Romanian microcompany and estonian holding company

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ADROCK123

New member
So I have formed a romania micro company, subject to 1% tax. I am a resident in Romania, and my banking is in romania, etc. On top of the 1%, there is a 5% dividend tax, which increase to 8% next year.

There is a law such that
The dividend tax is eliminated if there is a shareholding percentage of a minimum of 10% for an uninterrupted period of at least one year.

In estonia, another EU country, as far as I can tell, dividend tax is 0%

If I open an estonian holding company of my Romanian company, do I pay no dividend tax?
Does this work? Anyone have experience with this or similar situations? Would it be that the estonian company due to CFC rules is in reality a romanian company and I have to pay anyways?

Thanks! Feel free to ask anything about romanian microcompanies as well.
 

Don

Mentor Group Gold
So I have formed a romania micro company, subject to 1% tax. I am a resident in Romania, and my banking is in romania, etc. On top of the 1%, there is a 5% dividend tax, which increase to 8% next year.

There is a law such that


In estonia, another EU country, as far as I can tell, dividend tax is 0%

If I open an estonian holding company of my Romanian company, do I pay no dividend tax?
Does this work? Anyone have experience with this or similar situations? Would it be that the estonian company due to CFC rules is in reality a romanian company and I have to pay anyways?

Thanks! Feel free to ask anything about romanian microcompanies as well.
yes, indeed.

Dividends distributed by Estonian companies are exempt from corporate income tax („participation exemption“) if these are paid out of:
  • Dividends received from Estonian, EU, EEA (European Economic Area) and Swiss tax resident companies in which the Estonian company has at least a 10% shareholding.
  • Profits derived through a permanent establishment (“PE”) in the EU, EEA or Switzerland.
  • Dividends received from all other foreign companies in which the Estonian company has at least a 10% shareholding, provided that either the underlying profits have been subject to foreign tax or foreign income tax was withheld from dividends received.
  • Profits derived through a foreign PE in all other countries, provided that such profits have been subject to tax in the country of the PE.
  • Liquidation proceeds, payments upon share buy-backs or capital reductions, which have been subject to taxation by the distributor of such income.
Additionally, corporate income tax payable on dividend distribution may be decreased by the amount of tax withheld in another country from Holding Company income (e.g., interest income). This planning opportunity may be used in the case of profit-participating loans and investment contracts, where profit consists mainly of interest income.

 

ADROCK123

New member
yes, indeed.

Dividends distributed by Estonian companies are exempt from corporate income tax („participation exemption“) if these are paid out of:
  • Dividends received from Estonian, EU, EEA (European Economic Area) and Swiss tax resident companies in which the Estonian company has at least a 10% shareholding.
  • Profits derived through a permanent establishment (“PE”) in the EU, EEA or Switzerland.
  • Dividends received from all other foreign companies in which the Estonian company has at least a 10% shareholding, provided that either the underlying profits have been subject to foreign tax or foreign income tax was withheld from dividends received.
  • Profits derived through a foreign PE in all other countries, provided that such profits have been subject to tax in the country of the PE.
  • Liquidation proceeds, payments upon share buy-backs or capital reductions, which have been subject to taxation by the distributor of such income.
Additionally, corporate income tax payable on dividend distribution may be decreased by the amount of tax withheld in another country from Holding Company income (e.g., interest income). This planning opportunity may be used in the case of profit-participating loans and investment contracts, where profit consists mainly of interest income.

So it is possible, but as the other poster said, you need to establish some kind of substance in the country you are not living in, so in my case I would need to have significant enough substance for the holding company in estonia such that it doesn't get recognized as a romanian company, which does seem to be more expensive than what you might be saving, but I am not sure how much is required in terms of the substance. Maybe it is okay to just hire a director? I am not sure.
 

marzio

Mentor Group Gold
I am not sure how much is required in terms of the substance. Maybe it is okay to just hire a director?

It's not only substance. You have to prove that the holding has a valid economic reason to exist otherwise the tax administration will label this as an articial arrangement put in place only to save on taxes. That's why i said that's easier to move where the holding is and hire somebody in Romania.

Also in Estonia you are considered resident if you have a permanent residence at your disposal so there isn't any minimum stay but you have to be sure that no other country will claim you are tax resident there otherwise tax residency will be awarded to the other state.
 
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Don

Mentor Group Gold
It's not only substance. You have to prove that the holding has a valid economic reason to exist otherwise the tax administration will label this as an articial arrangement put in place only to save on taxes. That's why i said that's easier to move where the holding is and hire somebody in Romania.

Also in Estonia you are considered resident if you have a permanent residence at your disposal so there isn't any minimum stay but you have to be sure that no other country will claim you are tax resident there otherwise tax residency will be awarded to the other state.
You are spot on.
Since 2019 EU countries have implemented general anti avoidance directive - GAAR. Within the Union, GAARs should be applied to arrangements that are not genuine; otherwise, the taxpayer should have the right to choose the most tax efficient structure for its commercial affairs. GAARs apply in domestic situations, within the Union and vis-à-vis third countries in a uniform manner, so that their scope and results of application in domestic and cross-border situations do not differ.

Establishing your personal tax residency in Estonia can be a decent choice to help bring the costs of substance down.
On Estonian level you can also defer paying CIT indefinitely keeping it effectively at 0%.
For residency you only need to keep the Estonian address, and youre not locked in an island like Cyprus or Malta, which are decent choices if you like living there. Paying around 200 EUR in tax per month you can get yourself covered with public health insurance valid across the EU.
In every two years, Estonian residents can sell one property tax free (no capital gains tax) on the condition that they used it as their dwelling before the sale.
 

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