Living off a Cyprus company director's loan while residing outside Cyprus?

[RedSquirrel]

I run an online business, will be living in Spain for the next year and want to optimise my taxes, as the tax rates in Spain are very high. It is likely that as I'll be spending over 6 months there I'll be considered a Spanish tax resident.

My company is a Cyprus resident company (legitimate entity with solid management and control in Cyprus - director, employee etc based there full time).

I was wondering the best way to pay myself going forward? Someone suggested to me that Cypriot directors loan is a possibility (meaning zero % tax), although this sounds too good to be true, and I assume that mechanisms are in place to stop this happening. Is this really an option?

Could someone please let me know what they think? Thanks!

 

[Gediminas]

Spanish institutions most likely won't start attacking you as the beginning. At least I was told like this by our partners in Spain. Maybe the best option for you would be to create/maintain tax residency in Cyprus and try to avoid Spanish taxes. The dividends in Cyprus are not taxable. A loan is an option as well, but it is also on tax avoidance rules and if you are UBO of this company, you might go to problems.

 

[RedSquirrel]

Thanks for your response Gediminas. It is reassuring to hear that the Spanish institutions are unlikely to come after me immediately.

I don't think maintaining tax residency in Cyprus will be possible as I'm an English citizen, so if it's not Spain taxing me it will be the UK. I also own a UK company. Perhaps the best thing would be to pay myself a basic salary through the UK company (around 10,000 per year), and then use the Cypriot directors loan to supplement? Do you think that could work well?

All while trying to be tax resident in the UK.

 

[Gediminas]

You could also pay yourself a salary in Cyprus. No income tax for up to 20k/year and just 10% for social security. Getting a loan from a company you owe (it doesn't matter if you aren't a director) would be a bit risky, to be honest, because the loan goes not for some kind of a business purpose, but to cover living expenses.

 

[Tax Cow]

Financial transactions, including loans, with related parties are reportable to tax authorities in the EU. Ultimately, they get to decide if the purpose of the loan is tax avoidance, or if it's an arms-length transaction.

If you do it legally, you must pay the loan back with an arms-length interest, and in doing so, you will place more money back in the company than you took from it as "untaxed salary". If you want the opposite, you must deliberately default on those loans. A risky strategy, but not utterly reckless since you're not a Spaniard and they have no record of your financial history. Take the loan before you take the Spanish residency so you're not negligent by not informing the tax office. With that said, they may approach you to discuss your liabilities as soon as after your first tax return.

Make an angel face and make them believe you intend to pay the loan back.

Once you're settled in Spain, having a bit of domestic net worth in your name, they will definitely start to show more interest in your affairs. It's one of the more aggressive tax offices in the EU. After year 3 or so, move to a fully legal solution which you've discussed with a tax planner.

As an obvious tax reduction tool, you can use that substantiated Cyprus company for holding personal investments. That will let you compound at a reduced corporate tax rate while also avoiding the personal net wealth taxes. Your taxes can turn out to be quite reasonable.

 

[Alexander Blake]

One of the most interesting theme for discussion.Thanks for it!

 

[JustAnotherNomad]

How long are you intending to stay in Spain?
Brexit may of course make things more complicated, but I can tell you that thousands of EU passport holders move around in the EU and never even register for residency until a few years later when they’ve decided to stay permanently.