UK Residency + Estonia Corporation

[jayjay]

Hey all

Pretty much what the subject says - I did a quick search on the forum and couldn’t quite find much about this topic.

What does one need to know if he/she is a UK resident but has a Estonia corporation? (The corporation is invoicing clients in the UK/EU and also makes investments)

At this point assume no funds are being paid out to the UK resident - all profits are being reinvested within the Estonia corporation.

Thanks in advance!

 

[JustAnotherNomad]

The company will be tax resident in the UK and be taxed as a UK company, unless you can prove that it's managed by someone residing outside the UK.

 

[jayjay]

The company will be tax resident in the UK and be taxed as a UK company, unless you can prove that it's managed by someone residing outside the UK.

Really? Tax advisor told me otherwise - thats the reason why you need to get an eResidency in Estonia. You don’t become a tax resident there yourself but as far as the company goes it needs to follow Estonian tax rules

@spacely Any thoughts on the above? Believe you work with Estonia corporations right?

Thanks

 

[JustAnotherNomad]

UK tax advisor? Licensed? Really? Hard to believe.
You cannot avoid UK corporate income tax just by registering your company in another country.
If you had an office in Estonia and you could prove you're actually working there, maybe. Or if you had a local director working for you in Estonia, for a regular salary, yes.
But if you're the only shareholder and director and you're sitting in the UK, HMRC will consider it a UK company for tax purposes.

https://www.gov.uk/hmrc-internal-manuals/international-manual/intm120060
Even if HMRC agrees that the company is resident in Estonia, e.g. because you have a local director there, they may still decide that there are also taxable operations in the UK (so-called permanent establishment), so then at least everything somehow related to those UK-based operations will be taxable in the UK on the corporate level:

https://www.gov.uk/hmrc-internal-manuals/international-manual/intm264050
And then finally, even if everything else is fine, they could still decide that your Estonian company is a controlled foreign corporation (CFC), so the corporate income that can be attributed to your shareholder percentage is taxable in the UK:

https://www.gov.uk/guidance/controlled-foreign-company-an-overview
Long story short: If a UK tax advisor told you that's a good setup, RUN. That person should not be licensed.
Otherwise, talk to a UK tax advisor and have him/her explain the rules to you.

 

[jayjay]

UK tax advisor? Licensed? Really? Hard to believe.
You cannot avoid UK corporate income tax just by registering your company in another country.
If you had an office in Estonia and you could prove you're actually working there, maybe. Or if you had a local director working for you in Estonia, for a regular salary, yes.
But if you're the only shareholder and director and you're sitting in the UK, HMRC will consider it a UK company for tax purposes.

https://www.gov.uk/hmrc-internal-manuals/international-manual/intm120060
Even if HMRC agrees that the company is resident in Estonia, e.g. because you have a local director there, they may still decide that there are also taxable operations in the UK (so-called permanent establishment), so then at least everything somehow related to those UK-based operations will be taxable in the UK on the corporate level:

https://www.gov.uk/hmrc-internal-manuals/international-manual/intm264050
And then finally, even if everything else is fine, they could still decide that your Estonian company is a controlled foreign corporation (CFC), so the corporate income that can be attributed to your shareholder percentage is taxable in the UK:

https://www.gov.uk/guidance/controlled-foreign-company-an-overview
Long story short: If a UK tax advisor told you that's a good setup, RUN. That person should not be licensed.
Otherwise, talk to a UK tax advisor and have him/her explain the rules to you.

Thanks for the detailed answer - definitely going to dig deeper.
Just curious, what do you think of example 3 here: How do e-residents pay taxes? — e-Estonia

 

[JustAnotherNomad]

The Estonians are not being very up front about this because they know it would hurt their business.
You will see that with all kinds of offshore providers: They will only explain the rules of their country and just say they can't advise you on the laws where you are based. Even though they know perfectly well that your home country likely won't accept the structure.

But even in the article you're referring to, you can read:

"Like personal tax residency, there is also variation in the criteria that different countries use to determine corporate tax residency. As a general rule though, most tax systems are now based around the principle of paying taxes in the country where the value is generated. For example, the term ‘Permanent Establishment’ (PE) is used to determine the economical link with the county, in order to establish the taxable threshold in the foreign country.

If your company has a strong presence in one country then this will be simple to determine [...].

[...]

Kateryna lives in Kyiv, Ukraine where she established a company on her own. She runs her startup through e-Residency [...]. The company generates all its value in Ukraine so pays all its taxes there, however."

 

[jayjay]

The Estonians are not being very up front about this because they know it would hurt their business.
You will see that with all kinds of offshore providers: They will only explain the rules of their country and just say they can't advise you on the laws where you are based. Even though they know perfectly well that your home country likely won't accept the structure.

But even in the article you're referring to, you can read:

"Like personal tax residency, there is also variation in the criteria that different countries use to determine corporate tax residency. As a general rule though, most tax systems are now based around the principle of paying taxes in the country where the value is generated. For example, the term ‘Permanent Establishment’ (PE) is used to determine the economical link with the county, in order to establish the taxable threshold in the foreign country.

If your company has a strong presence in one country then this will be simple to determine [...].

[...]

Kateryna lives in Kyiv, Ukraine where she established a company on her own. She runs her startup through e-Residency [...]. The company generates all its value in Ukraine so pays all its taxes there, however."

Yep definitely did confuse things - so what if there’s 0 business with the UK? Say the Estonia company is billing a company in Spain for digital work - but the director is in the UK. Would that still be considered a PE and hence UK tax resident?

 

[JustAnotherNomad]

Yes, the no. 1 criterion is where management is exercised. If management is in the UK, the company's global revenue is taxable in the UK.
Now there could also be a PE in Spain, so then corporate income would be taxable in Spain. And since there's a tax treaty between the UK and Spain, there would be less tax to be paid in the UK, since it would be paid in Spain instead. But a PE usually requires some physical presence, so just having a client there wouldn't be sufficient.
But the rules for what constitutes management and control or a PE are complex and can vary from country to country, so you should talk to a UK tax advisor who has heard about these terms.

You may not be aware of it, but 20 years ago or so, it was extremely popular for people all over Europe to incorporate UK Ltd. companies to reduce the share capital that would need to be paid (1 GBP vs. thousands of euros). They would own UK Ltd. companies that would pay all their corporate taxes in their home country due to management and control. They didn't pay a single cent in UK taxes.
You considering incorporating in Estonia is basically the same thing, just the other way around.

If you want to reduce your UK taxes, you would probably at least need some office space (at least a desk or so) in Estonia and be able to prove that you actually work from there at least a certain number of days per month.
Or you could try to hire a local director or employees, but salaries would have to be realistic.
They may also ask why you incorporated in Estonia and if the only reason is "I wanted to save taxes", they may not accept that. So you better have a good story.
But all of this is very complex and country-specific, so you should talk to a good advisor. I'm just trying to give you a very broad idea of what I've found out over the years. I'm not a lawyer.

Of course you could also just incorporate in Estonia, assume that the company is resident there (as you originally did) and only pay tax in the UK on the money that you pay out.
A lot of people have setups like that, simply out of ignorance. But if they catch you, pleading ignorance probably won't cut it. You'd at least be looking at late fees and fines, possibly even criminal charges for tax fraud.

 

[spacely]

Really? Tax advisor told me otherwise - thats the reason why you need to get an eResidency in Estonia. You don’t become a tax resident there yourself but as far as the company goes it needs to follow Estonian tax rules

@spacely Any thoughts on the above? Believe you work with Estonia corporations right?

Thanks

I believe that it is all simple.
By having a company in Estonia company is falling under the Estonian tax laws.
If the company has a shareholder and board member resident of the UK - in this case this person is the subject of the UK taxes, but not the company, which is in Estonia.

Just to be clear, e-residency does not give you any of the tax advantages, it is just a convenient tool to manage your company online.

 

[JustAnotherNomad]

I believe that it is all simple.

It's usually better to know than to believe.

By having a company in Estonia company is falling under the Estonian tax laws.

Yes, but by having management in the UK, it also falls under UK tax law.

If the company has a shareholder and board member resident of the UK - in this case this person is the subject of the UK taxes, but not the company, which is in Estonia.

That is false, as I have explained in detail in this thread. Are you trolling?

Just to be clear, e-residency does not give you any of the tax advantages, it is just a convenient tool to manage your company online.

That's contradicting what you wrote above. Obviously not paying UK corporate income tax and accumulating capital tax free would be a tax advantage.

 

[uplana]

Looks like @JustAnotherNomad knows what he is talking about, you should take his advise and go to an tax advisor who knows the rules.

 

[jayjay]

I’ll have a chat with another advisor this time, looks like the first one wasn’t quite accurate :S Thanks @JustAnotherNomad

 

[JustAnotherNomad]

Please let us know what they tell you. You should explicitly mention the terms "place of effective management", "permanent establishment" and "CFC rules" for him/her and ask if any of that could be an issue.

 

[bbb77]

The Estonians are not being very up front about this because they know it would hurt their business.
You will see that with all kinds of offshore providers: They will only explain the rules of their country and just say they can't advise you on the laws where you are based. Even though they know perfectly well that your home country likely won't accept the structure.

But even in the article you're referring to, you can read:

"Like personal tax residency, there is also variation in the criteria that different countries use to determine corporate tax residency. As a general rule though, most tax systems are now based around the principle of paying taxes in the country where the value is generated. For example, the term ‘Permanent Establishment’ (PE) is used to determine the economical link with the county, in order to establish the taxable threshold in the foreign country.

If your company has a strong presence in one country then this will be simple to determine [...].

[...]

Kateryna lives in Kyiv, Ukraine where she established a company on her own. She runs her startup through e-Residency [...]. The company generates all its value in Ukraine so pays all its taxes there, however."

I get this however what happens if the Estonian company isn't making any payments to the UK shareholders? How does the UK tax office know that the UK shareholder is even doing any work? And if they are, can the UK tax office insist they are paid and therefore taxed? I get the point if dividends or salary gets paid to the UK shareholder but what if none of this happens? Also how does HMRC charge UK corporation tax if there isn't a UK company? Does the UK shareholder get assessed instead at a personal level? Just wondering if anyone has experience of this or know of cases where this has happened?

 

[bbb77]

I get this however what happens if the Estonian company isn't making any payments to the UK shareholders? How does the UK tax office know that the UK shareholder is even doing any work? And if they are, can the UK tax office insist they are paid and therefore taxed? I get the point if dividends or salary gets paid to the UK shareholder but what if none of this happens? Also how does HMRC charge UK corporation tax if there isn't a UK company? Does the UK shareholder get assessed instead at a personal level? Just wondering if anyone has experience of this or know of cases where this has happened?

I just had another thought, on the UK tax return it asks (if I recall correctly) if you have any foreign income. If you didn't receive any foreign income because you didn't take a salary or dividends, then you're not hiding anything from the UK taxman, are you? Or am I misunderstanding something?

 

[Roamer]

Not sure what nonsense is being talked about here but please follow JustAnotherNomad's advice. You will not fool HMRC.

1. Corporation tax will be owed in the country your exercise central management and control – i.e., where you are
2. In case UK and Estonia fight for your corporation tax dollars, the treaty between both will enter in force – google: uk estonia double tax treaty and enjoy the read
3. On a personal level, you live in the UK so you will have to pay England's income taxes (dividends/salaries/interests/etc)
4. ...and if you don't, good luck with the taxman!

Unless you are willing to surrender control of your company by only being a shareholder and not running operations, then forget about this.

 

[JustAnotherNomad]

I get this however what happens if the Estonian company isn't making any payments to the UK shareholders?

You do understand that corporate income tax is a tax paid by the company, right? So how are payments to shareholders relevant for that?

How does the UK tax office know that the UK shareholder is even doing any work?

I don't know UK law specifically, but you'd usually have to declare that you're a majority shareholder of a foreign corporation. And then they will ask who is managing the company.
And if you try to hide your ownership, they will find out sooner or later anyway.

And if they are, can the UK tax office insist they are paid and therefore taxed?

Huh?

I get the point if dividends or salary gets paid to the UK shareholder but what if none of this happens?

See above. I can't believe we're still even debating this...

Also how does HMRC charge UK corporation tax if there isn't a UK company?

"I registered my Marijuana business as a Colorado LLC and it's fully licensed. How could the police in Singapore even arrest me? I'm selling my product on behalf of my Colorado LLC!"

Does the UK shareholder get assessed instead at a personal level?

No. Corporate income tax has nothing to do with personal income tax.

 

[bbb77]

I don't know UK law specifically, but you'd usually have to declare that you're a majority shareholder of a foreign corporation. And then they will ask who is managing the company.
And if you try to hide your ownership, they will find out sooner or later anyway.

That's the thing, I don't think you have to declare your assets on your UK self assessment tax form, only your income. If you don't have any (from a particular asset), you aren't hiding anything because you weren't asked what you own, but what you earn. I need to double-check this, but I've submitted UK tax forms for many years now and I certainly don't have to declare everything I own (e.g. shares) every year if they aren't paying me any income.

 

[JustAnotherNomad]

It doesn't matter, since there is information exchange and they will find out about it anyway.

 

[bbb77]

It doesn't matter, since there is information exchange and they will find out about it anyway.

I get that too. What I don't get is where in an individual's tax assessment is the section where a CFC has to be declared. I think UK corporate tax forms do have a section, however personal tax forms do not seem to have this. I guess there's somewhere but I don't know how UK corporate tax would be applied to an individual, it certainly doesn't seem to be documented or talked about anywhere