to pay your own company €100 when other companies in South America would only charge €30 for the same work. So they will say you overpaid to save taxes. The result will be that they say, €30 is a fair hourly rate (arm’s length) and that amount you can indeed pay tax on in South America. But €70 is the profit that is attributable to Spain, and you have to pay Spanish taxes on this. As you can imagine, this stuff can quickly become really complex and you’d need good lawyers to structure things in a legal way.

 

[Btraveler]

great examples and detailed explanation @JustAnotherNomad

 

[Bluepearl]

Well, if there is everything ok with s company and you as a person are 100% owner, I would suggest selling it. Estonia has open register so you can easily show some basic details to new potential owner. Then if new owner has e-residency you can do it remotely. What about bank account? I guess is EMI right?