Where does a company pay taxes?

[John89]

There is one thing I have difficulty understanding (I am not a US citizen and I don't live in the US):
Suppose I open a company in Cyprus (or any other country). That company owns stocks, bonds, and etfs, and its income comes entirely from dividends from stocks, bonds and etfs. So the company doesn't need to pay taxes on these dividends, because it is in Cyprus.
However, suppose I live in France rather than Cyprus.
The Cyprus company pays me a salary every month.
1) Are the dividends that the Cyprus company receives paid according to Cyprus law (0% taxes) or according to French law (25% taxes, or whatever)?
2) If they are paid according to French law, how on earth would the French taxman know how the Cyprus company makes money? Would the Cyprus taxman tell the French taxman? Wouldn't it be illegal for the taxman of a country to share information about the accounting/financial transactions of a company in another country?
3) Of course I am going to pay taxes on my income paid by the Cyprus company to me in France. I am asking about the taxes on dividends paid by the Cyprus company.

 

[Sols]

As a general rule, companies are taxed where they exercise control and management. There are exceptions, especially if you live in a tax haven.

If you live in France but set up a company in Cyprus over which you exercise control and management, the company is tax resident in France and shall comply with French tax law. If the company has local directors in Cyprus, it may also be tax resident in Cyprus in which case it will be liable for tax in Cyprus and in France. This is where a double taxation treaty comes in and hopefully prevents you from paying full tax in both jurisdictions.

You have a lot of reading to do. Some core principles you'll want to become more comfortable with a Tax Residence, Permanent Establishment, Economic Substance, CFC, and how double taxation works.

1) Are the dividends that the Cyprus company receives paid according to Cyprus law (0% taxes) or according to French law (25% taxes, or whatever)?

Probably both.

2) If they are paid according to French law, how on earth would the French taxman know how the Cyprus company makes money? Would the Cyprus taxman tell the French taxman? Wouldn't it be illegal for the taxman of a country to share information about the accounting/financial transactions of a company in another country?

In addition to the terms above, you need to look into CRS/AEOI (Common Reporting Standard/Automatic Exchange of Information). Banks send information to the authorities about bank accounts that you control (including corporate accounts), and the authorities in turn notify their counterpart authorities in your home country.

Additionally, within the EU, for the past 10+ years now under the DAC (Directive on Administrative Cooperation), tax authorities in member states have various channels for exchanging information with each other. We are currently on DAC6.

3) Of course I am going to pay taxes on my income paid by the Cyprus company to me in France. I am asking about the taxes on dividends paid by the Cyprus company.

Speak with a tax adviser/lawyer before you do something like this. Sure, it might cost a few hundred or even a few thousand but if you're looking at structuring your finances internationally, that cost beats the massive fines and penalties you incur if you do something illegal.

 

[John89]

Thank you for your answer, much appreciated!
Any idea how I can pay less taxes on dividends? I might go live in Italy, and I want to live off dividends. For US companies, if the company distributes $100 in dividends I will pay: 15% taxes in the US (remains $85), 26% of tax on $85 (remains $62,9), 24% tax on the profits of the company (remains $47.8), and then I have to pay 23% personal income tax (remains $36.8). That's a total of 63% taxes on dividends!!!

 

[Sols]

Any idea how I can pay less taxes on dividends?

Got an EU passport? Move to Malta, Cyprus, or Ireland and enjoy the non-domiciled resident schemes available there. They each have their own quirks so make sure to do your own due diligence.

UAE is also a fairly easy option. It's a much simpler 0% tax there.

Basically, the idea is to move to a tax haven.

I might go live in Italy, and I want to live off dividends.

Enjoy the massive taxes, unless you have enough dividends to be content with the 100,000 EUR/year lump sum tax cap available to HNWI.

For US companies, if the company distributes $100 in dividends I will pay: 15% taxes in the US (remains $85), 26% of tax on $85 (remains $62,9), 24% tax on the profits of the company (remains $47.8), and then I have to pay 23% personal income tax (remains $36.8). That's a total of 63% taxes on dividends!!!

Sounds massive. Speak with a tax adviser about ways to optimise that under French law (or Italian law, if you move there). Investing through a company might be a waste of time, money, and effort. Often is in many jurisdictions.

 

[Piano]

Got an EU passport? Move to Malta, Cyprus, or Ireland and enjoy the non-domiciled resident schemes available there. They each have their own quirks so make sure to do your own due diligence.

UAE is also a fairly easy option. It's a much simpler 0% tax there.

Basically, the idea is to move to a tax haven.


Enjoy the massive taxes, unless you have enough dividends to be content with the 100,000 EUR/year lump sum tax cap available to HNWI.


Sounds massive. Speak with a tax adviser about ways to optimise that under French law (or Italian law, if you move there). Investing through a company might be a waste of time, money, and effort. Often is in many jurisdictions.

What the U.K. non Dom status ?

 

[Fred]

As always - no headache and 0% tax is available in the UAE.

Stick to the mentioned EU countries only if it's a personal requirement from you or your business.

For all the classic offshore tax haven benefits with decent retail banking there is no alternative like the UAE.

 

[Sols]

What the U.K. non Dom status ?

Yes, that's another option to be consider. It's a little more complicated than the others and Brexit might've added further complexity, but definitely worth looking into.

For example, your Cyprus company is likely tax resident in UK if you live there (in addition to Cyprus), so you're probably not doing your net tax bill any favors.