Question Structuring EU based Internet Business | VAT | 1M+ Revenue

[thawk]

Hello,

I already opened a thread some time ago as I had questions about indirect taxes. But, unfortunately, no one could help me.

Facts:

• I'm doing 100% business through the internet (customers from all over the world, with 50%+ U.S. customers)
• 2021 Revenue: ~1 million EUR (revenue is continually growing and will be higher next year)
• Only B2C
• I'm based inside the EU
• Currently registered as a sole trader
• I will not move to another country
• Privacy would be good but that is not the biggest problem. I'm not doing illegal stuff, but privacy is important to me in general.

I have hired a local tax advisor (a big and reputable company here, but they do not advise outside of the EU, so they can only help me with my local country's taxes and the EU law). They suggested that I should immediately switch to a limited liability company due to the massive growth in 2021. Currently, I pay income tax on the total profit which can go up to 55%. The corporate taxes on the profits for a limited liability company are 20-25% and dividends ~25% again. But, it is still worth it as I can pay a salary + keep the rest of the money inside the company.

I do not want to evade taxes, nor do I want to do any illegal stuff. I also need a proper company setup + tax filings for my payment processors and banks. I can not evade the income/ corporate taxes here, and I'm okay with that. However, the biggest problem are the indirect taxes like VAT & Sales Tax (in the U.S.). The EU changed their laws this summer which means I have to pay full VAT for all my EU customers. In 2020, I was below all thresholds but that does not exist anymore. I would also have to pay VAT/ Sales Tax/ (whatever it is called in the specific country) to all my customer's countries. That is practically impossible, and I would not be competitive anymore. Most of my competitors set up a Dubai FZE company and do not charge any VAT.

My idea is the following:

Company 1: Opening a limited liability company in my home country (EU)​

Company 2: Opening a Dubai FZE company that is 100% owned by "company 1" and operates the whole business.​

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Then I could move the profits from company2 to company1 and pay a salary, keep the money inside company1, or pay personal dividends from company1. The money is in my home country, and everything should be 100% legal as I pay taxes in my country when I pull the money from the company. The only reason for that would be to avoid the indirect taxes, especially the VAT in the EU. And ~20% off the revenue is A LOT.​

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As far as I know, Dubai Free Zone companies (FZE) do not have to collect any VAT or other indirect taxes. Please let me know if I'm wrong, as that's the whole point here.

I already asked my tax advisor about the Dubai company and the VAT problem, but they couldn't answer yet. They told me they could only advise me with the EU law/ our country's law.

Would you please let me know your thoughts? I would be very grateful for your opinion.

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[tsu458]

There is no legal way to not pay the VAT for EU customers. Consider moving within the EU to reduce the corporate tax and tax on dividends. There is no other choice left.

If you sell to EU customers, you pay VAT. A FZE has the same obligation.

 

[thawk]

There is no legal way to not pay the VAT for EU customers. Consider moving within the EU to reduce the corporate tax and tax on dividends. There is no other choice left.

If you sell to EU customers, you pay VAT. A FZE has the same obligation.

Alright, thank you for the info. I just thought a "free zone company" is not obliged to collect VAT (like the duty-free shops in the airports).

I actually don't really want to move to another EU country. I would have to live in a new country at least for half a year and I don't want to do that due to family, friends, etc.

 

[ElBotellon]

Alright, thank you for the info. I just thought a "free zone company" is not obliged to collect VAT (like the duty-free shops in the airports).

I actually don't really want to move to another EU country. I would have to live in a new country at least for half a year and I don't want to do that due to family, friends, etc.

not sure in which high tax country you are based but I would carefully avoid your scheme unless you have people in the UAE.
Indeed all the money done by the UAE company would be included in company 1 company as INCOME due to CFC regulations. You should check how to avoid CFC in your country (requisites can be different by country).

 

[Sols]

Bit oversimplified, but short of straight up tax evasion (which can quickly end up being money laundering) it comes down to three choices:

1. Continue as is and pay full local tax, including VAT. You are subject to the laws of where you live. Accept and adapt.
2. Relocate to a place whose tax laws you agree with.
3. Surrender control and set up so much of a structure and substance in a tax haven that your role genuinely is just that of a benefactor/shareholder. This is a spectrum and one you would need to assess with qualified experts to make sure you don't trigger any substance or management and control checks where you live. Done correctly, this lets you get away with just paying capital gains. Might be hard to make financially viable at 1 million EUR/year turnover, without the costs of setting it up being greater than your current tax burden. — But even with all that, EU VAT very often still applies to non-EU sellers. Enforcement is a little lax, though, especially for small companies.

 

[Roamer]

Read on up:

• Central Management & Control
• Controlled Foreign Companies
• Place of Effective Management
• Transfer Pricing
• BEPS

Essentially, you're dreaming (not a huge deal, we all have when first looking at this things). If you remain resident in your high-tax country, your Dubai company will be tax-resident in your high-tax country. Unless you have the ability the create an incredible well-planned protocol to create substance and REAL decision-making in Dubai. For example, real full-time executive director(s).

The easiest would be for you to move and set up shop elsewhere.

 

[thawk]

Read on up:

• Central Management & Control
• Controlled Foreign Companies
• Place of Effective Management
• Transfer Pricing
• BEPS

Essentially, you're dreaming (not a huge deal, we all have when first looking at this things). If you remain resident in your high-tax country, your Dubai company will be tax-resident in your high-tax country. Unless you have the ability the create an incredible well-planned protocol to create substance and REAL decision-making in Dubai. For example, real full-time executive director(s).

The easiest would be for you to move and set up shop elsewhere.

Thank you for your response (and the other responses).

I know that I can not evade the income taxes/ corporate taxes in my country without moving the effective management. My tax advisor told me the same. However, my goal was to evade VAT because I thought that the Dubai company would not need to pay any VAT (my idea was to bypass VAT with Dubai but pay the full income/ corporate taxes in my country). Unfortunately, @tsu458 told me that the Dubai company would be liable to pay VAT for EU customers as well. That means I will stick to an LLC in my country. I'm not going to move to another country and I will not dig deeper (changing effective management, hiring an executive director in Dubai, etc) since I'm still too small for that.

 

[Konstanz]

Just find some trustable person who can own and be director of company and do in his name. Who is resident in Dubai