Zero-tax Everywhere with Estonian PE?

[justanotherguy]

Am I missing something? It seems that Estonian PE turns any company into zero-tax (until profits are distributed obviously).

Taxation of the profit of a permanent establishment | Estonian Tax and Customs Board

A non-resident’s permanent establishment in Estonia pays income tax on profit and assets both in monetary or non-monetary form taken out of the permanent establishment. Specificities arising from tax treaties are taken into account in taxation.

www.emta.ee

A non-resident’s permanent establishment in Estonia pays income tax on profit and assets both in monetary or non-monetary form taken out of the permanent establishment.

i.e. UAE company is run by EE holding/resident, with PE in EE, so in UAE no tax is owed until distributed? (otherwise 9% would apply?).

Can some DTTs ruin this? This is purely about CIT now.

 

[JustAnotherNomad]

No, this is essentially the same thing as with any other country.

Country A: Companies that are incorporated in country A are tax resident and pay 30% CIT. PEs are treated the same.
Country B: Companies that are incorporated in country B are tax resident and pay 10% CIT. PEs are treated the same.

Now some guy from country A thinks he is smart and can register a company in country B and only pay 10%. But he creates a PE in country A. So now any profit that can be attributed to this PE is subject to 30% tax in country A. But the company is also resident in country B, where it has to pay 10% since it is incorporated there. Now you have double taxation.
If there is a tax treaty, then it should solve this solution. It would probably determine that tax is only due in country A (30%) and nothing has to be paid in country B.

It's the same with Estonia.
You live full time in Estonia and you register a company in the BVI. No tax in the BVI, but Estonia says it should be treated the same as a local company, so 20% on distributions.
There's no tax in the BVI, so there is double taxation, but the BVI doesn't levy any tax.
That's it.

Now you do the same thing with a country that has higher taxes. Say you incorporate in a country that has 22% CIT.
You have to pay 22% in that other country (whether you distribute or not), and in Estonia, the PE has to pay 20%, but only on distributions. Double taxation.
If there is a treaty (or some other mechanism in the domestic tax code), then this can be avoided, and then there should be tax in only one of the countries.

So you'd have to look at what is written in the UAE-EE tax treaty. Yes, it is possible that the value that can be attributed to the EE PE would not be taxed in the UAE. So?
Then you could also simply register a company in Estonia?
Ok, so maybe your idea is to split the profit, so that you have the maximum that is possible to take out tax free in the UAE (attributed to the UAE PE), and the rest attributed to the EE PE? That might work, but I guess it could be difficult.

@Don will have more input.

 

[Don]

Am I missing something? It seems that Estonian PE turns any company into zero-tax (until profits are distributed obviously).

Taxation of the profit of a permanent establishment | Estonian Tax and Customs Board

A non-resident’s permanent establishment in Estonia pays income tax on profit and assets both in monetary or non-monetary form taken out of the permanent establishment. Specificities arising from tax treaties are taken into account in taxation.

www.emta.ee

i.e. UAE company is run by EE holding/resident, with PE in EE, so in UAE no tax is owed until distributed? (otherwise 9% would apply?).

Can some DTTs ruin this? This is purely about CIT now.

It's correct that you can register any foreign company PE in Estonia (e.g., US LLC, UAE LLC), and the profits will not be taxed until you move the profits out of the PE. Moreover, you don't need to follow local accounting rules. Establishing economic substance is cheap, and there are great opportunities for tax planning, banking, visas, residence permits, etc.

In regard to the UAE-EE treaty what's notable is that Estonia would allow the deduction of management fees from Estonian PE and as a UAE tax resident it would be tax-free income for you:

Article 7 of the UAE-EE DTT: "In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere."

Likewise, if you became an Estonian tax resident, your management fees from UAE directorship would not be taxed in Estonia. Either way, you could be a winner.

It could also be an interesting piece of a puzzle for certain cross-border structures, or you could just use a foreign company to operate through Estonia.

• Hong Kong: Only taxes income that is sourced in Hong Kong. Foreign-sourced income, even if remitted back to Hong Kong, is typically not subject to tax, meaning profits from foreign PEs would be exempt.
• Singapore: Operates on a territorial basis of taxation. Companies are not Singapore tax residents by default.
• Malta: Companies which are resident but not domiciled (or vice versa) in Malta are subject to tax in Malta on all income and chargeable gains arising in Malta, and on income arising outside Malta which is remitted back to Malta. No tax is payable on foreign income which is not received in Malta and on capital gains arising outside Malta to a company which is not ordinarily resident and domiciled in Malta, even if remitted to Malta.

 

[inector]

It's correct that you can register any foreign company PE in Estonia (e.g., US LLC, UAE LLC), and the profits will not be taxed until you move the profits out of the PE

Thanks for the info!!! In order to do the whole PE thing, do these foreign companies (like US LLC / UAE LLC / HK) need to be 100% owned by a EE person / EE company.

• Hong Kong: Only taxes income that is sourced in Hong Kong. Foreign-sourced income, even if remitted back to Hong Kong, is typically not subject to tax, meaning profits from foreign PEs would be exempt.
• Singapore: Operates on a territorial basis of taxation. Companies are not Singapore tax residents by default.
• Malta: Companies which are resident but not domiciled (or vice versa) in Malta are subject to tax in Malta on all income and chargeable gains arising in Malta, and on income arising outside Malta which is remitted back to Malta. No tax is payable on foreign income which is not received in Malta and on capital gains arising outside Malta to a company which is not ordinarily resident and domiciled in Malta, even if remitted to Malta.

My 2 cents about HK - heard you can tell IRD about PE during tax filing + tax exemption. Sounds easy.

Would it work for a Swiss company (because the banking choices would be amazing), or any EU company? Is it as easy as some filings like HK to tell the Company B about the EE PE?

 

[Don]

Thanks for the info!!! In order to do the whole PE thing, do these foreign companies (like US LLC / UAE LLC / HK) need to be 100% owned by a EE person / EE company.

My 2 cents about HK - heard you can tell IRD about PE during tax filing + tax exemption. Sounds easy.

Would it work for a Swiss company (because the banking choices would be amazing), or any EU company? Is it as easy as some filings like HK to tell the Company B about the EE PE?

There is no requirement for ownership by an EE person.
Normally we provide a substance package with a part time employee and desk rental.
It works with absolutely any company as long as the jurisdiction is recognised by Estonia.

Estonia is an interesting jurisdiction from the perspective that it offers two distinctive type of registrations for foreign companies that is not the case in many other jurisdictions:
1) registering a PE - doesn't require you to follow local accounting rules and doesn't need a local director.
You can hire local employee or get a part-time employee as part of the substance package. Accounts are not publicly available.
2) registering a foreign branch - Accounts must be maintained according to the requirements of the Estonian Accounting Act and are publicly available.
The branch would need to hire a local director.

 

[JustAnotherNomad]

In order to do the whole PE thing, do these foreign companies (like US LLC / UAE LLC / HK) need to be 100% owned by a EE person / EE company.

You did not understand what a PE is. It's not something that is unique to Estonia.

1) registering a PE - doesn't require you to follow local accounting rules and doesn't need a local director.
You can hire local employee or get a part-time employee as part of the substance package. Accounts are not publicly available.

Do you need substance from the Estonian side? I guess not, only from the other country's side?
What if you just want to be able to get access to EU services, say you want to use Stripe, which isn't available in your country of registration, or much more expensive.
Can you register a PE in Estonia and then sign up to Stripe through that PE?

In regard to the UAE-EE treaty what's notable is that Estonia would allow the deduction of management fees from Estonian PE and as a UAE tax resident it would be tax-free income for you:

Article 7 of the UAE-EE DTT: "In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere."

Likewise, if you became an Estonian tax resident, your management fees from UAE directorship would not be taxed in Estonia. Either way, you could be a winner.

This is quite interesting.
So you could live in Estonia and have a UAE company that pays a director's fee, which would be taxable in the UAE only, but where there is no personal income tax.

But I don't see how it would work the other way around? If you are UAE tax resident with a UAE company and a EE PE - the management fees that the EE PE pays should only be taxable in Estonia? I guess the PE could pay a salary, but then since it's not a subsidiary, but the same company, you could run into issues with GAAR/transfer pricing in the UAE if you already draw a UAE salary from the company?

 

[Don]

Dou need substance from the Estonian side? I guess not, only from the other country's side?

We should consider the whole structure in general.
You could of course create a EE PE simply by place of management and office

What if you just want to be able to get access to EU services, say you want to use Stripe, which isn't available in your country of registration, or much more expensive.
Can you register a PE in Estonia and then sign up to Stripe through that PE?

Yes, if you have EU presence with a PE then banks and EMI-s can accept you. With Stripe, simply your place of operation will be in Estonia when you create an account (separate for the PE) - it could be one of the duties of the local employee to manage this account.

But I don't see how it would work the other way around? If you are UAE tax resident with a UAE company and a EE PE - the management fees that the EE PE pays should only be taxable in Estonia? I guess the PE could pay a salary, but then since it's not a subsidiary, but the same company, you could run into issues with GAAR/transfer pricing in the UAE if you already draw a UAE salary from the company?

Expenses incurred in connection with a permanent establishment, including expenses incurred in connection with management and administration, may be deducted in determining the profits of a permanent establishment, regardless of the country in which the expenses incurred.
Indeed the arrangement should be carefully analysed.
Note that the treaty refers to "executive and general administrative expenses" not only management or directors fees.

Taxation of the profit of a permanent establishment | Estonian Tax and Customs Board

A non-resident’s permanent establishment in Estonia pays income tax on profit and assets both in monetary or non-monetary form taken out of the permanent establishment. Specificities arising from tax treaties are taken into account in taxation.

www.emta.ee

 

[fshore]

Moreover, you don't need to follow local accounting rules.

Normally you have to follow local accounting rules if you run a foreign company from that country. Do you have any source for the claim that you don't need to follow estonian accounting rules?

 

[Don]

Normally you have to follow local accounting rules if you run a foreign company from that country. Do you have any source for the claim that you don't need to follow estonian accounting rules?

I actually already did if you look at the link in my earlier post, but Ill quote for you from the tax office website again:

A non-resident legal person can keep accounts of a permanent establishment situated in Estonia according to the rules in force in the country of location, if these rules comply with internationally accepted accounting standards and enable to determine the correct tax liability in Estonia.

In practice it means you only need to submit the accounts of the PE to the tax office.

 

[lacomaco]

I actually already did if you look at the link in my earlier post, but Ill quote for you from the tax office website again:

In practice it means you only need to submit the accounts of the PE to the tax office.

I have a trouble understanding the PE registration and accounting concept. In many countries a foreign investor can operate through a subsidiary, a branch or a representative office. These are company/legal person choices. On the other hand the PE exist only as a tax concept,, not a legal entity. Can you enlighten us?

 

[Don]

I have a trouble understanding the PE registration and accounting concept. In many countries a foreign investor can operate through a subsidiary, a branch or a representative office. These are company/legal person choices. On the other hand the PE exist only as a tax concept,, not a legal entity. Can you enlighten us?

If a foreign company wants to operate in Estonia, it does not necessarily need to register a branch in the business register. (This is new EU regulation and should be available almost everywhere)

There are multiple possibilities:
1) register a PE and its treated as a PE (you basically just get a tax number for a foreign company and need to report directly to tax office)
2) register PE but actually its not treated as a PE for income tax purposes (yes sometimes even having employees or a property that you rent out in Estonia is actually not treated as a PE although you might need to register as one)
3) register a branch office (entered into business register)

None of the above is considered a legal entity.

In some cases with branches its possible to operate in multiple jurisdictions at the same time while being exempted from submitting any annual financial reports.
This should actually apply across the whole EU due to the following regulation:

L_2019186EN.01008001.xml

Its indeed a bit complex as in some cases we need to consider foreign legislation too, but there are some interesting opportunities.

 

[justanotherguy]

Amazing info, thanks a lot.

The only thing that's confusing is that emta.ee says

A permanent establishment is a business entity through which the permanent economic activity of a non-resident is carried out in Estonia.

(I assume "non-resident" they mean obviously the foreign entity, like a US LLC or HK company, etc, hopefully not wrong here)

1. Why do they say it is a business entity? Does a foreign entity have to register a company in Estonia in order to establish PE? Or can it be a simple substance, like an office, without the company in Estonia.
2. So the only filings to do for PE in Estonia is the Annex 3 of Declaration TSD? Seems like that's it...

 

[Konstanz]

having PE in Estonia can cause other problems. You will become subject to VAT declarations. And VAT in Estonia is 20% and will be 22%

 

[fshore]

having PE in Estonia can cause other problems. You will become subject to VAT declarations. And VAT in Estonia is 20% and will be 22%

And if you're subject to vat then I assume you'd have to follow estonian accounting standards?

 

[Don]

Amazing info, thanks a lot.

The only thing that's confusing is that emta.ee says

(I assume "non-resident" they mean obviously the foreign entity, like a US LLC or HK company, etc, hopefully not wrong here)

1. Why do they say it is a business entity? Does a foreign entity have to register a company in Estonia in order to establish PE? Or can it be a simple substance, like an office, without the company in Estonia.
2. So the only filings to do for PE in Estonia is the Annex 3 of Declaration TSD? Seems like that's it...

PE has slightly different definition in taxation act:

A permanent establishment is the place through which, whether in full or in part, the permanent economic activities of a non-resident are carried out in Estonia. Non-residents whose economic activities in Estonia are carried out through an authorised representative pursuant to the provisions of the Income Tax Act also have a permanent establishment.

So doesn't need to be a business entity, it can as well be a non-profit.

Income tax act says the following:

(1) Permanent establishment means a business entity through which the permanent economic activity of a non-resident is carried out in Estonia.

(2) A permanent establishment is created as a result of economic activity which is geographically enclosed or has mobile nature, or as a result of economic activity conducted in Estonia through a representative authorised to enter into contracts on behalf of the non-resident.

(3) When a non-resident carries on business in Estonia through a permanent establishment situated in Estonia, the income which the permanent establishment might be expected to derive if it were a distinct and separate taxpayer engaged in the same or similar activities under the same or similar conditions and dealing wholly independently of the non-resident of which it is a permanent establishment shall be attributed to the permanent establishment.

PE submits TSD and fills annex 3

having PE in Estonia can cause other problems. You will become subject to VAT declarations. And VAT in Estonia is 20% and will be 22%

It can also be a benefit, e.g., you can do IOSS reporting through the PE.

 

[JustAnotherNomad]

Why would VAT be an issue? Isn't VAT about where your customers are located? So even a BVI company would have to pay VAT and file VAT reports if it has EU customers...?

 

[peter55555]

Has anyone had any success opening a real bank account (not EMI) in Estonia or other EU/EEA country for a US LLC or UK LLP that has a registered PE in Estonia, whose owners are Estonian tax residents? Please share your experience.

 

[EliasIT]

Why would VAT be an issue? Isn't VAT about where your customers are located? So even a BVI company would have to pay VAT and file VAT reports if it has EU customers...?

want to ask the same question?

 

[blizz]

No one can ask the last question please?