Estonia Corporate Tax: to pay or not to pay?

[HeinzKetchup69]

Let's say I'm a resident of Estonia, while being a sole director of a UAE company.
I get a salary from the UAE company and pay salary taxes in Estonia for that amount.

What about all undistributed profits from the UAE, that are kept in the UAE bank account, do I have to declare it to the Estonian authorities? Do I have to pay taxes on that undistributed profits in Estonia?


Let's forget for a moment double tax treaties here. Will Estonia consider the UAE corporation a Tax resident of Estonia and tax it at a corporate level, or not, since they do not tax undistributed profits?

The objective here is to re-invest those company profits while paying myself a small salary of 10K Euro a month.


This is what CHAT GPT says, can anyone confirm if true? However my main question remains, do I HAVE TO declare the UAE company to Estonian authorities or can I simply not give a f**k?

 

[Marzio]

If you are managing the company from Estonia, the company will be considered tax resident both in UAE and in EE.

Undistributed profits will not be taxed.

If you hire a UAE director the company would not be deemed tax resident in Estonia but it could be considered a CFC.

It will not be considered a CFC if:

1. The accounting profit of the previous financial year did not exceed EUR 750,000.

2. Other revenues of the foreign company, such as profits from subsidiaries, affiliates, and financial investments, interest income, and other financial income (i.e. non-trading income) did not exceed EUR 75,000 during the same period.

If the company will be considered a CFC all undistributed profits will be taxed in Estonia at PIT rates.

 

[mytoofood]

sounds like something for @Don

 

[Don]

If you are managing the company from Estonia, the company will be considered tax resident both in UAE and in EE.

That's incorrect since Estonia does not have criteria for determining foreign companies as tax residents in Estonia.
While such practice is widespread, Estonian income tax act does not include such provisions.

Undistributed profits will not be taxed.

If you hire a UAE director the company would not be deemed tax resident in Estonia but it could be considered a CFC.

It will not be considered a CFC if:

1. The accounting profit of the previous financial year did not exceed EUR 750,000.

2. Other revenues of the foreign company, such as profits from subsidiaries, affiliates, and financial investments, interest income, and other financial income (i.e. non-trading income) did not exceed EUR 75,000 during the same period.

If the company will be considered a CFC all undistributed profits will be taxed in Estonia at PIT rates.

Tax from CFC applies only if it's considered fictitious and you clearly have no substance in UAE.

Given that you hold residencies in both countries, you might qualify as a non-tax resident in Estonia and a tax resident only in UAE based on DTT. In such a case, you would not need to worry about Estonia's tax obligations.

Also, with tax residency in Estonia, UAE-sourced income might not be double taxed.

375k AED/year income is tax-free in UAE.
For example, business income from UAE (100k EUR yearly income would be taxed with ~500 EUR tax) is 0.5%, or if it's higher, like 200k EUR, then around 4.5%.

PS: It is not recommended to use CHATGPT for tax advice.

In short, the tax rate can be lower, provided it's correctly structured. Otherwise, the salary tax is 20% in Estonia.

 

[HeinzKetchup69]

That's incorrect since Estonia does not have criteria for determining foreign companies as tax residents in Estonia.
While such practice is widespread, Estonian income tax act does not include such provisions.

Tax from CFC applies only if it's considered fictitious and you clearly have no substance in UAE.

Given that you hold residencies in both countries, you might qualify as a non-tax resident in Estonia and a tax resident only in UAE based on DTT. In such a case, you would not need to worry about Estonia's tax obligations.

Also, with tax residency in Estonia, UAE-sourced income might not be double taxed.

375k AED/year income is tax-free in UAE.
For example, business income from UAE (100k EUR yearly income would be taxed with ~500 EUR tax) is 0.5%, or if it's higher, like 200k EUR, then around 4.5%.

PS: It is not recommended to use CHATGPT for tax advice.

In short, the tax rate can be lower, provided it's correctly structured. Otherwise, the salary tax is 20% in Estonia.

How does the Salary taxed only at 0,5% to 4,5% work in Estonia? are you talking about corporate tax here or personal income tax?

There is no substance in the UAE, this is a 1 man company, I would live in Estonia 7 to 9 months a year, basically full time.

 

[Don]

How does the Salary taxed only at 0,5% to 4,5% work in Estonia? are you talking about corporate tax here or personal income tax?

There is no substance in the UAE, this is a 1 man company, I would live in Estonia 7 to 9 months a year, basically full time.

Such low rate is possible in case business income is taxed in UAE, and exempted from tax in Estonia, and recipient being Estonian tax resident.

 

[Marzio]

That's incorrect since Estonia does not have criteria for determining foreign companies as tax residents in Estonia.

In the UAE-EE double tax treaty they state that If the entrepreneur operates through a permanent establishment in another contracting state, the part of the profit that can be attributed to the permanent establishment may be taxed there.

You are telling me that you are only taxed if PE is deliberately disclosed to EE otherwise tx authorities don't have a way to determine if a company have a PE in EE?

Tax from CFC applies only if it's considered fictitious and you clearly have no substance in UAE.

Which is exactly his case

 

[Don]

In the UAE-EE double tax treaty they state that If the entrepreneur operates through a permanent establishment in another contracting state, the part of the profit that can be attributed to the permanent establishment may be taxed there.

You are telling me that you are only taxed if PE is deliberately disclosed to EE otherwise tx authorities don't have a way to determine if a company have a PE in EE?

Estonia could only tax the Estonian sourced profits arising from a Estonian PE, but not treat foreign company as Estonian tax resident, this is literally impossible, because there is no such law.

Which is exactly his case

This can apply in case they start a cross-border tax audit to determine the CFC.
In practice, PEs are not really enforced in Estonia since a foreign companies PE does not pay tax in Estonia until it withdraws the profits from the PE.

 

[HeinzKetchup69]

Estonia could only tax the Estonian sourced profits arising from a Estonian PE, but not treat foreign company as Estonian tax resident, this is literally impossible, because there is no such law.


This can apply in case they start a cross-border tax audit to determine the CFC.
In practice, PEs are not really enforced in Estonia since a foreign companies PE does not pay tax in Estonia until it withdraws the profits from the PE.

What does "withdraw" mean.... is withdrawing profits from the company into an investment vehicle such as crypto, gold or stocks, considered a "withdrawal" of the profits?

 

[Marzio]

Estonia could only tax the Estonian sourced profits arising from a Estonian PE, but not treat foreign company as Estonian tax resident, this is literally impossible, because there is no such law.

So lets make an example.

You are the tax resident in UAE and operate a US LLC with EE sales people which you pay on commission.

If what you say is correct then this is a 0% setup (if you exclude commissions paid to sales people) because even if sales are generated in EE, the company will not be considered tax resident in EE because there's no such law in EE and it's not considered tax resident in UAE because it's managed outside UAE.

Is that right?

 

[Don]

So lets make an example.

You are the tax resident in UAE and operate a US LLC with EE sales people which you pay on commission.

If what you say is correct then this is a 0% setup (if you exclude commissions paid to sales people) because even if sales are generated in EE, the company will not be considered tax resident in EE because there's no such law in EE and it's not considered tax resident in UAE because it's managed outside UAE.

Is that right?

Salespeople can also be "independent marketers" who don't have the authority to enter into contracts on behalf of the entity.
In such case there could be no permanent establishment.
Such people could be operating as:
1) entrepreneur account - zero compliance way to work (it's a special bank account where 20% of incoming funds are deducted as tax, and 20% is the total tax rate, including income and social taxes)
2) registered sole proprietors - high tax and compliance solution that hardly anyone uses

It is also possible that a permanent establishment is registered and some people are hired under the company, but the permanent establishment is not taxed with income tax. This depends on the nature of the activity of the people (e.g., assistant and preparatory activities, for one, do not trigger PE).

Also, in the case of a representative, a person acting as an independent representative will not establish a permanent establishment for a non-resident if the representative is acting in his/her own capacity in the ordinary course of business and is legally and economically independent of the non-resident. Owning or controlling one person does not in itself create a permanent establishment.

 

[JustAnotherNomad]

You are the tax resident in UAE and operate a US LLC with EE sales people which you pay on commission.

If what you say is correct then this is a 0% setup (if you exclude commissions paid to sales people) because even if sales are generated in EE, the company will not be considered tax resident in EE because there's no such law in EE and it's not considered tax resident in UAE because it's managed outside UAE.

That would work in many countries, as long as there are no local clients/no proper office (the sales agents work from home) and the sales reps cannot enter the company into binding agreements. It really depends on how strict the PE rules are.

Estonia is known to have very weak PE rules. The concept is basically only applied for very large multinational companies.

 

[clemens]

Bu if you have to pay 0% income tax in Dubai, why would tax worry you in such an setup ?

 

[brianK]

There is no substance in the UAE, this is a 1 man company, I would live in Estonia 7 to 9 months a year, basically full time.

where would you live the rest of the year ?

 

[Revoltec]

If the company will be considered a CFC all undistributed profits will be taxed in Estonia at PIT rates.

Why would all CFC undistributed profits be taxed at PIT rates? Shouldn't a CFC have the same treatment as an Estonian company, that is, tax free undistributed profits?

 

[Don]

Why would all CFC undistributed profits be taxed at PIT rates? Shouldn't a CFC have the same treatment as an Estonian company, that is, tax free undistributed profits?

CFC rules apply only when there is a resident company that owns shares in a foreign enterprise.

 

[Revoltec]

CFC rules apply only when there is a resident company that owns shares in a foreign enterprise.

So if I settle in Estonia and open a US LLC to trade stocks, is there a risk for it to be considered a CFC instead of a PE? Why, why not?

And if it considered to be a CFC, how would it be taxed?

 

[Don]

So if I settle in Estonia and open a US LLC to trade stocks, is there a risk for it to be considered a CFC instead of a PE? Why, why not?

And if it considered to be a CFC, how would it be taxed?

no, in Estonia, it is not possible in such a context for the entity to be considered a CFC because there is no such applicable law.
However, foreign entities could be taxed as PE-s.
PEs are taxed at zero until profits are deemed withdrawn from the PE (e.g., repatriated to the place of incorporation).

In practice Ive even seen Estonians run amazon FBA-s with US LLC-s, then sell the shares for millions without never registering a PE in Estonia. The tax office never saw any problem.

 

[Revoltec]

no, in Estonia, it is not possible in such a context for the entity to be considered a CFC because there is no such applicable law.
However, foreign entities could be taxed as PE-s.
PEs are taxed at zero until profits are deemed withdrawn from the PE (e.g., repatriated to the place of incorporation).

In practice Ive even seen Estonians run amazon FBA-s with US LLC-s, then sell the shares for millions without never registering a PE in Estonia. The tax office never saw any problem.

Don, I really appreciate your help. It seems like you know a lot about this field. But I guess I am still new to all of this.

1. In case the US LLC is deemed to be a PE, all profits would be tax free as income from trading stocks would be considered foreign sourced income, right?

2. Can you please explain why there are no CFC rules? This is what I read:

"Controlled foreign companies (CFCs)​

CFC rules for companies will be introduced from 2019 onwards on the basis of ATAD.

A CFC is defined as any non-resident enterprise in which the resident company alone or together with its related parties holds more than 50% of the voting rights or capital, or is entitled to receive more than 50% of the profits. A foreign PE of an Estonian company is also considered to be a CFC.

In order for the tax obligation to be triggered, the following conditions will have to be met:

• The underlying transaction or chain of transactions generating the profit of the CFC was fictitious.
• The principal aim of the underlying transaction or chain of transactions was gaining a tax advantage.
• The CFC is effectively managed by key employees of the shareholder of the controlling company that created the opportunity to make a profit."

I think there are many risks here. The Estonian tax agency could argue that the transaction is fictitious or made for the purpose of tax advantage?

 

[Don]

Don, I really appreciate your help. It seems like you know a lot about this field. But I guess I am still new to all of this.

1. In case the US LLC is deemed to be a PE, all profits would be tax free as income from trading stocks would be considered foreign sourced income, right?

2. Can you please explain why there are no CFC rules? This is what I read:

"Controlled foreign companies (CFCs)​

CFC rules for companies will be introduced from 2019 onwards on the basis of ATAD.

A CFC is defined as any non-resident enterprise in which the resident company alone or together with its related parties holds more than 50% of the voting rights or capital, or is entitled to receive more than 50% of the profits. A foreign PE of an Estonian company is also considered to be a CFC.

In order for the tax obligation to be triggered, the following conditions will have to be met:

• The underlying transaction or chain of transactions generating the profit of the CFC was fictitious.
• The principal aim of the underlying transaction or chain of transactions was gaining a tax advantage.
• The CFC is effectively managed by key employees of the shareholder of the controlling company that created the opportunity to make a profit."

I think there are many risks here. The Estonian tax agency could argue that the transaction is fictitious or made for the purpose of tax advantage?

Interpretation of an interpretation via a Google translation can be misleading. It's not "related parties" but correct is "associated enterprises"

Here is the relevant provision from the law: