Kosovo LLC and Estonian LLC

[Conte Ugolino]

So I have this LTD somewhere in the Balkans doing software and a friend of mine has a similar service with an Estonian setup.
We used to work together and we trust each other's work.

Sometimes I would outsource stuff to him and sometimes he would outsource stuff to me depending on the volume of projects.
We thought about it and it was better to settle stuff on the moment rather than wait for the end of the year and settle the bills like banks.
I have a freelancer license in Austria and he has a similar one in Germany ( I leave 70% of what comes in on my LLC whereas he takes everything )

I came across this post USA LLC + Belgium Freelancer and it kinda worried me as people as sometimes we'd settle large-ish invoices and folks have been screaming left and right that's illegal as f**k.

While I have hired people back in the Balkans and have outsourced part of the work, he's "hired" himself as a contractor at his own company, and that's how he gets the money home.

Would this raise any eyebrows in general?

 

[JustAnotherNomad]

While I have hired people back in the Balkans and have outsourced part of the work, he's "hired" himself as a contractor at his own company, and that's how he gets the money home.

You should both talk to a tax lawyer to consider the consequences and come clean.
As long as there were no tax benefits obtained, consequences should probably be very mild (not sure, but I would guess it might not a criminal matter).
If you actually saved on taxes, you have to discuss with the lawyer how to handle it, as it might have been a felony. But if you turn yourself in, you would probably get off with a fine.

 

[Conte Ugolino]

He chose Estonia because of Xolo, everything is online and convenient
I chose Kosovo because a GmbH would be too much paperwork for me and I'm completely allowed to build a company elsewhere and hire people (also I'm thinking to move there in the future )

No one is saving anything meaningful in taxes that we wouldn't save having the same setup but with GmbHs and secondly, we're just software dudes and not doing anything illegal. Not sure what would I turn myself in for.

( we both pay all the income taxes we get where we're residents )

 

[JustAnotherNomad]

He chose Estonia because of Xolo, everything is online and convenient
I chose Kosovo because a GmbH would be too much paperwork for me

I'm not sure about the exact rules in Austria and Germany, but your companies are likely tax resident in Austria/Germany due to management and control.
They have to be registered and then pay taxes like a local company. (You should be able to get a tax refund from Estonia/Kosovo under the tax treaty.)
If you don't do that, you are breaking the law.

I'm completely allowed to build a company elsewhere and hire people

Of course you are, as long as you follow all the rules in Austria/Germany.

(also I'm thinking to move there in the future )

Then there will likely be exit tax in Austria/Germany as well.
If you just move abroad without declaring ownership of the company, you'd be committing tax fraud regarding the exit tax as well.

No one is saving anything meaningful in taxes

Please remind me again how much corporate income tax your company pays in Austria?
If you're not personally getting an advantage, you may be able to avoid criminal charges, but your setup would still be in violation of Austrian law.

we're just software dudes and not doing anything illegal.

Yes you are, if you don't register your companies where you live.

Not sure what would I turn myself in for.

Depending on how long you've had the companies for, you may still have time to amend your tax returns and avoid consequences.
Talk to a tax lawyer.

 

[Conte Ugolino]

I think there is a misunderstanding (or a misinterpretation ):
- I will ask my friend but afaik the Estonian company technically is in Estonia, he has an e-residency and corporate tax is paid in Estonia. So there's 22% dividend taxes so if let's say he has 100k of profits, he'd pay 22k to the Estonian government and 78k to himself of which he will pay income tax ( through the Freiberufler)
- My case is a bit more simple as I have employees in Kosovo and I have a local manager there so technically company is there and I just own part of the company and thats it.
I already pay income tax in Austria under my Freiberufler license for any work I do regardless of who my client is.

 

[JustAnotherNomad]

I think there is a misunderstanding (or a misinterpretation ):

No, not really.

- I will ask my friend but afaik the Estonian company technically is in Estonia, he has an e-residency and corporate tax is paid in Estonia.

For tax purposes, the Estonian company is in Germany like any German company, due to management and control.
It doesn't matter where it's incorporated. It has to be registered in Germany (even if there is no profit) and pay tax in Germany on any profit.
The German tax authorities likely already received information about the company from his bank.

So there's 22% dividend taxes so if let's say he has 100k of profits, he'd pay 22k to the Estonian government and 78k to himself of which he will pay income tax ( through the Freiberufler)

No, that's not how it works. In Estonia, you only pay tax on distributed dividends.
If the company was actually taxable in Estonia (it isn't) and he wanted to get out 100k, he could pay 20% Estonian tax and then distribute 80k dividends on which he would be paying capital gains tax (which likely is a lower rate). But he invoices his own company, which can cause trouble in Estonia (violation of transfer pricing restrictions, avoidance of tax of director fees).
Those issues aside, if he really invoices 100% of the profits all the time, then there is obviously no tax advantage for him, but the company would still have to be registered and tax returns be submitted in both Estonia and Germany. He would be much better off using a German company.

- My case is a bit more simple as I have employees in Kosovo and I have a local manager there so technically company is there and I just own part of the company and thats it.

Is it you or the local manager who runs the company? Does the manager receive a typical salary for their position? That would likely make a difference.
In any case, your ownership of company would likely still have to be registered in Austria, depending on the exact rules.
Your company likely at least has a PE in Austria, so at least part of the company's revenue is taxable in Austria if you really want to follow the rules.
A tax lawyer would be able to tell you more.

Long story short: You can't just choose where you want to pay tax.
You can't just decide "Oh, I will register my company in country X that has lower taxes than my home country and then only pay tax in my home country on the money I pay out!" - that's not how taxes work.
Do with this information what you want.

 

[Conte Ugolino]

The local manager in the company in Kosovo has a salary and he's like a CEO. I havent yet distributed any dividents or so.

Thanks for this information, seems I had a few misconceptions regarding this topic, and will consult my steuerberater (tax person) about this.

 

[JustAnotherNomad]

The local manager in the company in Kosovo has a salary and he's like a CEO.

The relevant question will be if the salary is adequate for the position. If you pay him $100 a month, then the Austrian tax authority won't believe that he's the CEO and that you're just a passive investor.

Austria - Corporate - Corporate residence

Detailed description of corporate residence rules in Austria

taxsummaries.pwc.com

You can see that if they don't accept your "manager" as the CEO, then your company would be tax resident in Austria because "its place of effective management is located in Austria".
If that isn't the case, then there would likely still be a PE because you "carry out business" for the company in Austria (for example, in your home).

will consult my steuerberater (tax person) about this.

That's a good idea, but not all accountants really understand international taxation. If it's a large company with international experience, you will be fine, but if it's a single person with no international experience, I would be very careful. If he/she can't give you a good answer, it might make sense to talk to a tax lawyer - a call with a lawyer shouldn't cost more than 250 euro tops, probably less. And they would probably be able to give you a much more qualified answer.

 

[EliasIT]

Thanks for this information, seems I had a few misconceptions regarding this topic, and will consult my steuerberater (tax person) about this.

you should do that anyway before you do any transactions which you think is either tax free or taxed lower then in Germany.

 

[Conte Ugolino]

@EliasIT, I know there's no such thing as free lunch.

I went for my setup due to the long game and my friend went for his setup due to just Estonia having everything online and way cheaper management ( at least thats what I remember, as having the GmbH in Germany was 25k of capital locked, full time accountant costing around 5-6k a year and so )

 

[JustAnotherNomad]

You can absolutely use an Estonian company for example, people used to do that with UK Ltd.'s when they didn't have the required capital to set up a local company. But that company still needs to pay tax like a local company. In response most countries lowered their capital requirements (UG in Germany), after that UK Ltd. companies lost their popularity.
@Conte Ugolino What did your tax advisor tell you?

 

[Conte Ugolino]

You can absolutely use an Estonian company for example, people used to do that with UK Ltd.'s when they didn't have the required capital to set up a local company. But that company still needs to pay tax like a local company. In response most countries lowered their capital requirements (UG in Germany), after that UK Ltd. companies lost their popularity.
@Conte Ugolino What did your tax advisor tell you?

That I needed a laywer not a tax person so I had to sell the activity before it started to raise questions.