Estonia, Lithuania and Latvia for a holding company

[22kay]

Hi,

My question: I am looking to incorporate a holding company in either Lithuania, Estonia or Latvia, but would like to discuss which options would be best of these three.

My requirement: dividends not taxed (eg. no WTH taxes) when paid out to a none EU resident.
I am a EU citizen.
I am NOT a EU resident.
Low cost of maintenance of the holding company.
As much as possible done through Internet.
Low administration.
Holding to act as a "true" holding company, eg. no business revenue, only subsidiary dividends.
Not be dependent on tax treaties.

The idea:
I would like to hold (own) companies that are registered in any EU country in either Lithuania, Estonia or Latvia and pay out dividends with no tax (CIT already paid) to the holding company.
Holding company then pays out the dividend directly to me without any WTH dividend tax, and I am taxed in the tax resident country outside of EU where I live. I can change country depending on my choice, it would still not levy any wth on the paid out dividends from the holding company.

Example:
Holding company owns 100% of a Swedish company (as a subsidiary). Swedish company has profit which it already paid CIT on -> dividend is made to the holding company -> dividend is paid out from holding company to me.

Comments:
I believe this is a fairly common setup, but I would like to know if anyone has done this with either of the countries mentioned and if it was possible to implement this model? Any recommendations on the way?
I would consider other countries as well, as long as they are EU-countries, low on maintenance and possible to perform easily through Internet and/or low on administration.

- WTH = Withholding taxes
- CIT = Corporate Income Tax

 

[Konstanz]

I do not recommend holding company in Estonia, Latvia or Lithuania.
These countries do not have stable political / tax systems
Better look at Lichtenstein, Cyprus, Malta, Switzerland, Luxembourg.
I think @Gediminas can provide good advice for these specific matters.

 

[Sols]

Why those three? Cyprus and Malta are low cost, tax efficient options for holding companies.

 

[Martin Everson]

Estonia has zero WTH on dividends but then its DTA's apply unless you live in a select few countries like UAE, Mexico etc then there is no WTH applied. The other two are a compromise when it comes to WTH i.e Latvia applies a 20% WTH when money flows to persons in a low tax jurisdiction for example.

If you meet the EU Parent Subsidiary rule then the money will flow out tax free to any of these three companies from the Swedish company. But DTA' is the gotcha as depending on your residency WTH will be applied to holding company distributions.

 

[22kay]

1) "I do not recommend holding company in Estonia, Latvia or Lithuania.
These countries do not have stable political / tax systems"
- are there any historic/recent or current ongoing issues that makes you say the are not stable? Trying to understand the situation.

2) Since Lichtenstein, Switzerland and Luxembourg are not members of EU, how are dividends treated when sent from a corporation in an EU country? As a comparison, within EU-corp to EU-corp there is no WTH dividend taxes.

3) Does Malta or Cyprus levy any WTH tax on dividends to non country residents or is it 0/zero?

I do not recommend holding company in Estonia, Latvia or Lithuania.
These countries do not have stable political / tax systems
Better look at Lichtenstein, Cyprus, Malta, Switzerland, Luxembourg.
I think @Gediminas can provide good advice for these specific matters.

Estonia has zero WTH on dividends but then its DTA's apply unless you live in a select few countries like UAE, Mexico etc then there is no WTH applied. The other two are a compromise when it comes to WTH i.e Latvia applies a 20% WTH when money flows to persons in a low tax jurisdiction for example.

If you meet the EU Parent Subsidiary rule then the money will flow out tax free to any of these three companies from the Swedish company. But DTA' is the gotcha as depending on your residency WTH will be applied to holding company distributions.

"But DTA' is the gotcha as depending on your residency WTH will be applied to holding company distributions."
- if there is no tax treaty for Estonia, does this apply:
https://taxsummaries.pwc.com/estonia/corporate/withholding-taxesIt's either 0% or 7% - not sure if even PWC is updated, but what I found googling...so not sure how true the data is from the link.

Just saw the link is for corporate WTH of dividends.
I assume personal would be different...

 

[Martin Everson]

3) Does Malta or Cyprus levy any WTH tax on dividends to non country residents or is it 0/zero?

Malta does not and neither does Cyprus for natural persons but Cyprus has more DTA's with zero WTH. This ensures a natural person actually gets the dividend from the Cyprus holding company without the DTA kicking in and some WTH rules applying.

Better look at Lichtenstein, Cyprus, Malta, Switzerland, Luxembourg.

Forget Switzerland....35% WHT???? Forget that country...lol. And DTA's are not as good terms as i.e Cyprus.

 

[22kay]

So, to conclude 3 options would apply in my case, as most feasible:
1) Estonia
2) Cyprus
3) Malta

And choosing one would depend on the tax residency country of mine and how DTA would be treated.

How do the above countries differ in "yearly maintenance costs" when it comes to costs? Eg. which is a lower cost option?

 

[Martin Everson]

How do the above countries differ in "yearly maintenance costs" when it comes to costs? Eg. which is a lower cost option?

Estonia is totally digital. However you need to consider Economic Substance requirement. No Economic Substance then no tax residency. Days of shell holding companies in EU long gone.

 

[AndyAresa]

So, to conclude 3 options would apply in my case, as most feasible:
1) Estonia
2) Cyprus
3) Malta

And choosing one would depend on the tax residency country of mine and how DTA would be treated.

How do the above countries differ in "yearly maintenance costs" when it comes to costs? Eg. which is a lower cost option?

Estonia is very affordable

 

[22kay]

Estonia is totally digital. However you need to consider Economic Substance requirement. No Economic Substance then no tax residency. Days of shell holding companies in EU long gone.

Does that mean local office and local director?
Or has it become more complicated for recent years?

 

[Martin Everson]

Does that mean local office and local director?
Or has it become more complicated for recent years?

Yup. You need to meet the Economic Substance requirements of whichever country you choose which mostly follow the OECD economic substance model.

In Estonia it means holding company will have to have:

• It’s own (rented or owned) office space/premises / physical address;
• Qualified and knowledgeable directors and managers who are located and employed in Estonia;
• Other employee/s with relevant experience residing in Estonia;
• Employer status of the company and registration with the Estonian tax and customs board for Social Insurance where directors and/or other staff are employed (not only nominated);
• Its accounting records maintained in Estonia and the accounting work performed by local accountants;
• Operative local bank accounts, with local resident signatories/counter-signatories;
• Relevant assets located in Estonia (i.e., staff, equipment, and all other necessities which are normally required for doing business);
• The substantial involvement of local staff in the operations of the entity;
• An independent local email address and/or website;
• An independent telephone line.

 

[22kay]

Ok, thank you.

Any recommendations on who can help with an initial discussion regarding Estonia holding company creation?
Or Cyprus? Or Malta?

 

[Martin Everson]

Ok, thank you.

Any recommendations on who can help with an initial discussion regarding Estonia holding company creation?
Or Cyprus? Or Malta?

You can speak to people here on forum or seek out your own tax advisor. I can't help here however.

 

[22kay]

I wasn't targetting you specifically

If anyone here offers professional guidance on the the topic (or can recommend someone), please pm me.

 

[JustAnotherNomad]

The issue is not with your holding company country. Strange that no one has mentioned that before.
The issue is whether you can actually transfer dividends from the subsidiary to the parent company without paying WHT.

I don't think what @Martin Everson wrote is correct - a company incorporated in Estonia should by default always be tax resident in Estonia. You should easily be able to get a tax residency certificate for the company.
There are no substance requirements in Estonia, as far as I know. I mean, why would they impose such a restriction? They would limit the possibility to tax the company...

However, there may be limitation on benefits clauses in the tax treaty. And also the subsidiary country may have substance requirements. This is done to limit treaty shopping.
So if you live in some country that the Swedish government doesn't like, then setting up a shell company in Estonia probably won't cut it because you'd have to prove to the Swedish tax authorities that the company is "actively doing business" in Estonia or something like that (economic substance). There's a good chance no one will check this, but if they do, you could be in trouble.
And a simple nominee director likely wouldn't cut it. They'd want to see a "market rate salary" and see proof that he's not just a nominee.

As far as I know, Estonia has a pretty stable tax code - I'm not so sure about Lithuania or Latvia.
Note that Estonia does tax capital gains from selling shares in the company, while Lithuania and Latvia should have exemptions for this if you hold a certain percentage of the shares for a certain time.

Estonia also doesn't have any WHT, while I think Lithuania and Latvia do, unless a tax treaty specifies something else (notably Lithuania has 0% WHT on dividends paid to a corporate shareholder from the UAE, if memory serves me right).

Cyprus would probably be the best option as I don't think they have any WHT and nominee directors are very common there, and there also shouldn't be any CGT when selling the shares.
I guess Malta could also work, not so sure.
Liechtenstein is not an EU country as far as I know, but they should support the parent-subsidiary directive - but only if there is a tax treaty, and there aren't that many.
Luxembourg would probably also work well, but from what I've heard, everything is extremely expensive there.

Here's another elegant solution:
If you are an EU citizen, why don't you become tax resident in Estonia? Rent a cheap room and declare that's where you live. You have substance for your Estonian company and dividends can flow tax-free from your holding company to you as an individual. Estonia doesn't tax dividends received by a natural person.
That's of course assuming that you actually live in a tax-free country without tax treaties. If you really live in a high-tax country, then this wouldn't work. But then most likely your original plan wouldn't work either as your holding company would likely be taxable in that country under corporate tax residency/permanent establishment/CFC rules.

 

[22kay]

The issue is not with your holding company country. Strange that no one has mentioned that before.
The issue is whether you can actually transfer dividends from the subsidiary to the parent company without paying WHT.

I don't think what @Martin Everson wrote is correct - a company incorporated in Estonia should by default always be tax resident in Estonia. You should easily be able to get a tax residency certificate for the company.
There are no substance requirements in Estonia, as far as I know. I mean, why would they impose such a restriction? They would limit the possibility to tax the company...

However, there may be limitation on benefits clauses in the tax treaty. And also the subsidiary country may have substance requirements. This is done to limit treaty shopping.
So if you live in some country that the Swedish government doesn't like, then setting up a shell company in Estonia probably won't cut it because you'd have to prove to the Swedish tax authorities that the company is "actively doing business" in Estonia or something like that (economic substance). There's a good chance no one will check this, but if they do, you could be in trouble.
And a simple nominee director likely wouldn't cut it. They'd want to see a "market rate salary" and see proof that he's not just a nominee.

As far as I know, Estonia has a pretty stable tax code - I'm not so sure about Lithuania or Latvia.
Note that Estonia does tax capital gains from selling shares in the company, while Lithuania and Latvia should have exemptions for this if you hold a certain percentage of the shares for a certain time.

Estonia also doesn't have any WHT, while I think Lithuania and Latvia do, unless a tax treaty specifies something else (notably Lithuania has 0% WHT on dividends paid to a corporate shareholder from the UAE, if memory serves me right).

Cyprus would probably be the best option as I don't think they have any WHT and nominee directors are very common there, and there also shouldn't be any CGT when selling the shares.
I guess Malta could also work, not so sure.
Liechtenstein is not an EU country as far as I know, but they should support the parent-subsidiary directive - but only if there is a tax treaty, and there aren't that many.
Luxembourg would probably also work well, but from what I've heard, everything is extremely expensive there.

Here's another elegant solution:
If you are an EU citizen, why don't you become tax resident in Estonia? Rent a cheap room and declare that's where you live. You have substance for your Estonian company and dividends can flow tax-free from your holding company to you as an individual. Estonia doesn't tax dividends received by a natural person.
That's of course assuming that you actually live in a tax-free country without tax treaties. If you really live in a high-tax country, then this wouldn't work. But then most likely your original plan wouldn't work either as your holding company would likely be taxable in that country under corporate tax residency/permanent establishment/CFC rules.

"That's of course assuming that you actually live in a tax-free country without tax treaties. If you really live in a high-tax country, then this wouldn't work. But then most likely your original plan wouldn't work either as your holding company would likely be taxable in that country under corporate tax residency/permanent establishment/CFC rules." - correct, no tax treaty and no world wide taxation.

I like the "elegant solution":
"you are an EU citizen, why don't you become tax resident in Estonia?" - are we talking about the 183-day rule, or can it be just a cheap apartment contract signed by me and with a postal address with my name on it?

 

[JustAnotherNomad]

High-tax countries (including Estonia) rarely require you to spend much time there. Just rent a place, register your address there and declare to the Estonian tax authorities this is now your center of life. Should be more than good enough for tax residency.
But please double check this with an Estonian tax lawyer. I'm pretty sure it should work very well though.

The same thing should work with Cyprus, but Cyprus is not a Schengen country (easier to track how many days you spend there) and they require you to spend at least 60 days there.

One thing though - now you could run into the opposite situation: That Estonia could try to tax your subsidiaries under PE rules. So it's really important that you plan this well with an Estonian advisor.

 

[22kay]

High-tax countries (including Estonia) rarely require you to spend much time there. Just rent a place, register your address there and declare to the Estonian tax authorities this is now your center of life. Should be more than good enough for tax residency.
But please double check this with an Estonian tax lawyer. I'm pretty sure it should work very well though.

The same thing should work with Cyprus, but Cyprus is not a Schengen country (easier to track how many days you spend there) and they require you to spend at least 60 days there.

One thing though - now you could run into the opposite situation: That Estonia could try to tax your subsidiaries under PE rules. So it's really important that you plan this well with an Estonian advisor.

Not sure about the PE, since corporate tax is paid in the established country where the subsidiary resides, so there would be no sourcing of any work to the Estonian parent, it would be a "true" holding company. But I will of course check all this with a legal team

 

[JustAnotherNomad]

If you're really not involved in the management of the company, that should probablt be fine.
But if you have an active role in the business, then things could look different.
Please keep us posted how it goes! I have heard about someone using a model like this, but I don't know any details about his setup. So it would be great to learn if/how this can work in practice.

 

[Martin Everson]

I wasn't targetting you specifically

No worries .

If anyone here offers professional guidance on the the topic (or can recommend someone), please pm me.

After reading the replies you got which are misleading. I would say get proper tax advice before you land yourself in hot water. Your activity is "Holding business" so you are directly impacted. GAAR is real. Please read the below link fully. You otherwise risk losing tax treaty benefits. Don't rely on bro science here.

The Importance of Economic Substance for EU Companies​

https://aspentrust.com/the-importance-of-economic-substance-for-eu-companies/
After you read it then....read it again . Have a nice evening.