PE rules for Swiss or US Corporation

[miketrnd]

Hi, I was wondering if anyone here has dealt with corps in Switzerland and/or the USA that are managed/owned by non-residents. In my case, the mind and management would be inside EU.

Because of the PE rules I would have to pay Corporate Taxes in the EU, but , I want to avoid having to pay Corporate Tax twice. (I realize I'd still have to file a tax return in two countries).

From what I gathered so far : both countries (USA and Switzerland) consider "A company resident in Switzerland if its domicile is in Switzerland". I couldn't quiet figure out what that means for tax purposes though.

Which of the two (US or Switzerland) is less of a headache ?

Thanks.

 

[Marzio]

I couldn't quiet figure out what that means for tax purposes though.

Incorporated in Switzerland.

 

[miketrnd]

My bad. I just realized that last part was not worded correctly.

I couldn't quiet figure out what that means for tax purposes though.

What I meant to ask was would a company incorporated there - but having no local operations and being managed from abroad - be liable for taxes ? I know American citizens are taxed by the IRS even if they don't reside in the US so I'm wondering if it's the same for Corporations.

 

[Marzio]

would a company incorporated there - but having no local operations and being managed from abroad

The company will be tax resident both in CH and in the country where it's managed from.

 

[miketrnd]

Ah ok thanks for clearing that up.

 

[algotrader]

The company will be tax resident both in CH and in the country where it's managed from.

Depends on the country where it is managed from and whether the owner of the company is a legal or physical person. Cannot be answered in general.

 

[Marzio]

Depends on the country where it is managed from and whether the owner of the company is a legal or physical person

I'm eager to know how the fact that a Swiss company is managed from country A or country B makes any difference in the fact that the company will be tax resident both in CH and in the country where it's managed from.

 

[algotrader]

I'm eager to know how the fact that a Swiss company is managed from country A or country B makes any difference in the fact that the company will be tax resident both in CH and in the country where it's managed from.

Whether a company incorporated in country B is considered a tax resident in country A because it is managed/owned by a resident in country A depends on the tax law in country A, the substance in country B, whether the company is controlled/managed by a physical or legal person and the DTA between A and B. There's no automatism applicable to all countries in the world. It also depends on the definition of "managed from". If the manager resident in country A travels once a year to country B in order to make all management decisions it can be assumed that the company is managed from country B. In addition, there can be nominee directors (co-managers) permenantly resident in B.

 

[Marzio]

All those variables weren't mentioned by OP (substance, management travel) but even with those variables taken into consideration it's unlikely that a Swiss company with a resident Swiss director would not be considered Swiss resident.

 

[JackAlabama]

All those variables weren't mentioned by OP (substance, management travel) but even with those variables taken into consideration it's unlikely that a Swiss company with a resident Swiss director would not be considered Swiss resident.

Swiss companies require a lot of substance and a resident director (for ltd.s). So they will be Swiss resident in any case.
It can be very well possible that such a company will regarded as domestic company in high tax EU place, depending on management etc..

 

[algotrader]

Of course, it will be considered tax resident in Switzerland if it's incorporated there. But it does not necessarily mean that it will be considered tax resident in another EU country as well f it's managed from there and/or the physical person owner has his permanent tax residence there. Some Eastern European EU countries don't have CFC rules for physical persons. The question is therefore from which country the OP wants to control the company from. Also, most DTAs have a clause to avoid paying tax twice, so that you receive a tax credit in country A for the tax paid in country B.

 

[Marzio]

it does not necessarily mean that it will be considered tax resident in another EU country as well f it's managed from there

If a company is managed from another country, even without CFC rules (like Georgia) you are creating a permanent establishement there.

The Swiss company will continue to be considerd tax resident there but all the income will be taxed at the permanent establishement level in the country where the management is.

This means that PE profits will not be taxed again in Switzerland.

Of course if the country where the company is managed from doesn't have a DTA with Switzeralnd income will be taxed both at the PE level and in CH too.

 

[miketrnd]

The other country would be Hungary. I would not set foot in Switzerland. Well except if the incorporation requires an in-person visit. Just found the Hungarian/Swiss DTA which I'm reading now.

 

[Marzio]

The other country would be Hungary.

Ok so my last post with article 5 and 7 screenshots will apply to you.

Just out of curiosity why do you incorporate a CH entity and managed it from HU? Why don't you form directly a KFT?

 

[miketrnd]

Thanks for the clarification.

I would do a KFT but the US based stocks brokers that I deal with do not allow corporate or individual accounts for residents of Hungary. The other EU members are no longer accepted (except for Interactive Brokers) either so that's why Switzerland is the only option as far as Europe goes.

 

[JackAlabama]

Thanks for the clarification.

I would do a KFT but the US based stocks brokers that I deal with do not allow corporate or individual accounts for residents of Hungary. The other EU members are no longer accepted (except for Interactive Brokers) either so that's why Switzerland is the only option as far as Europe goes.

Why no USA LLC then? Considering that to be much much cheaper (10x) than a swiss company since you will pay tax anyway in HU?

 

[miketrnd]

Why no USA LLC then? Considering that to be much much cheaper (10x) than a swiss company since you will pay tax anyway in HU?

I tried the LLC route but that was not satisfactory to the brokers so I ended up closing it. The US might also cancel their DTA with Hungary starting next year United States – Update: U.S. Treasury Terminates Tax Treaty with Hungary

 

[Marzio]

I guess you'll receive divendes from brokers so why don't you go instead with a Romanian SRL with a PE in Hungary?

Romania is one of the few countries with 10% WHT on US dividends.

I fail to understand why a broker wouldn't accept a RO company.

 

[algotrader]

If a company is managed from another country, even without CFC rules (like Georgia) you are creating a permanent establishement there.

The Swiss company will continue to be considerd tax resident there but all the income will be taxed at the permanent establishement level in the country where the management is.

This means that PE profits will not be taxed again in Switzerland.

Of course if the country where the company is managed from doesn't have a DTA with Switzeralnd income will be taxed both at the PE level and in CH too.

You are citing the OECD model convention.

https://www.oecd.org/tax/treaties/35363840.pdf

1) Not all EU countries are member of the OECD and have implemented this model convention 1-to-1 in their tax legislation and their DTAs.
2) In order for a business to have a permanent establishment in country A it has to register a branch there and carry on business there. If the business is buying and selling financial instruments on international exchanges via a company registered in Switzerland and a stock broker registered in the US, article 7 won't apply for Hungary.
3) Owners without residence in Switzerland or in the border region need to appoint a local nominee director for the Swiss company. So, Article 5 doesn't apply neither to this case as the company will be managed by a Swiss director.

 

[miketrnd]

I guess you'll receive divendes from brokers so why don't you go instead with a Romanian SRL with a PE in Hungary?

Romania is one of the few countries with 10% WHT on US dividends.

I fail to understand why a broker wouldn't accept a RO company.

No dividends but wouldn't the DTA apply to regular business income too?

I fail to understand why a broker wouldn't accept a RO company.

They told me it's because of EU rules. Probably more paperwork for the brokers.