Offshore company + EMI. What are the dangers?

[Trashy]

Hello,

I am living and working as a sole proprietor in an EU country. While taxes are generally sky-high, we have a handy tax scheme, where you pay roughly $160 a month, and you can have tax free income of up to $39,000. You have to pay 40% of tax on any amount exceeding the limit. This is great. However, working as a software developer who invoices foreign companies, along with the fact that our local currency is quickly losing value, I oftentimes find myself way above the tax free threshold.
I've been thinking about a solution like this.
There are multiple offshore, 0% tax jurisdictions which don't have automatic exchange relationships with my country. In fact, checking this link, I find that my country doesn't have such agreements with virtually any of the offshore countries. So I could set up a company there. I could use an EMI, such as TransferWise, which does not currently implement CRS, to receive money. I know both facts could change without any notice.
What I would do is have my new, offshore company issue the invoices to my client(s). I, then, would invoice my own company for the same work, but staying below the tax free threshold. The remainder of the money would remain on the company's account, to be used later.
Sorry, I'm rather new in this area, so I might have missed something obvious. Is this plan "dangerous", legally speaking? I know you won't be able to give legal advice, especially without knowing my country.

Thank you!

 

[Gediminas]

Hello,

I am living and working as a sole proprietor in an EU country. While taxes are generally sky-high, we have a handy tax scheme, where you pay roughly $160 a month, and you can have tax free income of up to $39,000. You have to pay 40% of tax on any amount exceeding the limit. This is great. However, working as a software developer who invoices foreign companies, along with the fact that our local currency is quickly losing value, I oftentimes find myself way above the tax free threshold.
I've been thinking about a solution like this.
There are multiple offshore, 0% tax jurisdictions which don't have automatic exchange relationships with my country. In fact, checking this link, I find that my country doesn't have such agreements with virtually any of the offshore countries. So I could set up a company there. I could use an EMI, such as TransferWise, which does not currently implement CRS, to receive money. I know both facts could change without any notice.
What I would do is have my new, offshore company issue the invoices to my client(s). I, then, would invoice my own company for the same work, but staying below the tax free threshold. The remainder of the money would remain on the company's account, to be used later.
Sorry, I'm rather new in this area, so I might have missed something obvious. Is this plan "dangerous", legally speaking? I know you won't be able to give legal advice, especially without knowing my country.

Thank you!

Hi, may you specify which EU country you live in?

 

[Sols]

Have you considered moving? Cyprus and Malta are very popular destinations for people in your situation, working well-paid jobs remotely and looking to save on tax. Depends on your personal situation of course.

Relying on secrecy is not a sustainable model anymore. Even if your country is late to fully implement CRS/AEOI, it's only a matter of one or two years before they do and then you're back where you are now.

 

[Trashy]

Hi, may you specify which EU country you live in?

Hello, I'm from Hungary. Sorry, I was under the impression that mentioning specific countries is somehow frowned upon.

Have you considered moving? Cyprus and Malta are very popular destinations for people in your situation, working well-paid jobs remotely and looking to save on tax. Depends on your personal situation of course.

Relying on secrecy is not a sustainable model anymore. Even if your country is late to fully implement CRS/AEOI, it's only a matter of one or two years before they do and then you're back where you are now.

I spend roughly half of the year traveling around the world, but moving permanently? No, not at this point. If I earned around 100k, then I would consider it.

 

[Sols]

I'm confused. Hungary has some of the lowest taxes in the EU. Why are you paying 40%?

9% corporate tax. tax rates tool test page
15% personal income tax. tax rates tool test page

It sounds like all you need to sit down with a tax adviser and figure out why you are paying about 4x as much tax as you should.

 

[Trashy]

I'm confused. Hungary has some of the lowest taxes in the EU. Why are you paying 40%?

9% corporate tax. tax rates tool test page
15% personal income tax. tax rates tool test page

It sounds like all you need to sit down with a tax adviser and figure out why you are paying about 4x as much tax as you should.

Yes, under the standard scheme, corporate tax rate is 9% and income tax is 15%. However, there is also a 19.5% social contribution tax (called "SZOCHO") on top of the income tax. The scheme I am using (called "KATA") means a monthly fixed tax amount of 50,000 HUF (roughly $160) and you don't have to pay any of the above taxes. If your income is over 12,000,000 HUF (roughly $39,000), then you have to pay an additional 40% tax on the amount above the limit. Effectively, the tax rate I'm paying under the scheme is 10%, which is fine. However, I don't really have any room to grow, figuratively speaking.

 

[Sols]

Have you really sat down and discussed this with a tax adviser? If you change from operating as a sole proprietor and into a corporation, you can probably enjoy significant tax savings.

In a typical one-person such as yours (assuming you incorporate), you might pay yourself a tiny salary and the rest you pay yourself as dividends. What you are talking about (social security) is usually only applicable to employees, not shareholders.

I would take that over some dodgy, unsustainable offshore structure any day.