Estonia Company + Cyprus PE + CY Residency

[JohnDones]

I stumbled upon this post by @Don

Quote: EE company with a PE in CY can redistribute the profits of the PE to the shareholders tax-free. And in the case of trading securities, there is no capital gains tax in Cyprus, so the overall tax will be 0%.

Do I understand this correctly:

• Estonia company with retained earnings (example: 100k)
• Director+Shareholder gets Cyprus residency
• Set up Cyprus PE (office with “analysts” who buy/sell equities)
• CY PE invests 100k into stocks
• CY PE liquidates assets and gets 200k (0% capital gains in Cyprus)
• EE company redistributes PE profit to shareholders tax free?

What am I missing here?

Why would Estonia not tax this amount as a regular distribution, hence 20%?

Thank you
JD

 

[Marzio]

That's why

https://www.fin.ee/en/taxes#corporate-income-tax

 

[JohnDones]

That's why

https://www.fin.ee/en/taxes#corporate-income-tax

Good find appreciate it. So the exemption applies for the second 100k (profit) in my example above. The principal 100k would still be taxed at a regular CIT rate if distributed?

 

[Marzio]

The principal 100k would still be taxed at a regular CIT rate if distributed?

Any income that flows from CY to EE is not be subject fo further taxation when distributed.

 

[JohnDones]

Any income that flows from CY to EE is not be subject fo further taxation when distributed.

Thank you for clarifying. Would be interesting to know if anyone has ever done this in practice for years. I guess not every accountant/auditor would be able to do this properly.

 

[Marzio]

I would verfy with a CY accountant if ALL securities capital gains are tax exempt because that's the critical piece IMHO

 

[Don]

I would verfy with a CY accountant if ALL securities capital gains are tax exempt because that's the critical piece IMHO

No, its mostly capital gains from trading shares in all types of companies that are exempt in CY. Not all securities are exempt or commodity derivatives.
Thats why this Estonia - Cyprus structure can be great as if you trade multiple types of instruments, those trades that might be taxable in CY, you could trade on the Estonian level, deferring tax indefinitely, and avoiding any tax exposure.
Also depending on your personal tax residency, it could be more advantageous structure compared to CY non-dom with a CY company as you would pay 2.65% social taxes on dividends this way.
I would consider Estonian tax residency instead as it doesn't require 60 days (or any days for that matter) stay, and is more tax efficient with such a structure.

Any income that flows from CY to EE is not be subject fo further taxation when distributed.

Correct

 

[CyprusLawyer101]

Have you checked ATAD and how it would apply yo this?

 

[Don]

Have you checked ATAD and how it would apply yo this?

Estonia will not even check how much tax is paid in Cyprus. They only want to know how much profit was repatriated, as this will be tax free in Estonia.

So far, EU member states have not reached an agreement on the highly controversial Atad 3 draft directive proposal and the final outcome is still uncertain.

 

[CyprusLawyer101]

Estonia will not even check how much tax is paid in Cyprus. They only want to know how much profit was repatriated, as this will be tax free in Estonia.

So far, EU member states have not reached an agreement on the highly controversial Atad 3 draft directive proposal and the final outcome is still uncertain.

I am not talking about ATAD 3

 

[Don]

I am not talking about ATAD 3

The thing with Estonia and ATAD is that even if the foreign profits are attributed to the Estonian holding due to being qualified as a non genuine arrangement due to lack of substance, the profits would still not taxed until the distribution actually happens.
Always best to have some substance, and with such structure especially so if it involves Estonian citizens/residents.

 

[CyprusLawyer101]

The thing with Estonia and ATAD is that even if the foreign profits are attributed to the Estonian holding due to being qualified as a non genuine arrangement due to lack of substance, the profits would still not taxed until the distribution actually happens.
Always best to have some substance, and with such structure especially so if it involves Estonian citizens/residents.

What about exit taxes on chargeable assets?

 

[JohnDones]

I think the main question is has this been done in practice and survived an audit. A lot of things work in theory.

Say you distribute 100k (PE profit) from Estonia and don't pay corp tax. How's that not a trigger for an audit?

 

[Don]

I think the main question is has this been done in practice and survived an audit. A lot of things work in theory.

Say you distribute 100k (PE profit) from Estonia and don't pay corp tax. How's that not a trigger for an audit?

Yes.
If needed you will be asked to show the tax declaration of the PE, to prove that the repatriated income was sourced from abroad. It works similarly as other jurisdictions which don't tax foreign sourced income like Singapore, Gibraltar or Malta.

 

[JohnDones]

Yes.
If needed you will be asked to show the tax declaration of the PE, to prove that the repatriated income was sourced from abroad. It works similarly as other jurisdictions which don't tax foreign sourced income like Singapore, Gibraltar or Malta.

Would the PE need to have its own set of bank/brokerage accounts? Is it required, good to have or doesn't matter?

 

[Don]

Would the PE need to have its own set of bank/brokerage accounts? Is it required, good to have or doesn't matter?

Yes you need it for accounting, to keep things separate.
Its really simple to do with a broker like IBKR.

 

[JohnDones]

Yes you need it for accounting, to keep things separate.
Its really simple to do with a broker like IBKR.

Appreciate all your answers here, really helpful.

So when the PE opens a Wise account + IBKR, the main Estonian entity would fund those accounts? How is that accounted in Estonia, as a loan to a PE?

 

[Don]

Appreciate all your answers here, really helpful.

So when the PE opens a Wise account + IBKR, the main Estonian entity would fund those accounts? How is that accounted in Estonia, as a loan to a PE?

Yes the head office can finance a foreign PE, but when moving assets to a foreign PE it is usually deemed as distribution, unless assets are returned within 12 months.

 

[JohnDones]

Yes the head office can finance a foreign PE, but when moving assets to a foreign PE it is usually deemed as distribution, unless assets are returned within 12 months.

Right, so you would need to move the funds back on Dec 31 to close the year with the seed amount back in the main company? And profit (if any) remains in the PE.

 

[Don]

Right, so you would need to move the funds back on Dec 31 to close the year with the seed amount back in the main company? And profit (if any) remains in the PE.

It is also an option for the shareholders to inject the capital directly into PE in the first place. In such a case, there is no "deemed distribution," as assets are not taken out from the Estonian headquarters.
Deemed distribution is a crucial concept for anyone managing an Estonian company to understand, as no tax must be paid before distributions.
Deemed distribution happens when assets, e.g., funds from undistributed profits of Estonian headquarters, are taken out and moved to a foreign PE. However, as I mentioned, there is an exception to the rule that it's possible to move assets out of the headquarters without tax implications if the move is temporary.

I recommend getting some advice to understand the full implications on personal and corporate levels.