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Tax-free residency in Estonia

JustAnotherNomad

Entrepreneur
I think I've mentioned it before, but today I dove a bit more into the details.
The Estonian income tax act can be found here (in English).

Estonia has a relatively unique system where companies only pay corporate income tax when profits are distributed. Such dividends are only taxed at the corporate level (20% CIT), the shareholder receiving the dividends is not taxed again. But it gets much better than that. Estonia is one of those countries where residency triggers tax residency:

§ 6. Resident
(1) A natural person is a resident if his or her place of residence is in Estonia or if he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia.
So you just rent an apartment there and register as a resident. A EU passport would certainly help with that.

As mentioned, there is no tax on dividends received, provided that the company that paid out the dividends has paid corporate income tax:

§ 18. Dividends
[...]
(1¹) Income tax shall not be charged on dividends if income tax has been paid on the share of profit on the basis of which the dividends are paid or if income tax on the dividends has been withheld in a foreign state.
With an Estonian company receiving the dividends instead of an individual, the rules are a bit more complex (see § 50, I don't want to quote it all), but essentially it should be fine for an Estonian company to receive dividends from a foreign branch and re-distribute them to an Estonian tax resident individual without paying the 20% CIT. Provided that the foreign branch isn't in a "low tax rate territory", etc. etc.

Estonia has CFC rules:

§ 22. Taxation of income of legal persons located in low tax rate territories
(1) Income tax is charged on the income of a legal person located in a low tax rate territory (§ 10) and controlled by Estonian residents, irrespective of whether the legal person has distributed any profits to taxpayers or not.
So what is a "low tax territory"?

§ 10. Low tax rate territory
(1) A low tax rate territory is a foreign state or a territory with an independent tax jurisdiction in a foreign state, which does not impose a tax on the profits earned or distributed by a legal person or where such tax is less than one-third of the income tax which a natural person who is an Estonian resident would, pursuant to this Act, have to pay on a similar amount of business income, without taking into account the deductions allowed under Chapter 4. If taxes imposed on the income earned or distributed by different types of legal persons differ, a territory is deemed to be a low tax rate territory only with regard to legal persons in the case of whom the tax meets the conditions for low tax rate territories specified in the first sentence of this subsection.
(2) A legal person is not deemed to be located in a low tax rate territory if more than 50 per cent of its annual income is derived from actual economic activity or if the state or territory of location of the legal person provides the Estonian tax authority with information concerning the income of a person controlled by Estonian residents.
(3) Without prejudice to the provisions of subsections (1) and (2), the Government of the Republic shall establish a list of territories which are not regarded as low tax rate territories.
So usually, it would be a "low tax territory" if the tax is less than 1/3 of the Estonian tax.
But it's also not a "low tax rate" if the company is actually an operative business and not just receiving royalty fees etc.
And finally... there is a white list!

Even the UAE and Bahrain are on that list - but it would not work for our purposes, as corporate income tax must have been charged for Estonia to exempt the dividends from taxation. (And I assume that the DTA might ruin the deal as well.)
Other countries on that list are Romania, Georgia, Bulgaria, Hungary, ...

Georgia has "virtual zone companies". Same tax concept as Estonia - no CIT until dividends are paid out, and only 5% in that case.
So it should be possible to have a company in Georgia, be a resident of Estonia and pay only 5% tax on dividends that are paid out.
Romania has 1% tax on the revenue of "micro companies". Bulgaria and Hungary have 9-10% CIT. Same concept otherwise.
(I was too lazy to check if there is withholding tax at the source, but at least in the EU that should be avoidable thanks to the parent-subsidiary directive.)

What is generally important is that there must be economic substance. But in all those countries, it should be easy to build substance, thanks to low wages.
It should be relatively easy to prove that the "effective place of management" is not in Estonia and that there is no permanent establishment either, if you can show that you spend very little time in Estonia. After all, you are tax resident per your residence, not because of the number of days you spend in Estonia. So maybe the substance requirements would be even less in that case.

I am not a lawyer and I haven't had this verified by a lawyer either, but that's essentially how this should work.
Estonia has lots of DTA's, which reduces the risk of being taxed in another country.
 

marzio

Active Member
Romania has 1% tax on the revenue of "micro companies"
FYI Romania's branch profits are taxed at 16%.

It's a very good alternative if somebody is willing to create substance in another country and you really need them to be working for you. Substance for me is always a gray area because you have demonstrate that the place of effective management isn't Estonia. How much substance is enough? A local director? A local director + employee? A local director + 2 employees? How skilled have to be those workers?
 

Konstanz

Active Member
Estonia is not tax free on income tax prospective.
It has CFC , permanent establishment rulings and 20% income tax rate:

This post is misleading. You will be taxed when you take money out of company or get any other GLOBAL income as Estonian resident.
 

JustAnotherNomad

Entrepreneur
I don’t think it has to be a branch. It can be a Romanian company owned by an individual resident of Estonia. That should work just as well.

Substance is almost always required. What country lets you incorporate a company in some other country and doesn’t care if it the company even is a proper company?
If you live in Cyprus and register a company somewhere else, does Cyprus really not care about substance? Or is the law simply not enforced?
 

JustAnotherNomad

Entrepreneur
This post is misleading. You will be taxed when you take money out of company or get any other GLOBAL income as Estonian resident.
I strongly suggest you re-read my post. Ideally the tax code I even linked to.

Or if you don’t trust me, ask Pwc:

Foreign dividends are tax exempt provided that either the underlying profits out of which dividends are paid have been subject to foreign income tax or if income tax was withheld from dividends received.

Or just ask Google:
If an Estonian tax resident (private individual) is receiving dividends from other jurisdictions, then the same taxation rule applies here as well. In other words, taxation happens in the company level and if corporate income tax is paid, then there is no taxation on the level of a dividend receiver. However, these dividends must be declared on annual tax return and proof of payment of corporate income tax must be provided. If this profit was not taxed on a company level or required proof presented, then 20% income tax must be paid on the level of a private individual.

For example, if an Estonian tax resident (private person) receives dividends from a Finnish company, then as a rule the Finnish company profit is taxed with Finnish corporate income tax (20%) and dividends, received by the Estonian tax resident, are tax free.
 

JustAnotherNomad

Entrepreneur
It’s not perfect, but I think it deserves a lot more attention than Portugal’s NHR.
Portugal’s NHR scheme is limited to 10 years, there is a lot of bureaucracy, many, many, many criteria to fulfill etc.
This, however, looks quite straightforward. Everything is in English, even the laws, everything is online, the rules are simple, tax lawyers are affordable.

I considered Portugal for a while and I think this is a lot better than the NHR regime. Yes, there is some risk, but if you don’t spend much time in Estonia, I don’t think they should be able to screw you over, especially if you don’t make millions upon millions.
 

marzio

Active Member
It can be a Romanian company owned by an individual resident of Estonia
Isn't this a CFC?

Substance is almost always required. What country lets you incorporate a company in some other country and doesn’t care if it the company even is a proper company?
If you live in Cyprus and register a company somewhere else, does Cyprus really not care about substance? Or is the law simply not enforced?
In Cyprus CFC is only valid for companies, not for individuals so in theory you could register an offshore company and receive tax free dividends without having any kind of substance.

Look i'm not saying that the Estonia + Cyprus strategy is better, i'm only saying that if you start to play the substance game it's better that substance to be real to sleep at night and not trigger any CFC.
 

JustAnotherNomad

Entrepreneur
No, I don’t think the Romanian company would be a CFC because it’s an operative business and Romania is also white listed.

But substance isn’t only about CFC.
It’s also about the effective place of management (article 4 in the tax treaty) and permanent establishment. If you look at CFC rules, you will find that they often only apply to companies with passive activity, such as holding IP. CFC rules are intended to also catch companies with substance. So you can’t put five lawyers in an office on the Seychelles and say “They take care of my IP!” - and then you move millions there in royalty fees. CFC rules say “Ok, even if you have proper substance there - if you have control over the company, then we will still tax you.”
Look at this map, many countries only apply CFC rules to passive income (and Switzerland and Liechtenstein don’t even have CFC rules):


But that’s not because they allow you to have an operative business in the Seychelles tax-free, it’s because they have other ways to screw you.
Also, I think Portugal should be blue on the map. Their CFC rules are also mostly about passive income.
 
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JustAnotherNomad

Entrepreneur
This part isn't clear to me. Why shouldn't you spend much time in Estonia? Aren't you resident there in your strategy?
It’s not a requirement to spend time in Estonia (or Portugal for that matter) to be considered tax resident. You only need a place to live there.
If you don’t spend much time there, then it would be harder for the tax authorities to claim that you are managing your company from Estonia.

It’s the same case with Portugal’s NHR system: You can’t work or manage your foreign company from Portugal if you want to get the dividends tax-free. You always need a foreign company and some explanation how your business is really run from Malta/Cyprus/whatever. Having your apartment in Portugal is otherwise good enough to be considered tax resident. So you need to find a balance there.
 

marzio

Active Member
If you don’t spend much time there, then it would be harder for the tax authorities to claim that you are managing your company from Estonia.
§ 6. Resident
(1) A natural person is a resident if his or her place of residence is in Estonia or if he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months

Uhm i'm confused. The income tax act states that you need to stay in Estonia for at least 183 days to be considered resident. Will they give you tax certificate even if you don't stay 183 days?
 

JustAnotherNomad

Entrepreneur
The relevant word there is “or”:

You are tax resident if you either rent an apartment in Estonia for the full year (and register as a resident) - no matter how many days you spend in Estonia. (Germany, Portugal, ... many countries have the same rule.)

OR:

You are tax resident if you spend 183 days in the country in a 12-month-period. For example if you have 4 work assignments of 2 months each (8 months in total), where you are staying in different hotels.


As for CFC rules:

The definition of a permanent establishment in Cyprus is a business that is wholly or partly carried on in the country at a fixed address. This includes locations that are management offices, branches, factories, workshops or building sites where construction projects have lasted more than three months. Any profits made by a permanent establishment in Cyprus are subject to tax there, even where the individual or entity is owned by a non-resident for tax purposes.

So in theory, if you register your business in Hong Kong and you are the only shareholder and director and there are no other employees, but you are in Cyprus 365 days per year for 3 years in a row, then it seems quite likely that company is managed from Cyprus and that there is at least a PE in Cyprus. For which the local tax must be paid.
Even though the CFC rules don’t apply. But I understand that they don’t enforce it.
 

Konstanz

Active Member
I have read your post!
Well, you cannot use BVI or Seychelles company tax-free residing in Estonia. That was my point.
You would have to pay tax either individually or through your company or when you distribute profit from Estonia company!
I don't see how Estonia is "tax-free". Yes, it might be lower tax than Germany, France or Spain, but is not tax free. I don't think it would have big interest among HNWI.
HNWI want a clear 0% tax and no CFC
 

JustAnotherNomad

Entrepreneur
I suggest you read everything in this thread once more and not just the title.
I didn’t write about BVI or Seychelles, I wrote that the company must have paid corporate income tax - but it can be very little. You will not be taxed again on the personal level.
Malta, Portugal (NHR), Cyprus are all very popular and also there some taxes still have to be paid.
And yes, if you own a factory in... Italy or wherever and you live in Estonia you will pay zero tax on the personal level. Zero.
 

marzio

Active Member
You are tax resident if you either rent an apartment in Estonia for the full year (and register as a resident)
Ok now i get it. You rent an apartment for the full year, register as a resident and once you are resident you can obtain the tax certificate.

Somehow i completely missed this part. Indeed is a superior choice compared to NHR.
 

Konstanz

Active Member
I suggest you read everything in this thread once more and not just the title.
I didn’t write about BVI or Seychelles, I wrote that the company must have paid corporate income tax - but it can be very little. You will not be taxed again on the personal level.
Malta, Portugal (NHR), Cyprus are all very popular and also there some taxes still have to be paid.
And yes, if you own a factory in... Italy or wherever and you live in Estonia you will pay zero tax on the personal level. Zero.
Not true. You would pay WHT in Italy.

In some cases yes, it would work. But you should analyze country by country tax laws + DTA agreements.

Yes, Estonia is a nicer country to live than for example Georgia. However, it might be really cold in winter there :)

I don't think Estonia would check or count the days you spent there. But you would have to spend some time there

Don't you understand why people move to UAE? Because the tax rate is a clear 0% and no CFC. So, rich people can put wealth offshore, protect wealth and live without the headache

Not many HNWI would trust to leverage their residency/wealth on Eastern European country inspectors and tax men

When you live in 0% and no CFC countries, you don't have to worry when you get something on your personal bank accounts - what you get is yours and no one cares! You don't have to pay tax or explain anybody anything. Even if you put wealth or use BVI - no one would care
 
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JustAnotherNomad

Entrepreneur
I admit I didn’t check for WHT. But you would probably be able to avoid it with an Estonian holding company.

It’s unfair to compare this to UAE residency. Yes, UAE is a clear 0%, but fewer/worse DTAs. But lots of people are getting Cyprus residency for the same reason and Cyprus has 60 days minimum requirement, while Estonia has zero (in theory).
 

marzio

Active Member
As mentioned, there is no tax on dividends received, provided that the company that paid out the dividends has paid corporate income tax.
Will this be the case also if no corporate income taxes are paid but there is 5% withholding taxes on dividend distributed to Estonia?
 
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