I've been browsing and looking for the 'ideal' set-up for our situation and would like your thoughts and potential pitfalls taking into account risk/rewards, or any personal experiences you might have had. The solution should also be as simple/lean and 'fool proof' as possible with not too much overhead. We don't mind paying some taxes to get a fully compliant solution and not prevent usage of funds down the line.
We are 2 friends living in a western-eu (high tax) country, who developed some unique software in our spare time (= our personal IP). We are in talks with a (unrelated) single party based in the UK who might be willing to license this software from us. The license would be provided as-is, no more work would be needed/done, so income would be passive. Our potential client is quite flexible on billing : we can split the IP and 'invoice' either separately or combined, it could be invoiced as something generic, or explicitly as royalties.
We have an mutual agreement about division of profits (it's based upon reports we get on usage of specific parts, so not based on a fixed percentage).
We are ofcourse willing to relocate/place our new 'homebase' within the EU, but would be travelling (not together) inside or outside EU for a lot of the time.
Our new tax residency country should thus be pretty chill about the 183d (I know it's more complex that just those days in the assessment, but you get the gist), but we would be cutting ties with our current countries as much as possible.
- Bulgaria :
Pro : they have a pretty solid tax system without 'using' special status., I guess if you're paying taxes, they wont be inclined to look that much into the 183d from their side , cheap
Cons : not-shengen (so might be easier for our current residency to claim residency), cyrillic scripture, eastern-europe vibe
- Portugal NHR:
Pro : more western, no socials, no minimum stay requirement (officially, enabling us to travel)
Cons : NHR status could work, but i feel you're also at bit at the mercy of interpretation and they might change this/try to disprove your set-up. Of course also limited in time (but in 10yr a lot can happen).
- Malta:
Pro : flat 5k tax on non-remitted income
Cons : shengen but an island, I've read they are more keen to investigate/check on actually being there 183d
"And to get a tax certificate you will need to prove that you really spend more than 183 days. Very complicate to get it. They will ask you many proves including sports clubs bills, or gyms clubs, utilty bills, tickets from supermarkets or restaurants, etc.. The real proves that you are living there"
I'm unsure if foreign (non-remitted) income would be reported on your personal tax return, this might pose issues in the long run whenever another country might inquire about source of funds (even though you not need to in malta).. Reporting everything would be a plus since you have a clear trace and less potentials headaches in the future. WDYT?
- Cyprus
Excluded due to hard 60d checks
Potential set-ups, 'high' to 'low' tax, but also 'very clean' to slightly 'less clean'
2. LTD has 0 profit -> 0 corp tax.
3. 10% taxed on PIT + 7k socials
+ Very clean, no questions asked ever
2. 10% taxed on PIT, but with 25% excluded for expenses => effective 7.5% tax + 7k socials
+ It looks clean, but I've read in a few instances where Bulgarians were not a fan ("but long term anything apart from a company might be a bigger mess to deal with")
I can't find why, since it is by the book, according to the tax law.
1. Each of us gets royalties from the UK customer
2. We get a 5% WHT in the UK->BG
2. 10% taxed on PIT, but with 40% excluded for expenses => 6% tax
the 5% WHT in UK could be used as tax credit in BG => effective 6% total tax
+ some socials (1.5k) to avoid questions
+ It looks clean, but same as (2) - it is not encouraged by Bulgarians to use this
2. We get a 5% WHT in the UK->PT
3. Foreign sourced royalties are exempt from PIT with NHR
4. Might need some background to 'prove' it's not actively worked on so that we don't need to pay socials, should be doable.
In theory royalties are deemed 'self-employment income' and 'sourced in Portugal'. Unless they are already existing ("acquired elsewhere") then they might be seen as capital gains. I don't think it's a straightforward as saying that all royalties are 0% with NHR;
- Portuguese sourced income - the law - Fresh Portugal - Tax experts
- INCOME FROM ROYALTIES: also in Category B || Part 7 - Portugal Resident
Royalties – the temporary or permanent transfer of intellectual or industrial rights – are considered to be part of Category B (independent business activities) when made by the originator, or in Category G when transferred by a third party. When in Category B, no prior registration is required unlike other forms of business activities. However, as “intellectual workers”, they have the same Social Security obligations as other sole traders.
+ Clean, but subject to NHR 'interpretation' and the story needs to be correct
2. 5k fixed tax (remitted amounts only) - would be 3-5% tax each approx.
+ Cfr remarks about malta. Not sure what would be reported in your income tax return, and if this could be a issue for a third country when potentially one day using these funds to buy a house and needing to proof origin.
- In theory these royalties might be seen as 'capital gains arising outside Malta' so they would be exempt even when remitted (and maybe could be included on tax return). Not sure how hard their checks would be.
- LLC distributions might also be seen in Malta as capital gains/dividends, see above.
- There could also be something with a malta non-dom company (foreign income would be exempt), but if I understand correctly this might be considered 'remitted' when distributing this to the shareholders + corp structure (accountant/audit, ..). I assume this would be too much overhead to be cost-effective
2. We invoice using US LLC
2. We get a 0% WHT in the UK->USA on royalties (if invoiced as royalties)
3. Foreign sourced royalties or dividends are exempt from PIT with NHR, and LLC is not taxed (pass trough). We could put in our tax return as capital gains (both royalties or dividends as LLC are commonly deemed) and it wouldn't matter to PT.
3.a in theory there are royalties WHT in the DTT between PT and USA, so there might be implications when explicitly stating to PT they are royalties.
4. Might need some background to 'prove' it's not actively worked on so that we don't need to pay socials, should be doable.
I cannot start a subject about NHR without mentioning the US LLC route of course. This set-up (as discussed here a few times also) is highly subject to PT 'interpretation' of US LLC (transparent or opaque) ect. I'm hesitant if it's worth the risk (because after all, 5% or even 10% tax would be pretty neat).
I guess this could work, since there is no effective management done in the LLC (since it's passive we only have to create a single contract with that single client) and we could hire an assistant for the monthly billing so there are also no operations. There would be very limited 'overseas management' from PT (one could argue non, except maybe a wire transfer to our personal account but we might be able to time that as well, or get it done by the assistant).
I believe the biggest disadvantage of the US LLC is route is the inability to get a tax certificate,
US LLC
There is a ruling about a multi-member LLC, so we could set that up (with custom profit allocation arrangement), or we could use a single-member disregarded entity.
I'm unsure about the (tax or other) implication of both options. Any input?
We are 2 friends living in a western-eu (high tax) country, who developed some unique software in our spare time (= our personal IP). We are in talks with a (unrelated) single party based in the UK who might be willing to license this software from us. The license would be provided as-is, no more work would be needed/done, so income would be passive. Our potential client is quite flexible on billing : we can split the IP and 'invoice' either separately or combined, it could be invoiced as something generic, or explicitly as royalties.
We have an mutual agreement about division of profits (it's based upon reports we get on usage of specific parts, so not based on a fixed percentage).
We are ofcourse willing to relocate/place our new 'homebase' within the EU, but would be travelling (not together) inside or outside EU for a lot of the time.
Our new tax residency country should thus be pretty chill about the 183d (I know it's more complex that just those days in the assessment, but you get the gist), but we would be cutting ties with our current countries as much as possible.
Possible personal tax residencies;
- Bulgaria :
Pro : they have a pretty solid tax system without 'using' special status., I guess if you're paying taxes, they wont be inclined to look that much into the 183d from their side , cheap
Cons : not-shengen (so might be easier for our current residency to claim residency), cyrillic scripture, eastern-europe vibe
- Portugal NHR:
Pro : more western, no socials, no minimum stay requirement (officially, enabling us to travel)
Cons : NHR status could work, but i feel you're also at bit at the mercy of interpretation and they might change this/try to disprove your set-up. Of course also limited in time (but in 10yr a lot can happen).
- Malta:
Pro : flat 5k tax on non-remitted income
Cons : shengen but an island, I've read they are more keen to investigate/check on actually being there 183d
"And to get a tax certificate you will need to prove that you really spend more than 183 days. Very complicate to get it. They will ask you many proves including sports clubs bills, or gyms clubs, utilty bills, tickets from supermarkets or restaurants, etc.. The real proves that you are living there"
I'm unsure if foreign (non-remitted) income would be reported on your personal tax return, this might pose issues in the long run whenever another country might inquire about source of funds (even though you not need to in malta).. Reporting everything would be a plus since you have a clear trace and less potentials headaches in the future. WDYT?
- Cyprus
Excluded due to hard 60d checks
Potential set-ups, 'high' to 'low' tax, but also 'very clean' to slightly 'less clean' :
1 Bulgaria LTD:
1. Invoice the UK customer and pay ourselves wages2. LTD has 0 profit -> 0 corp tax.
3. 10% taxed on PIT + 7k socials
+ Very clean, no questions asked ever
2 Bulgaria Freelance:
1. Each of us invoices the UK customer as BG freelancer2. 10% taxed on PIT, but with 25% excluded for expenses => effective 7.5% tax + 7k socials
+ It looks clean, but I've read in a few instances where Bulgarians were not a fan ("but long term anything apart from a company might be a bigger mess to deal with")
I can't find why, since it is by the book, according to the tax law.
3 Bulgaria Freelance:
1. Each of us gets royalties from the UK customer 2. We get a 5% WHT in the UK->BG
2. 10% taxed on PIT, but with 40% excluded for expenses => 6% tax
the 5% WHT in UK could be used as tax credit in BG => effective 6% total tax
+ some socials (1.5k) to avoid questions
+ It looks clean, but same as (2) - it is not encouraged by Bulgarians to use this
4 Portugal NHR UK royalties:
1. Each of us gets royalties from the UK customer2. We get a 5% WHT in the UK->PT
3. Foreign sourced royalties are exempt from PIT with NHR
4. Might need some background to 'prove' it's not actively worked on so that we don't need to pay socials, should be doable.
In theory royalties are deemed 'self-employment income' and 'sourced in Portugal'. Unless they are already existing ("acquired elsewhere") then they might be seen as capital gains. I don't think it's a straightforward as saying that all royalties are 0% with NHR;
- Portuguese sourced income - the law - Fresh Portugal - Tax experts
- INCOME FROM ROYALTIES: also in Category B || Part 7 - Portugal Resident
Royalties – the temporary or permanent transfer of intellectual or industrial rights – are considered to be part of Category B (independent business activities) when made by the originator, or in Category G when transferred by a third party. When in Category B, no prior registration is required unlike other forms of business activities. However, as “intellectual workers”, they have the same Social Security obligations as other sole traders.
+ Clean, but subject to NHR 'interpretation' and the story needs to be correct
5 Malta:
1. Invoice using US LLC (separately or combined partnership)2. 5k fixed tax (remitted amounts only) - would be 3-5% tax each approx.
+ Cfr remarks about malta. Not sure what would be reported in your income tax return, and if this could be a issue for a third country when potentially one day using these funds to buy a house and needing to proof origin.
- In theory these royalties might be seen as 'capital gains arising outside Malta' so they would be exempt even when remitted (and maybe could be included on tax return). Not sure how hard their checks would be.
- LLC distributions might also be seen in Malta as capital gains/dividends, see above.
- There could also be something with a malta non-dom company (foreign income would be exempt), but if I understand correctly this might be considered 'remitted' when distributing this to the shareholders + corp structure (accountant/audit, ..). I assume this would be too much overhead to be cost-effective
6 Portugal NHR US LLC royalties:
1. We get license/add our royalties to an US LLC2. We invoice using US LLC
2. We get a 0% WHT in the UK->USA on royalties (if invoiced as royalties)
3. Foreign sourced royalties or dividends are exempt from PIT with NHR, and LLC is not taxed (pass trough). We could put in our tax return as capital gains (both royalties or dividends as LLC are commonly deemed) and it wouldn't matter to PT.
3.a in theory there are royalties WHT in the DTT between PT and USA, so there might be implications when explicitly stating to PT they are royalties.
4. Might need some background to 'prove' it's not actively worked on so that we don't need to pay socials, should be doable.
I cannot start a subject about NHR without mentioning the US LLC route of course. This set-up (as discussed here a few times also) is highly subject to PT 'interpretation' of US LLC (transparent or opaque) ect. I'm hesitant if it's worth the risk (because after all, 5% or even 10% tax would be pretty neat).
I guess this could work, since there is no effective management done in the LLC (since it's passive we only have to create a single contract with that single client) and we could hire an assistant for the monthly billing so there are also no operations. There would be very limited 'overseas management' from PT (one could argue non, except maybe a wire transfer to our personal account but we might be able to time that as well, or get it done by the assistant).
I believe the biggest disadvantage of the US LLC is route is the inability to get a tax certificate,
US LLC
There is a ruling about a multi-member LLC, so we could set that up (with custom profit allocation arrangement), or we could use a single-member disregarded entity.
I'm unsure about the (tax or other) implication of both options. Any input?
