Question Tax Strategy for Zero Tax UAE & Estonia Setup

[rowena]

Hello,
I'm planning to create another setup for my business. I already have 2 UAE companies but this time I need to incorporate outside UAE(for better banking options).

I'm a UAE resident(zero income tax) and I can provide a tax residency certificate from UAE. I'm planning to incorporate an Estonia company remotely. As you know there are taxes for dividend distributions so I will pay salary(employee) to myself to avoid Estonia Corporate Tax. It is a very simple setup and I don't see any problematic or illegal part. I want to distribute at least 80% of profits and this means I need to receive approx 90-100k euro salary per month.

It looks very easy and legit but am I missing something?

 

[Gediminas]

Hey,

Your strategy is a bit aggressive, but you should be fine.

 

[MiddleEuroAsia]

Hello,
I'm planning to create another setup for my business. I already have 2 UAE companies but this time I need to incorporate outside UAE(for better banking options).

I'm a UAE resident(zero income tax) and I can provide a tax residency certificate from UAE. I'm planning to incorporate an Estonia company remotely. As you know there are taxes for dividend distributions so I will pay salary(employee) to myself to avoid Estonia Corporate Tax. It is a very simple setup and I don't see any problematic or illegal part. I want to distribute at least 80% of profits and this means I need to receive approx 90-100k euro salary per month.

It looks very easy and legit but am I missing something?

Correct me If i'm a wrong, but aren't you gonna pay a 20% taxes on your "personal" income this way even as a non-resident? Or did you think that as long as you're not gonna do any business in Estonia, you're not liable to taxes? Is that correct?

So If that's the case, you want to keep reinvesting the profits into the company and leave the money there and not take out any dividends but pay yourself a salary (approximately 80% of the profits) to yourself and you won't pay any taxes in Estonia as you're tax resident in UAE and have no businesses in Estonia!.

If this is gonna work, this could solve a lot of problems for doing business in Europe as Estonian laws are pretty straightforward and there is no red tapes or Ifs or whats.

 

[Silvio]

This will absolutely not work otherwise any non-resident will open an Estonian company and take all the money out as salary and pay 0% tax. The company will need to pay tax on the salary paid to you.

Also don't forget that Estonian company registrar is completely public, all the directors, revenue, profits are shown online.

 

[MiddleEuroAsia]

This will absolutely not work otherwise any non-resident will open an Estonian company and take all the money out as salary and pay 0% tax. The company will need to pay tax on the salary paid to you.

Why? Aren't all undistributed corporate profits are tax exempt? so, as long as he pay him self a "Reasonable" salary instead of taking out dividends, he could "theoretically" receive his salary tax free. But I don't know if he ,the employer, has to pay health or social contribution though, from what I remember, it was something like 33% or something like that but I'm not sure. Any way, to OP, make sure to contact a tax advisor or contact the nonresident department in Estonia thru [email protected] and please update us about what they told you

 

[rowena]

So If that's the case, you want to keep reinvesting the profits into the company and leave the money there and not take out any dividends but pay yourself a salary (approximately 80% of the profits) to yourself and you won't pay any taxes in Estonia as you're tax resident in UAE and have no businesses in Estonia!.

If this is gonna work, this could solve a lot of problems for doing business in Europe as Estonian laws are pretty straightforward and there is no red tapes or Ifs or whats.

Yes, exactly this is the case. I will keep profits in the company and pay out by non-resident salary as you described also no need to pay any kind of health or social contribution for non-resident salaries.

This will absolutely not work otherwise any non-resident will open an Estonian company and take all the money out as salary and pay 0% tax. The company will need to pay tax on the salary paid to you.

It won't work with any non-resident person because you need to pay income tax where you are resident. It is the UAE for my case and there is a 0% income tax. Check the link below:

https://www.xolo.io/faq/xolo-leap/c...xes-i-need-to-pay-in-estonia-when-receiving-f

If you receive a salary from your company, it is classified as an employee salary, and no personal income tax nor social tax are paid on the salary in Estonia. Whilst the salary payments are not declared in Estonia, they are not tax-free. You’re responsible for declaring and paying taxes in the country where you are a tax resident as an individual person and/or where you perform your duties.

 

[MiddleEuroAsia]

If you receive a salary from your company, it is classified as an employee salary, and no personal income tax nor social tax are paid on the salary in Estonia. Whilst the salary payments are not declared in Estonia, they are not tax-free. You’re responsible for declaring and paying taxes in the country where you are a tax resident as an individual person and/or where you perform your duties.

Yes, you are right!. this really is a great solution for a lot of projects that I had in mind, and I believe this could be a great solution for some people here who live in a low/zero tax jurisdiction or a territorial tax country with no/lax CFC or PE rules.

the question is how much money could you take out as a "salary"?. could you take out 70, 80 or even 90% of the profits as a salary?. is these percentages even reasonable or doable?.

 

[rowena]

Yes, you are right!. this really is a great solution for a lot of projects that I had in mind, and I believe this could be a great solution for some people here who live in a low/zero tax jurisdiction or a territorial tax country with no/lax CFC or PE rules.

the question is how much money could you take out as a "salary"?. could you take out 70, 80 or even 90% of the profits as a salary?. is these percentages even reasonable or doable?.

There is no rule for this, you're free.

https://www.xolo.io/faq/xolo-leap/c...pay-myself-a-salary-operating-outside-estonia

There is no obligation to pay yourself a salary on a regular basis (we presume that you will not submit any claims against your company). There's no required minimum or maximum for the salary, and you can change the sums you pay and the frequency of payments whenever you like in future - it's your agreement with your company (you're sitting in both chairs).

 

[MiddleEuroAsia]

There is no rule for this, you're free.

https://www.xolo.io/faq/xolo-leap/c...pay-myself-a-salary-operating-outside-estonia

That's a great news!.

So, why people go thru all the hops of Cyprus and malta non dom and bla bla bla when they could incorporate a company in Estonia without any of the red tapes? or is it because they don't live in a low tax jurisdiction and therefore pay income taxes to their respective countries?. Either way, this is a very very good solution.

the problem is you have to find a "real" bank that will accept your company, because it seems that the people behind the E-residency program push EMIs (i.e. transferwise) a lot instead of promoting real Estonian banks!. So, do you have banks in mind? As lots of bank in Estonia won't work with you unless you have some sort of connection to Estonia, do you have a solution for this? or do you have any other EEA/EU jurisdiction in mind? Liechtenstein or Switzerland maybe?.

 

[rowena]

So, why people go thru all the hops of Cyprus and malta non dom and bla bla bla when they could incorporate a company in Estonia without any of the red tapes? or is it because they don't live in a low tax jurisdiction and therefore pay income taxes to their respective countries?.

It should be because of zero income tax residency difference.

the problem is you have to find a "real" bank that will accept your company, because it seems that the people behind the E-residency program push EMIs (i.e. transferwise) a lot instead of promoting real Estonian banks!. So, do you have banks in mind? As lots of bank in Estonia won't work with you unless you have some sort of connection to Estonia, do you have a solution for this? or do you have any other EEA/EU jurisdiction in mind? Liechtenstein or Switzerland maybe?.

Since I work with marketplaces, TransferWise is enough for my business but also there is an LHV bank. They accept e-residency backed companies.

 

[Ness]

@rowena , check first if there is no withholding taxes on dividends or salary paid to a non Estonian resident but residing outside EU in a low tax country.

 

[Silvio]

I'm 100000% sure it won't work, even if you personally won't pay taxes on the salary, the company itself will need to pay taxes on the salary it pays you. You know there is a difference between a GROSS salary and NET salary.

If that was true, you can open company in any jurisdiction, claim the entire profits as salary and pay 0% tax, you don't need Estonia for that

But I'm happy to be proven wrong if that is indeed the case, make sure to send an email to the Estonian tax office and ask them if this will work.

Source 1:
https://www.emta.ee/eng/business-cl.../taxation-salary-and-wages-foreigners-estonia
And here you can see the cost for the EMPLOYER for paying a salary:
https://www.kalkulaator.ee/en/salary-calculator

 

[rowena]

@maxmmm
We're talking about non-resident salary and outside Estonia. The link you shared is about foreigners in Estonia. Check below:

http://erhub.ee/articles/taxation-outside-estonia/

In case the company has employees who are not Estonian tax residents and who live and work outside Estonia, salary payments to these foreign employees are not taxed in Estonia and we do not submit any tax declarations about these employees. In such case, these foreign employees must declare their income from your Estonian company in the country in which they live and are tax residents.

Also, check the link you shared for foreigners inside Estonia. Even if you stay inside Estonia for less than 30 days, you won't have a tax liability for your salary(the red circle):

@rowena , check first if there is no withholding taxes on dividends or salary paid to a non Estonian resident but residing outside EU in a low tax country.

Can you check the link below? As far as I see there is zero withholding tax between Estonia and UAE.

https://taxsummaries.pwc.com/united-arab-emirates/corporate/withholding-taxes

 

[MiddleEuroAsia]

I'm 100000% sure it won't work, even if you personally won't pay taxes on the salary, the company itself will need to pay taxes on the salary it pays you. You know there is a difference between a GROSS salary and NET salary.

If that was true, you can open company in any jurisdiction, claim the entire profits as salary and pay 0% tax, you don't need Estonia for that

But I'm happy to be proven wrong if that is indeed the case, make sure to send an email to the Estonian tax office and ask them if this will work.

Source 1:
https://www.emta.ee/eng/business-cl.../taxation-salary-and-wages-foreigners-estonia
And here you can see the cost for the EMPLOYER for paying a salary:
https://www.kalkulaator.ee/en/salary-calculator

No, @rowena is right, the link you provided @maxmmm has a certain key point that you seem to miss, it assumes that the non resident employee is doing the work "temporarily" while in estonia.

Since 1 January 2021, a non-resident employer who leases or mediates temporary agency workers to the Estonian user undertaking to work in Estonia is required to register himself in the Estonian Tax and Customs Board and to withhold and declare all labour taxes from the salary of a non-resident temporary agency worker since the day when this temporary agency worker began his/her work in Estonia.

So, it's about a non resident Alien who is on a business trip or do some sort of temporary work while in Estonia, this has nothing to do with non residents that lives and do the work outside of Estonia.

theoretically, there is no taxes to be paid to as long as you keep the profits and do not take out dividends. Instead, you pay yourself a salary, and you do not pay taxes on it in Estonia but rather on your country of tax residence, which in this is case is the UAE. So overall, the taxes is 0%.

This hat the op mentioned talk about this in detail and in easy language, and this service is widely known and respected in Estonia like other services, so they not talking BS that would get them in trouble.

this cannot be done in other countries as in other countries, you have to pay social contributions generally which it seems is not the case in Estonia for non residents.

this really seem like an easy and clean solution to incorporate a business in an EU jurisdiction with 0 taxes if you do it right. No BS. No Red tapes. No what ifs.

 

[rowena]

@maxmmm
I just found an official source about this:

If the work, however, is not physically performed in Estonia, then no Estonian PIT nor Estonian social tax or unemployment contributions apply to salary payments as these are not considered to be sourced in Estonia. The income is taxable in the state of residence of the employee.

https://learn.e-resident.gov.ee/hc/en-us/articles/360001761658-Dividends-salary-and-directors-fee

 

[MiddleEuroAsia]

@rowena , check first if there is no withholding taxes on dividends or salary paid to a non Estonian resident but residing outside EU in a low tax country.

No withholding taxes for non residents in Estonia.

See: Taxation of income of non-residents | Estonian Tax and Customs Board

An withholding agent is required to withhold income tax on taxable payments. Income tax is withheld upon the making of a payment. Income tax withheld in accordance with the rates specified in the Estonian Income Tax Act or in foreign agreements is, for a non-resident recipient, the final income tax on income from Estonian sources.

So, withholding taxes is only applied on Estonian income for non residents, other foreign income has no withholding taxes in Estonia.

 

[Silvio]

It's not me that you need to convince, it's the Estonian tax office and I'm pretty sure they will not allow such a blatant thing fly. But good luck and please keep us updated ....

 

[UndividedNomad]

This Estonian service provider goes through an example showing that paying a salary to a non-resident shareholder can be done tax-free: https://yourcompanyinestonia.com/how-taxes-and-vat-works-for-estonian-companies/

“In 2019, Estonia has approved new legislation that allows solopreneurs and freelancers to assign themselves an employee salary only, without the need of appointing a board member salary. This is suitable for one-member companies only. In this scenario, you only pay yourself employee salary.

This has tremendous advantages if you are a digital nomad, without a personal tax residence. In that scenario, you won’t need to pay taxes for the salaries of your Estonian company.”

I have met with their tax advisors via their online consulting service and the tax advisor I met confirmed that this would work and mentioned that a lot of their customers run Estonian companies from Thailand, and pay themselves a salary tax-free from an Estonian point of view + no tax in Thailand as it’s considered foreign-sourced and no CFC rules. I am in the process of getting eResidency and will try this out as well. I’ll report in a few weeks as the eResidency process takes a few months to get.

 

[SomeSome]

That's a great news!.

So, why people go thru all the hops of Cyprus and malta non dom and bla bla bla when they could incorporate a company in Estonia without any of the red tapes? or is it because they don't live in a low tax jurisdiction and therefore pay income taxes to their respective countries?.

Obviously because of their residence. Setting up companies anywhere is quite easy. However paying yourself when you're from a high tax country... I currently have the Estonia company but until I have a low tax residence it's not that valuable

OP should not forget that if he lives permanently in UAE, then his estonian company will however follow UAE laws. It becomes a permanent establishment in UAE because he is running it from there. Unless he is not there permanently.

 

[SomeSome]

This Estonian service provider goes through an example showing that paying a salary to a non-resident shareholder can be done tax-free: https://yourcompanyinestonia.com/how-taxes-and-vat-works-for-estonian-companies/

“In 2019, Estonia has approved new legislation that allows solopreneurs and freelancers to assign themselves an employee salary only, without the need of appointing a board member salary. This is suitable for one-member companies only. In this scenario, you only pay yourself employee salary.

This has tremendous advantages if you are a digital nomad, without a personal tax residence. In that scenario, you won’t need to pay taxes for the salaries of your Estonian company.”

I have met with their tax advisors via their online consulting service and the tax advisor I met confirmed that this would work and mentioned that a lot of their customers run Estonian companies from Thailand, and pay themselves a salary tax-free from an Estonian point of view + no tax in Thailand as it’s considered foreign-sourced and no CFC rules. I am in the process of getting eResidency and will try this out as well. I’ll report in a few weeks as the eResidency process takes a few months to get.

How do you get official residency in Thailand though?