Question How to Reduce my Tax Liabilities? Recommended setups

[gap]

Hello everyone!
I’m currently self-employed with Hungarian citizenship offering remote consulting service. Working long term with a US based partner for ~100k USD per year and also dealing with about 70k USD/yr of crypto that I get paid from an EU partner.
These are not large amounts so I probably can't do magic here, but if you could give me some tips for tax optimization would be amazing.
Currently paying ~42.3% tax on my total income, I think that's pretty ridiculous.

I guess the first step is to be a resident in a country that doesn’t tax foreign income. Then find a tax haven for my business and bank account.

Can you recommend any setups that are worthwhile with this income range?

I'm willing to move, to travel, anything as long as I don't have to pay so much tax.

 

[JohnnyDoe]

You forgot to say where you currently reside.
Anyway, it is not hard to find a country with a tax rate below 42.3%. If you like island living, move to the Caribbean. You could try out the various islands for a few weeks/months before making a final decision.
If you like the desert, fake cities, slavery and the crazy bedouin dictators who rule over the place, the UAE are a good alternative.
If you have some savings set aside, you could buy a sailboat and live on it while traveling around the world.

 

[bigdaddyleon]

There are a few options, would go for UAE, no taxes & good weather.

 

[Sols]

As an EU citizen, the easiest by far is to just relocate to a lower taxed EU country. Cyprus and Malta are very popular. It probably won't be zero tax but it will be much lower than 42.3%.

 

[Marzio]

Unfortunately for you Hungary follows a citizenship based taxation

 

[gap]

You forgot to say where you currently reside.
Anyway, it is not hard to find a country with a tax rate below 42.3%. If you like island living, move to the Caribbean. You could try out the various islands for a few weeks/months before making a final decision.
If you like the desert, fake cities, slavery and the crazy bedouin dictators who rule over the place, the UAE are a good alternative.
If you have some savings set aside, you could buy a sailboat and live on it while traveling around the world.

I live in Hungary, all of these sound good. Could you name some exact countries I should study more?

Unfortunately for you Hungary follows a citizenship based taxation

Exactly, so I'll need a new citizenship right? Do you have anything to recommend?

As an EU citizen, the easiest by far is to just relocate to a lower taxed EU country. Cyprus and Malta are very popular. It probably won't be zero tax but it will be much lower than 42.3%.

How easy to do that? Without the hundreds of thousands of dollars in CBI programs?

 

[JohnnyDoe]

I live in Hungary, all of these sound good. Could you name some exact countries I should study more?

All the Caribbean islands, including the Bahamas.

Exactly, so I'll need a new citizenship right? Do you have anything to recommend?

I’ve never heard of Hungarians abroad sending money to the Hungarian taxman.

How easy to do that? Without the hundreds of thousands of dollars in CBI programs?

The Dominican Republic is cheap and easy, but not fast (6 years minimum).

 

[Marzio]

Why don’t you open a KFT instead of being self-employed?

Hungary has the lowest CIT in EU at 9%
You’ll pay yourself a small salary + dividends which as far as i know aren’t subject to social contributions.

 

[myhand]

You’ll pay yourself a small salary + dividends which as far as i know aren’t subject to social contributions.

What would be the max to be paid to avoid social contribution?

 

[Marzio]

What would be the max to be paid to avoid social contribution?

You can't avoid social contributions.

 

[Sols]

Exactly, so I'll need a new citizenship right? Do you have anything to recommend?

You do not need new citizenship to lower your corporate tax burden. But you would need to renounce your Hungarian citizenship if you want to lower your personal tax burden.

How easy to do that? Without the hundreds of thousands of dollars in CBI programs?

You just book a flight and get an apartment. Go register as a resident, get a local tax ID. The whole process takes about 1–2 weeks. EU citizens can move around freely within the EU.

But if you also want to become a citizen, that takes at least around 4–6 years of residence.

 

[Marzio]

You do not need new citizenship to lower your corporate tax burden. But you would need to renounce your Hungarian citizenship if you want to lower your personal tax burden.

Is that even possibile? Renouncing to your only citizenship? How can you travel without a passport?

 

[Sols]

Is that even possibile? Renouncing to your only citizenship? How can you travel without a passport?

There are millions of people who are stateless. Mostly due to political reasons but it's possible to voluntarily become stateless.

But that's not what I was proposing. I guess I thought context clues would indicate that obtaining a second citizenship and then renouncing would be the better path, because being stateless is not a good position to be in.

 

[Zephy]

Hello everyone!
I’m currently self-employed with Hungarian citizenship offering remote consulting service. Working long term with a US based partner for ~100k USD per year and also dealing with about 70k USD/yr of crypto that I get paid from an EU partner.
These are not large amounts so I probably can't do magic here, but if you could give me some tips for tax optimization would be amazing.
Currently paying ~42.3% tax on my total income, I think that's pretty ridiculous.

I guess the first step is to be a resident in a country that doesn’t tax foreign income. Then find a tax haven for my business and bank account.

Can you recommend any setups that are worthwhile with this income range?

I'm willing to move, to travel, anything as long as I don't have to pay so much tax.

I'm in a similar situation and have researched a lot this year and will start to implement next year, maybe I can give some directions but you must absolutely look these up yourself.
As an EU citizen I searched more in the EU because of quite a lot of reasons and only looked up legal ways so anonimity was less important.
In almost every case you need to move permanently and beside the personal taxation you should check your new residency's CFC rules.

- My top choice now is US LLC with Cyprus residency, you can find a lot of info on this forum about both even in combination.
On the level of personal taxation Cyprus has more than one attractive options but a company in Cyprus is costly and I mean UAE level costs, plus it's complicated and you also pay 12.5% tax on it, therefore I would try a US LLC instead.
I must mention the rumored/planned modification of CFC rules in the near future, which would be a huge blow for this setup if it will be enforced but currently it's all good.
- Plan B might be Portugal residency, it's tricky and I don't know if it could be good in your or even in my case, I mean in a legal way, their CFC rules spell trouble.
I've just started to think about it because of the rumored changes in Cyprus CFC rules and because Portugal has some advantage in everyday life plus 0 tax on foreign dividends.
- Outside of EU you might want to check UAE company too, it's quite costly but Hungary has a pretty unique DTT with UAE, that's the reason I mention this option.

There are other options in Asia, Latin America, etc, some of them are for another level of wealth, some of them are not developed enough or the legal system is not acceptable so I can not recommend or give you details about them.

Unfortunately for you Hungary follows a citizenship based taxation

You do not need new citizenship to lower your corporate tax burden. But you would need to renounce your Hungarian citizenship if you want to lower your personal tax burden.

True but only if no DTT and no EU/international law applies to you, it's a last resort fallback when you don't have substance in any other country and Hungary has a lot of DTTs too.
Even if it comes to that fallback you can still cut ties and wish good luck for the hungarian taxman to reach you in a country which doesn't even have a DTT with Hungary.
Sure, it's recommended to give up your residency but you can keep your citizenship, as an EU citizen this is important.

Why don’t you open a KFT instead of being self-employed?

Hungary has the lowest CIT in EU at 9%
You’ll pay yourself a small salary + dividends which as far as i know aren’t subject to social contributions.

The company pays 9% CIT and 2% local business tax on profit, and if you are a hungarian tax resident you pay 15% PIT and 13% social contribution on dividends and there is accounting and audit.
On top of that you pay 15% PIT + 18.5% social insurance of that minimum salary - withold and paid by the company - plus the company pays an additional 13% social contribution on the whole amount, with an example 665€ salary costs 1130€.
That 'only 9%' sounds good for someone not from Hungary but it's mainly marketing, on company level alone it's 9+2% then comes the dividend part. If you are a foreign tax resident shareholder and take dividends out of the country then it is tax free, otherwise the hungarian taxation is a total rip off.

 

[Marzio]

you pay 15% PIT and 13% social contribution on dividends

Are you sure that you pay social controbution on dividends? It’s not employement income so it doesn’t make sense.

My top choice now is US LLC with Cyprus residency

Be aware that US LLC profits are not considered dividends in Cyprus so you’ll pay personal income taxes on those profits

 

[Zephy]

Are you sure that you pay social controbution on dividends? It’s not employement income so it doesn’t make sense.

It's complicated, the short answer is yes if you are a hungarian resident.
The long answer is it depends on your other incomes - and the social contribution paid on those - and it is also capped. I was lazy to go into such lengths, my bad.
The 13% social contribution on dividends is capped at the total social contribution on the 'minimal income times 24', so in this case currently it's 200,000*24*0.13=624.000HUF - about 1500€ right now - minus the amount of social contribution OP paid on minimal CEO salary which should be 200,000*12*0.13. Yes it seems negligible especially when it comes to millions of Euros but depending on the dividend's volume it could be a visible amount, plus it's extra paperwork, meaning extra accounting fee.

Be aware that US LLC profits are not considered dividends in Cyprus so you’ll pay personal income taxes on those profits

As far as I know there is no clear rule about that in Cyprus. In practice they see it as you declare it. Of course it's somewhat related to their general lack of enforcement and they can bring forth a specific rule on this matter in the future, maybe in combination with new CFC rules but right now if you declare the money as dividend you are good to go.

Small additional point but one should consider VAT too, on the everyday level, it could be a huge deal and in this case it is.

 

[Marzio]

The 13% social contribution on dividends is capped at the total social contribution on the 'minimal income times 24', so in this case currently it's 200,000*24*0.13=624.000HUF - about 1500€ right now - minus the amount of social contribution OP paid on minimal CEO salary which should be 200,000*12*0.13.

Uhm can you make an example in EUR with a hypothetical 100K dividend?

If the social contribition on dividends is capped at total social contribution on the minimal income times 24 it will always be 1500€ regardless of the dividend amount, right?

As far as I know there is no clear rule about that in Cyprus.

Yes there is.

In Cyprus US LLC payments are deemed as follows:

- if the US LLC is subject itself to corporation tax in its resident country then it is considered as a corporation for Cyprus tax purposes and therefore payments to the Cyprus shareholder would be deemed as dividends; whilst
- if the US LLC is not subject to corporation tax in its resident country then the income deriving from such the US LLC is considered as income for Cyprus tax purposes

Source: US LLC + Cyprus residency

 

[Zephy]

Uhm can you make an example in EUR with a hypothetical 100K dividend?

If the social contribition on dividends is capped at total social contribution on the minimal income times 24 it will always be 1500€ regardless of the dividend amount, right?

I'm not a professional tax advisor but I'll try. I'll count 1€ as 400HUF for simplicity, the exact value is pretty fluctuating nowadays.
Assuming you've already paid ~6K minimal salary and 780€ social contribution on that, although the social contribution would be 13K on 100k dividend, you only need to pay an additional 780€ since the total amount is capped at ~500*24*0.13 - this cap only applies to dividends, there is no cap on salary and of course you also have to pay 15K PIT.
Don't forget that you already paid at least ~12.5K+ on CIT + local tax.
The total cost is 119280 to pay out 100K dividend and 6K salary, out of those 84220 and 3990 lands in your hands which results in ~26% total tax burden, not calculating with accounting, banking and other expenses now.
What I meant by 'depending on the dividend's volume' is that if you don't take out the whole 100K, instead invest back some of it and/or buy property directly then the less you take out the more you pay in proportion.
Then there are other taxes, like record high VAT, property taxes, excise duties, etc in my opinion all of these add a considerable amount to tax liabilities.

Yes there is.

In Cyprus US LLC payments are deemed as follows:

- if the US LLC is subject itself to corporation tax in its resident country then it is considered as a corporation for Cyprus tax purposes and therefore payments to the Cyprus shareholder would be deemed as dividends; whilst
- if the US LLC is not subject to corporation tax in its resident country then the income deriving from such the US LLC is considered as income for Cyprus tax purposes

Source: US LLC + Cyprus residency

I saw that but every other post said the opposite so I'm not sure how valid this is.
Even if it is, it's probably not enforced and even if it's enforced, a cheap non US holding company - perhaps like BVI - could solve this issue too.
If you are free to travel or simply spend some time away from Cyprus, the 90 days rule might be applicable too, then you need to take out everything as salary.
Another approach could be investing/spending what you can directly via the company and taking out only what you absolutely need, until 19.5K personal income tax rate is 0% in Cyprus.

 

[EliasIT]

There are millions of people who are stateless. Mostly due to political reasons but it's possible to voluntarily become stateless.

That's a dangerous path I would say!

 

[Marzio]

I saw that but every other post said the opposite so I'm not sure how valid this is.
Even if it is, it's probably not enforced and even if it's enforced, a cheap non US holding company - perhaps like BVI - could solve this issue too.

Well it’s a matter of your risk appetite.

Maybe they will never enforce it or they will be forced by the EU to close all the loopholes.

I know i would not build a business relying on tax administration not enforcing the law.

BVI would not work without substance so you need somebody there and you also need to find a bank account for BVI wich is not an easy task.