Estonia, Lithuania and Latvia for a holding company

[22kay]

No worries .




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​

Economic Substance for EU Companies | Aspen Trust Group

The Aspen Trust Group reviews strategies businesses can use to improve economic substance for EU companies located in Cyprus for tax incentives.

aspentrust.com

After you read it then....read it again . Have a nice evening.

"All legal documents and company-related paperwork should remain in the Cyprus office or be accessible in the office at any time if they are uploaded to cloud data systems." - wohoo...back to the eighties... So, if there is a laptop in the office that is always connected to the Dropbox accounting and agreement folder, problem solved...or? Just a funny writing...

It feels like the article just shows different way's of proving presence and there are many ways of doing that, some are more creative then other. The key point is that as long as the corp taxes are paid locally, you don't try to outsource (too much) of the administrative work (eg. keep it in the original country jurisdiction) you will be fine. Of course, keeping an arms length is the best way in regards to management, which they also mention in the article.

Yes, the presence requirement would need to be solved in an adequate way...and of course, it only complicates it some more. But it's not like you need to over complicate and hire a huge staff of employees and put them in a big corp building to prove presence. On the other hand, if you would hire a big staff and get a big corp building paid by the dividend that was already taxed once...who will benefit from that? Exactly, the local jurisdiction So, of course they try to scare you. More money to the politicians (just because they missed a loophole the first time)

As always, laws change and as you already recommended; a local tax lawyer is always a must as well as a local (good!) CA/CPA, I would say.

ps. The article is written by a company that makes money helping companies pass the presence test...it's a little biased, I would say. Sounds just like an American insurance company..."if you don't do it like we say, and we are not saying you should, but who knows what trouble you might get into. Pay us, but we don't guarantee anything..."

"All legal documents and company-related paperwork should remain in the Cyprus office or be accessible in the office at any time if they are uploaded to cloud data systems." - wohoo...back to the eighties... So, if there is a laptop in the office that is always connected to the Dropbox accounting and agreement folder, problem solved...or? Just a funny writing...

It feels like the article just shows different way's of proving presence and there are many ways of doing that, some are more creative then other. The key point is that as long as the corp taxes are paid locally, you don't try to outsource (too much) of the administrative work (eg. keep it in the original country jurisdiction) you will be fine. Of course, keeping an arms length is the best way in regards to management, which they also mention in the article.

Yes, the presence requirement would need to be solved in an adequate way...and of course, it only complicates it some more. But it's not like you need to over complicate and hire a huge staff of employees and put them in a big corp building to prove presence. On the other hand, if you would hire a big staff and get a big corp building paid by the dividend that was already taxed once...who will benefit from that? Exactly, the local jurisdiction So, of course they try to scare you. More money to the politicians (just because they missed a loophole the first time)

As always, laws change and as you already recommended; a local tax lawyer is always a must as well as a local (good!) CA/CPA, I would say.

ps. The article is written by a company that makes money helping companies pass the presence test...it's a little biased, I would say. Sounds just like an American insurance company..."if you don't do it like we say, and we are not saying you should, but who knows what trouble you might get into. Pay us, but we don't guarantee anything..."

Regarding the article. The footer says:

Copyright © 2023 Aspen Trust Group | Privacy Policy | Cookie Policy | Legal Notice

Designed by Tenba Group

Click on the Tenba Group-link and you get to a company doing Chinese SEO

 

[JustAnotherNomad]

The substance is something that the subsidiary country cares about, not the holding company country. So you'd also need to get legal advice from any country where the subsidiaries are located.
I'm pretty sure that Estonia won't care at all about substance for a company registered in Estonia. Substance is about making it harder to obtain a tax advantage by registering somewhere else - a company that is incorporated in Estonia is by default tax resident in Estonia and thus subject to Estonian tax.
(And I also think that it would be a bit ridiculous if they didn't accept a tax resident of an EU country with a holding company in the same country as sufficient substance - but I have no experience with this.)
I think everyone here agrees that you should only do this with proper legal counsel.
I didn't make this up - a long time ago I spoke to a successful entrepreneur with such a setup. He obviously had it all checked in detail by lawyers in all countries involved. But he actually moved to Estonia to live there full time - and receive dividends from his companies in different countries tax free.
Btw, Estonia has some restrictions for this, the corporate tax paid has to be at least 7% or so - not sure if there is an exception if there is a tax treaty (such as for the UAE). So if you want to receive dividends from a Seychelles company or something, there would probably be tax in Estonia. But your lawyer will be able to guide you about that...

 

[Don]

The substance is something that the subsidiary country cares about, not the holding company country. So you'd also need to get legal advice from any country where the subsidiaries are located.
I'm pretty sure that Estonia won't care at all about substance for a company registered in Estonia. Substance is about making it harder to obtain a tax advantage by registering somewhere else - a company that is incorporated in Estonia is by default tax resident in Estonia and thus subject to Estonian tax.
(And I also think that it would be a bit ridiculous if they didn't accept a tax resident of an EU country with a holding company in the same country as sufficient substance - but I have no experience with this.)
I think everyone here agrees that you should only do this with proper legal counsel.
I didn't make this up - a long time ago I spoke to a successful entrepreneur with such a setup. He obviously had it all checked in detail by lawyers in all countries involved. But he actually moved to Estonia to live there full time - and receive dividends from his companies in different countries tax free.
Btw, Estonia has some restrictions for this, the corporate tax paid has to be at least 7% or so - not sure if there is an exception if there is a tax treaty (such as for the UAE). So if you want to receive dividends from a Seychelles company or something, there would probably be tax in Estonia. But your lawyer will be able to guide you about that...

For the purposes of a holding company its important to note the participation exemption: Corporate income tax will not be charged on a redistribution of dividends if the underlying dividends are received from a subsidiary that is tax resident in a European Economic Area member state or Switzerland and the Estonian parent holds at least 10% of the shares or votes of the payer company. The participation exemption also applies to dividends received from other countries if the EE company holds at least 10% of the shares or votes and income tax has been paid on the underlying share of profit, or income tax on the dividends has been withheld in a foreign jurisdiction.

 

[Marzio]

For the purposes of a holding company its important to note the participation exemption: Corporate income tax will not be charged on a redistribution of dividends if the underlying dividends are received from a subsidiary that is tax resident in a European Economic Area member state or Switzerland and the Estonian parent holds at least 10% of the shares or votes of the payer company. The participation exemption also applies to dividends received from other countries if the EE company holds at least 10% of the shares or votes and income tax has been paid on the underlying share of profit, or income tax on the dividends has been withheld in a foreign jurisdiction.

Taxes | Rahandusministeerium

Taxes are levied primarily to raise revenue for central and local government. Taxes are compulsory levies and are unrequited- generally taxes are not paid in exchange for some specific public service or a benefit.

www.fin.ee

Estonia is great choice for a holding company.

 

[JustAnotherNomad]

For the purposes of a holding company its important to note the participation exemption: Corporate income tax will not be charged on a redistribution of dividends if the underlying dividends are received from a subsidiary that is tax resident in a European Economic Area member state or Switzerland and the Estonian parent holds at least 10% of the shares or votes of the payer company. The participation exemption also applies to dividends received from other countries if the EE company holds at least 10% of the shares or votes and income tax has been paid on the underlying share of profit, or income tax on the dividends has been withheld in a foreign jurisdiction.

Yes, but I believe there is also a minimum tax. If the subsidiary is located in a country with a corporate tax rate of less than 7% or so, the participation exemption also isn't applied. This should be checked with an Estonian lawyer.
And as mentioned, almost more importantly, the conditions in the subsidiary country (economic substance of the holding company) also have to be checked.
I'm really interested to hear how this goes.

 

[Don]

Yes, but I believe there is also a minimum tax. If the subsidiary is located in a country with a corporate tax rate of less than 7% or so, the participation exemption also isn't applied. This should be checked with an Estonian lawyer.
And as mentioned, almost more importantly, the conditions in the subsidiary country (economic substance of the holding company) also have to be checked.
I'm really interested to hear how this goes.

It might be applicable in certain cases in Estonia if its considered low tax territory:​

​

§ 10. Low tax rate territory​

(1) A low tax rate territory is a foreign state or a territory with an independent tax jurisdiction in a foreign state, which does not impose a tax on the profits earned or distributed by a legal person or where such tax is less than one-third of the income tax which a natural person who is an Estonian resident would (20%/3=7%), pursuant to this Act, have to pay on a similar amount of business income, without taking into account the deductions allowed under Chapter 4. If taxes imposed on the income earned or distributed by different types of legal persons differ, a territory is deemed to be a low tax rate territory only with regard to legal persons in the case of whom the tax meets the conditions for low tax rate territories specified in the first sentence of this subsection.

(2) A legal person is not deemed to be located in a low tax rate territory if more than 50 per cent of its annual income is derived from actual economic activity or if the state or territory of location of the legal person provides the Estonian tax authority with information concerning the income of a person controlled by Estonian residents.

(3) Without prejudice to the provisions of subsections (1) and (2), the Government of the Republic shall establish a list of territories which are not regarded as low tax rate territories.

 

[22kay]

So if a dividend is received by a natural person in a low tax jurisdiction (not taxed on foreign income) from the Estonian holding company, it should be taxed 7%?

So if a dividend is received by a natural person in a low tax jurisdiction (not taxed on foreign income) from the Estonian holding company, it should be taxed 7%?

Let me rephrase:
So if a dividend is received by a natural person in a low tax jurisdiction (not taxed on foreign income) from the Estonian holding company, it should be taxed 7%, unless there is a tax treaty stating otherwise?

Taxation of dividends | Estonian Tax and Customs Board

A resident company, including a general and limited partnership, pays income tax on profit distributed as dividends or other profit distributions upon payment thereof in monetary or non-monetary form.

www.emta.ee

The 7% is under the circumstance that the foreign dividend received by the Estonia corp has had corporate tax applied on in the resident country for the subsidiary?

 

[JustAnotherNomad]

I'm not sure about personal taxation in Estonia.
In any case, Estonian tax residents can receive dividends from Estonian companies tax free.
There is no capital gains tax and also no WHT in Estonia, as far as I know. Instead, capital gains are taxed as regular corporate profits. That means that if an Estonian company sells shares for example, that counts as corporate profits. But there is no corporate tax on Estonian companies, as long as profits aren't distributed to shareholders.
Estonian corporate tax (20%) only kicks in when profits are distributed. It's 20% on the gross profit, which works out as 25% on the distributed profits. If you pay out 100k, a profit of 125k is taxed 20%, which is the same as 25% on the 100k.
This does not apply if the profit was received as a dividend under the participation exemption.
It is my understanding that the participation exemption does not apply if the dividend received from a "low tax territory".
So if you have a Seychelles company that paid 0% tax (assuming that the Seychelles is classified as a low tax territory), an Estonian holding company would receive the dividends as a taxable profit. But this profit is not taxed, as long as the money is not paid out as a dividend (up to a certain degree, you may be able to take out the money as a salary - but for an Estonian tax resident this would be taxed as personal income at up to 40% or so).
If you pay out the money as a dividend, then the worst case would be that the Estonian company would have to pay 20% corporate income tax, and then the shareholder would be able to receive the money without any additional tax. If the person receiving a salary isn't an Estonian tax resident, then again, the salary should probably not be taxed in Estonia.
But please double check this.
EU countries and most other countries shouldn't count as low tax territories, so then the dividends should be able to flow tax free from the subsidiary to the holding company and from there to the shareholder.
But as mentioned, the country paying the dividends to the Estonian parent might put restrictions on this (economic substance).

Their general idea is that corporate profits should be taxed somewhere. Kind of similar to Singapore's "subject to tax" rule.

 

[Marzio]

It is my understanding that the participation exemption does not apply if the dividend received from a "low tax territory".

I dont' see the "low tax territory" rule anywhere, it only says that the underlying profits has been subject to tax.

 

[Don]

I dont' see the "low tax territory" rule anywhere, it only says that the underlying profits has been subject to tax.

It is in the income tax act. Always refer to the law as even state websites can be misleading at times.
A notable difference compared to taxation of dividends from a subsidiary is for an Estonian resident company that receives already taxed profits from a foreign PE, in such case this "low tax rule" don't apply, and profits can be freely redistributed to the shareholders.

 

[22kay]

It is in the income tax act. Always refer to the law as even state websites can be misleading at times.
A notable difference compared to taxation of dividends from a subsidiary is for an Estonian resident company that receives already taxed profits from a foreign PE, in such case this "low tax rule" don't apply, and profits can be freely redistributed to the shareholders.

Bingo

 

[Don]

I dont' see the "low tax territory" rule anywhere, it only says that the underlying profits has been subject to tax.

See my earlier post with reference and link to the source.

 

[Cons Mark]

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

If you want to have a Holding Company best solution for you is UK, USA (Delaware) and Hong Kong.

 

[Don]

If you want to have a Holding Company best solution for you is UK, USA (Delaware) and Hong Kong.

Im sure these jurisdictions offer various benefits so maybe you can name a few.

One of the often disregarded benefit of Estonia is that Property received as estate, such as real estate or money (including foreign currency, precious metals, etc.) inherited in Estonia are not subject to taxation upon receipt thereof. The exchange of inherited foreign currency into euros does not give rise to income tax liability either.

Estate | Estonian Tax and Customs Board

With the acceptance of a succession, all rights and obligations of a bequeather, including the obligations of the bequeather to the Estonian Tax and Customs Board, are transferred to a successor.

www.emta.ee

 

[22kay]

Commission proposes to end the misuse of shell entities for tax purposes within the EU

On 22 December, the European Commission presented a key initiative to fight against the misuse of shell entities for improper tax purposes.

taxation-customs.ec.europa.eu

Unshell

The Unshell proposal should ensure that entities in the European Union that have no or minimal economic activity are unable to benefit from any tax advantages and do not place any financial burden on taxpayers.

taxation-customs.ec.europa.eu

@Martin Everson , I assume this would be the actual issue, you were warning about?

Not sure why it is called abuse, when the current legislation is followed. I guess EU is becoming US :-(

What is left is either having a shell that is not a shell, which will just increase creativity from tax lawyers (and increase their income) to keep up with legislation or conform to the countries tax treaties and omit any shell setup?

 

[Martin Everson]

What is left is either having a shell that is not a shell, which will just increase creativity from tax lawyers (and increase their income) to keep up with legislation or conform to the countries tax treaties and omit any shell setup?

The later if you don't want the headache of revisiting your cross border arrangement in near future.

But hey.....I let people find out the hardway as I always say.

 

[Matrix observer]

One thing to have in mind for Estonia, in case it is relevant for you, is that benefial owners are public on Internet. Any one typing your name in a search engine will likely see that you own the Estonian company.

 

[22kay]

One thing to have in mind for Estonia, in case it is relevant for you, is that benefial owners are public on Internet. Any one typing your name in a search engine will likely see that you own the Estonian company.

Thanks, good to know. Sometimes that can be a good thing, sometimes not.

 

[JustAnotherNomad]

What is left is either having a shell that is not a shell, which will just increase creativity from tax lawyers (and increase their income) to keep up with legislation or conform to the countries tax treaties and omit any shell setup?

I don't see how this is relevant. As I mentioned, such rules already exist. Maybe they will become more formalized with this new EU directive, but setting up a shell company in Estonia already wouldn't have fulfilled the substance requirements that most EU countries have had for a long time.
That's why I suggested looking into residency in Estonia, as I would assume that an Estonian company that is being managed by an Estonian (tax) resident would probably fulfill such substance requirements.
But like I said, you'd have to talk not only to an Estonian advisor, but also advisors in each of the countries where the subsidiaries are located.

 

[22kay]

I don't see how this is relevant. As I mentioned, such rules already exist. Maybe they will become more formalized with this new EU directive, but setting up a shell company in Estonia already wouldn't have fulfilled the substance requirements that most EU countries have had for a long time.
That's why I suggested looking into residency in Estonia, as I would assume that an Estonian company that is being managed by an Estonian (tax) resident would probably fulfill such substance requirements.
But like I said, you'd have to talk not only to an Estonian advisor, but also advisors in each of the countries where the subsidiaries are located.

The new directive, as referenced by the EU, will have a "filtering system" with 3 levels.

1. is the companies income passive, eg. through dividends, etc
2. is a majority of the transactions cross-border
3. is management and administration outsourced

In my case the 1 and 2 are yes. The 1 is of course one of the reasons to have a holding company. No 2, yes, since dividends will flow between two companies in different (EU) nations.
No 3 can be handled, it's a matter of cost (as you already stated @JustAnotherNomad )

The following is the folder text from the EU commission:
"If the answer is yes in all three cases, the company will be subject to new
tax reporting obligations related to economic substance. If a company
fails at least one of the substance indicators, it will be presumed to be a
shell and will not be able to benefit from tax advantages intended to
support real economic activity."

So, dead end, more or less.

What would need to be is to have a company that makes it's own revenue locally AND THEN can act as a holding company and have the profit's transferred from any subsidiaries (and be aware of the share of the cross-border transactions, so they are minor of all transactions).

But it will not be possible to have a company to only act as holding company to "store" profits for future investments or to cover losses in the company group or for payout to owners in a cross-border setup. I don't even see how a local holding company with a subsidiary would work in that case, since that would bring no 1 as a "yes"? But at the same time, this is one of the cornerstones the holding setup is used locally (eg. in a national setup), so not sure how they are thinking here.

References:

https://taxation-customs.ec.europa.eu/document/download/4244ba07-8385-48f6-bd0b-65239f6af577_en?filename=Factsheet%20Unshell.pdf