Incorporate software start-up company in EU country (Estonia or Cyprus?) before crowdfunding

[Lemon90]

Hey there,

I am EU citizen and I would like to incorporate a company in Estonia or Cyprus (I don't like my country environment) before a kickstarter/indiegogo crowdfunding campaign. Crowdfunding is actually the wrong term since I am not receving funds but I am selling in advance the product, so it is taxable turnover. With the "funds" I will hire other people (remote contractor/employe) to perform certain tasks needed to complete (in a year) the product which is a software. The software will be sold on a US-based website, that means that I will receive from this website payment in form of royalties. As you may know there are tax treaties between US and the rest of the world that set the withholding tax applied to the royalties paid to non-residents (only if the final buyer is a US person, but still, it has huge impact on the overall revenues). For Estonia-based companies is 10%, for Cyprus is 0%.
This is my thought:
- if I incorporate in Estonia the costs are low (incorporation, accounting, apartament rent), I don't pay tax on profits but (correct me if I'm wrong) since I am the only shareholder I cannot pay myself with dividends (20% withholding tax), only with salary (≈43% in taxes). Plus there is always that 10 % withholding tax on US royalties;
- if I incorporate in Cyprus the costs at the start are quite high (3-4k euros) for incorporation but I maybe eligible for IP box, so 2.5% tax on profits and I can pay myself with salary and dividends. However running a Cyprus company from what I read is a bit more complicated and "bureaucratic" than the Estonian counterpart. The cost of living is perhaps higher to that of Estonia.

Basically, If the crowdfunding goes extremely well and I will have incorporated in Estonia I will regret it. If crowdfunding goes extremely bad and I will have incorporated in Cyprus I will be broke.

What would you do if you were me?

P.S. Also keep in mind that the bulk of sales will occur after about a year, when the product is ready. Usually, a few kind souls participate in crowdfunding.

 

[CyprusLawyer101]

Obviously I am super-biased to comment but if you are starting a business your plan should be prepared with an expectation of success rather than failure, therefore I would suggest you go for a a Cyprus company and make the business successful period.

 

[lifeisfun]

Why do you consider moving to a country where company will be incorporated?
You can live elsewhere.
You can also consider other countries
EU is not the best place for business.
Whatabout Georgia, UAE,...?

 

[Lemon90]

Obviously I am super-biased to comment but if you are starting a business your plan should be prepared with an expectation of success rather than failure, therefore I would suggest you go for a a Cyprus company and make the business successful period.

Yes, that's right haha but I must have a contingency plan in case things don't go how I wish.

Why do you consider moving to a country where company will be incorporated?
You can live elsewhere.
You can also consider other countries
EU is not the best place for business.
Whatabout Georgia, UAE,...?

My goal is to be in a country where I can do R&D without heavy taxes cutting my crowdfunded budget and be competitive worldwide. Taxex on my personal income is secondary, that 10% royalty withholding tax is far more harmful than the 43% taxes on the salary in Estonia. I cannot live in a different country other than where I incorporate because there is always the risk of triggering PE. Ultimately, I prefer a country within the EU.

 

[Don]

Hey there,

I am EU citizen and I would like to incorporate a company in Estonia or Cyprus (I don't like my country environment) before a kickstarter/indiegogo crowdfunding campaign. Crowdfunding is actually the wrong term since I am not receving funds but I am selling in advance the product, so it is taxable turnover. With the "funds" I will hire other people (remote contractor/employe) to perform certain tasks needed to complete (in a year) the product which is a software. The software will be sold on a US-based website, that means that I will receive from this website payment in form of royalties. As you may know there are tax treaties between US and the rest of the world that set the withholding tax applied to the royalties paid to non-residents (only if the final buyer is a US person, but still, it has huge impact on the overall revenues). For Estonia-based companies is 10%, for Cyprus is 0%.
This is my thought:
- if I incorporate in Estonia the costs are low (incorporation, accounting, apartament rent), I don't pay tax on profits but (correct me if I'm wrong) since I am the only shareholder I cannot pay myself with dividends (20% withholding tax), only with salary (≈43% in taxes). Plus there is always that 10 % withholding tax on US royalties;
- if I incorporate in Cyprus the costs at the start are quite high (3-4k euros) for incorporation but I maybe eligible for IP box, so 2.5% tax on profits and I can pay myself with salary and dividends. However running a Cyprus company from what I read is a bit more complicated and "bureaucratic" than the Estonian counterpart. The cost of living is perhaps higher to that of Estonia.

Basically, If the crowdfunding goes extremely well and I will have incorporated in Estonia I will regret it. If crowdfunding goes extremely bad and I will have incorporated in Cyprus I will be broke.

What would you do if you were me?

P.S. Also keep in mind that the bulk of sales will occur after about a year, when the product is ready. Usually, a few kind souls participate in crowdfunding.

Since you want to defer the income tax then Estonia is a great choice. What your saying about salaries is not true and not in any way different than in any other EU country based on ATAD.
You can also set up a Cyprus company with a permanent establishment (operations) in Estonia to get access to the Estonian tax system during the crowdfunding stage. IP is indeed best to be structured in Cyprus if you can qualify for the IP Box regime.

Also, Cyprus (holding) - Estonia (operational company) is one of the best structures. You can build your startup with 0% tax and later sell it with 0% CGT.

 

[RealDude]

Also, Cyprus (holding) - Estonia (operational company) is one of the best structures. You can build your startup with 0% tax and later sell it with 0% CGT.

What initial and annual costs are we talking about with a setup like this?

 

[Don]

What initial and annual costs are we talking about with a setup like this?

in this forum, we very often talk about offshore structures, with outsourced directors, minimum substance, and operating sort of borderline in terms of tax risks exposure so YMMV based on your preferences.
In my experience:

• Cyprus holding EUR 4-5k/year (with a nominee director) - if you need a more involved director add to the costs
• Estonia (small office in the capital city, accounting - ~50 transactions a month, part-time professional director, banking) ~ 1k/month
• Cyprus tax residency for yourself (200-300 eur/month rent year around + actual costs for spending 60 days in Cyprus
• Estonian tax residency (100-150 EUR/month rent year around (no real need to stay in the country to maintain the tax certificate)
• UAE tax residency (costs for spending 90 days/year in the country, good option if you want to pay yourself a salary tax-free from an Estonian company)
• If you can invest more you can try CY holding - EE (operating company) - Malta fiscal unit (operating company) - at the Maltese level (5% tax).
• If your business model is based on IP you can further optimize tax on the EE level
• Instead of Cyprus, you can also use Latvia as a holding (which can be a great option if you don't intend to sell the company before 3 years, as if the company has held the shares for 3 years, the company can distribute the capital gains as dividends tax-free

 

[RealDude]

in this forum, we very often talk about offshore structures, with outsourced directors, minimum substance, and operating sort of borderline in terms of tax risks exposure so YMMV based on your preferences.
In my experience:

• Cyprus holding EUR 4-5k/year (with a nominee director) - if you need a more involved director add to the costs
• Estonia (small office in the capital city, accounting - ~50 transactions a month, part-time professional director, banking) ~ 1k/month
• Cyprus tax residency for yourself (200-300 eur/month rent year around + actual costs for spending 60 days in Cyprus
• Estonian tax residency (100-150 EUR/month rent year around (no real need to stay in the country to maintain the tax certificate)
• UAE tax residency (costs for spending 90 days/year in the country, good option if you want to pay yourself a salary tax-free from an Estonian company)
• If you can invest more you can try CY holding - EE (operating company) - Malta fiscal unit (operating company) - at the Maltese level (5% tax).
• If your business model is based on IP you can further optimize tax on the EE level
• Instead of Cyprus, you can also use Latvia as a holding (which can be a great option if you don't intend to sell the company before 3 years, as if the company has held the shares for 3 years, the company can distribute the capital gains as dividends tax-free

Thanks for the overview. Estonia will have a very good reputation in the coming years, because yesterday the pro western party won the election again in a country full of Russians who are allowed to vote.

 

[Lemon90]

Since you want to defer the income tax then Estonia is a great choice. What your saying about salaries is not true and not in any way different than in any other EU country based on ATAD.

Yes, you are right. I read from here: "a sole shareholder and member of the management board who alone provides services or is engaged in the economic activity of the company and receives remuneration for this work, has to be paid for his/her active engagement, either the fee of management board member, wages or other compensation depending on the type of work. A sole shareholder also has the right for passive proprietary income, i.e. dividends, but his/her active economic activity has to be taxed by all labour taxes.". Basically, I must pay myself a salary proportionate to the work I do and then I can pay myself in dividends.
Thanks for the tips about company structures too.

 

[Don]

Yes, you are right. I read from here: "a sole shareholder and member of the management board who alone provides services or is engaged in the economic activity of the company and receives remuneration for this work, has to be paid for his/her active engagement, either the fee of management board member, wages or other compensation depending on the type of work. A sole shareholder also has the right for passive proprietary income, i.e. dividends, but his/her active economic activity has to be taxed by all labour taxes.". Basically, I must pay myself a salary proportionate to the work I do and then I can pay myself in dividends.
Thanks for the tips about company structures too.

What they are saying is that as an estonian tax resident solo entrepreneur who runs an OÜ (Estonian LLC) you cant expect to just pay dividends and avoid salary taxes.
If you are not a solo entrepreneur, Estonian tax resident, or have outsourced management, then the situation can be different.

 

[pfser]

What they are saying is that as an estonian tax resident solo entrepreneur who runs an OÜ (Estonian LLC) you cant expect to just pay dividends and avoid salary taxes.
If you are not a solo entrepreneur, Estonian tax resident, or have outsourced management, then the situation can be different.

Don is correct, but here's a slight hint, avoid paying dividends every month or too often; otherwise this will be considered s as a salary by tax authorities, meaning that you will pay all corresponding taxes.