With the growing trend of digital nomadism together with location-independent workplaces, we are seeing an increasing number of high network individuals (HNWIs), freelancers and company owners realize that they have the luxury of choosing a country to be tax resident in and (for company owners) also deciding which country to base their company in.
I’ve personally taken a strong interest in this topic as I’ve spent several years as a digital nomad, before adapting my lifestyle to family life with kids, thus slowing down my travels and using European countries as my base.
If you’re looking for consultancy on European tax structuring, head straight to my contact page, or read on for more information about the options available.
The Case for Being Based in Europe
I love the diversity and culture of the European continent, and while I have traveled all over the world, I keep returning back to Europe as a base for living and conducting business.
Provided you can pull it off, residing in one European country while owning companies in other European countries typically brings the best flexibility and tax advantages.
Tax laws tend to change quite frequently, as do the relations between countries. For example, the big countries tend to have a blacklist of countries they consider tax havens, and of course, you don’t want to base yourself or your company there. I believe the European Union currently provides the best flexibility in moving around and building an efficient tax strategy, not to mention the best quality of life.
No EU country can blacklist another country, so you have the security of countries playing nicely. You would perhaps be surprised to know that within the EU tax rates vary between countries in a very significant way.
As of 2023, I believe the best tax setup for most working individuals and families to be comprised of Malta for the corporate setup and Portugal for personal residence.
When coming to this conclusion, I’ve not only considered tax rates but also various other factors that affect one’s quality of life, as I believe that while tax optimization is an important exercise to protect your wealth, it should never occur at the expense of lifestyle.
- Lowest effective corporate tax rate in Europe – Malta (5% with a trading and holding company structure)
- Lowest personal taxation in Europe – Portugal (0% under the NHR programme)
There are countries that have great corporate tax rates, such as Ireland (12%) and Bulgaria (10%), while others (France, Germany, Portugal) not so much.
On the other hand, some European countries have very attractive incentive programs for attracting high net worth individuals and entrepreneurs to their shores, which you will want to consider for your family’s residence.
It goes without saying that you should look further than the tax percentage when evaluating different options. For example, it is to be expected that opening a company and doing business in Ireland is much easier than doing so in Bulgaria, and here the language barrier is pretty significant, not to mention the cultural one. This factor is especially true when choosing a country for residence, as the quality of life becomes a major determining factor.
Before we continue, let me talk briefly about tax planning.
Tax planning VS Tax Evasion
If you’re thinking of a move to another country, one of the important things to consider is how your disposable income will be affected. Of course, much of this boils down to taxes.
KPMG provides a very useful online tax comparison tool, where you can pick and compare up to 4 countries at one go. I was surprised to see that Spain and Italy have such high taxes, while the Russian rate looks impossibly low.
Tax planning is a lawful process where the individual or company search for the optimal reduction to the tax burden permitted within the options available in the legal system.
Consequently, tax planning seeks to prevent, avoid or postpone the taxable event, aiming to reduce or defer the taxpayer’s tax burden as much as possible within the law.
Tax planning is a lawful action by the taxpayer since it exercises the principle of the autonomy of the will established in common legislation and is in accordance with the options that the legal system itself establishes. While some people think that tax planning is for the billionaires, corrupt politicians, and dodgy types, this can’t be further from the truth. Anyone can and should practice tax planning because there is no reason to pay more than you should in taxes.
You should not, however, confuse tax planning with tax evasion, which is a completely different thing, and something neither I nor any serious tax lawyer or accountant would advise.
The Best Option – Personal Residence in Portugal and Corporate Residence in Malta
In my opinion, as of 2023, the best option is for the company owner to reside in Portugal, while the company would be based in Malta.
In short, with this option, the company taxation would be an effective 5% due to Malta’s 6/7 tax rebates, while the owner resident in Portugal would pay 0% tax on received dividends from the company for the ten years following the establishment of his residency there under the Non-Habitual Resident (confusing name, I know) scheme. In Malta, the setup would usually consist of one or more trading companies, together with a holding company.
Here are two excellent guides about Portugal’s NHR:
Let’s take a deeper look at Malta and Portugal to understand how this all ties in together.
Setting up the Maltese Companies
For those not familiar with the Maltese taxation system, it’s worth noting that it is the only country in Europe that operates a full imputation system.
This means that corporate profits are taxed to the company at a rate of 35%. However, when dividends are distributed to individuals out of taxed profits, the dividend carries an imputation credit of the tax paid by the company on the profits so distributed.
Taking as an example a company that makes taxable profits of 1,000:
|Taxable profits of a company||1,000|
|Corporate tax thereon at 35%||350|
|Profits after tax||650|
The company distributes all the post-tax profits to its shareholder who is an individual resident in Malta.
Malta utilizes the full imputation system of company taxation where corporate profits are taxed to the company at the rate of 35%. However, when dividends are distributed to individuals out of taxed profits, the dividend carries an imputation credit of the tax paid by the company on the profits so distributed.
Taking as an example a company that makes taxable profits of 1,000:
|Taxable profits of a company||1,000|
|Corporate tax thereon at 35%||350|
|Profits after tax||650|
The company distributes all the post-tax profits to its shareholder who is an individual resident in Malta. The company is obliged in terms of the provisions of the Income Tax Act to issue a dividend warrant which must contain the following information:
|Deemed gross dividend||1,000|
|Tax at source (imputation credit)||350|
The purpose of the warrant is to enable the recipient to fully understand the manner in which the profits being distributed have been taxed, and the obligations on the shareholder to declare such dividend or otherwise and the rights of such shareholder to claim a credit for any underlying tax/tax at source.
In Malta, the highest tax rate that individuals can suffer is also 35%. Should the shareholder declare the dividend in his tax return, the following would be declared:
|Deemed gross dividend||1,000|
|Tax charge at 35% (marginal tax rate)||350|
The imputation credit is put against the tax charge on the dividend in the hands of the individual. This system eliminates the economic double taxation that arises when the classical system is in operation. Under the full imputation system of company taxation, corporate profits are taxed only once.
Under the Income Tax Act, the individual shareholders are not obliged to declare dividends received from Maltese companies as the dividend is already covered by the imputation credit of 35% which is equivalent to the maximum rate of tax that individuals pay in Malta.
The rates of tax chargeable on individuals income are progressive starting at 15% and reaching up to a maximum of 35%. If the shareholder receiving the dividend is not chargeable at the maximum rate of tax as his income is low, then the following would be declared in his tax return:
|Tax chargeable at say 15%||150|
The individual will then receive a refund from the Revenue authorities following the submission of his tax return. The imputation system of company taxation applies to both resident and non-resident shareholders.
For shareholders resident in Malta, the bottom line is that since the current rate of income tax applicable to companies is 35% and the maximum rate applicable to individuals is also 35%, the receipt of a dividend out of these tax accounts can never result in a shareholder having to pay additional tax on receipt of the dividend.
It’s a different story for non-resident shareholders though. While their dividends won’t be taxed in Malta, they would still need to declare the receipt of the dividends in their country of residence and pay tax there.
For example, if the shareholder is a resident of Spain, he would pay between 19% and 26% of tax on the dividends received from the Maltese company, since no withholding tax was applied at the shareholder level in Malta. As another example, if the shareholder lives in France, he will pay 30% (flat savings tax rate in France) on the net amount of dividends received from the Maltese company.
Of course, if you pay 35% corporate tax in Malta and then pay a further hefty percentage in your country of residence, you are going to end up paying a very high effective tax rate. If that were the case it would make little sense to open companies in Malta for non-residents.
In order to deal with this problem, Malta offers a 6/7ths refund on the corporate tax paid in Malta if the shareholder is a non-resident and non-domiciled person. This brings down the effective corporate tax rate in Malta to 5%.
Here’s how best to structure the companies in Malta:
The structure above features the following:
- The Maltese Trading Company generates income from its trading activities;
- Malta Corporate Tax of 35% on net profits is applied to the Maltese Trading Co;
- Upon distribution of dividends to the Maltese Holding Co, the latter may claim a 6/7 refund of Malta corporate tax paid by the Maltese Trading Co;
- Dividend income and the tax refund received by the Maltese Holding Co is not liable to any further tax in Malta;
- The Maltese Holding Company can distribute in full both the tax refund and the dividend income received to its foreign shareholder;
- No withholding taxes on dividends paid to the foreign shareholder.
In the end, we can conclude that company profits are only taxed at the company level, and not taxed again in the hands of the shareholder. There are in fact, no withholding taxes imposed on dividends. This means that the company owner ends up paying a net of 5% on company profits in Malta (after receiving the 6/7ths tax refund) plus the taxation on dividends received in his country of residence.
One more benefit worth mentioning about Maltese companies, is that in the case of most income being sourced outside of Malta, the company will have the option to defer its tax payment by up to 18 months, giving you a considerable stretch of time to be able to reinvest that money and obtain returns before paying it to the tax authorities.
One new feature as of 2021 is also the possibility for a holding and trading company to present consolidated accounts, and in this manner there will be no need to first pay 35% tax and then wait for the refund for around a year. You would net things and pay 5% tax directly. That’s a big improvement to the scheme in my opinion.
A note about Malta
If you’ve read a few articles on my site already, you probably know I don’t hold back on my opinions and try to speak the truth, even if it works against my own interests sometimes. Therefore, I feel that I should give you a heads up about Malta, so that you don’t get any nasty surprises later on.
First of all, I’m very skeptical about Malta and its general prospects for the future. That’s why I left the country many years ago. For most of you who are planning to set up shop there, this might not be super relevant, after all you won’t actually be living there. However, it’s good to have some background.
Secondly, corruption and nepotism has reached new highs in recent years. Coupled with a general sense of greed and seeing that the money was flowing, the banks and financial companies got a bit lax, and were subsequently heavily chastised by the European Union, leading to Malta being grey listed. The result, as is usually the case, is that the innocent suffer along with, or more than, the criminals and shady people. So thanks to Moneyval and the grey list, opening a bank account in Malta, for example, is a tortuous, if not impossible task nowadays. Many companies have no option but to resort to using digital banks like Wise and Revolut for their banking. The country’s main bank, BoV, has become notoriously inept at handling business, refusing transfers that involve crypto exchanges, and even losing their USD banking partner. Their USD partner nowadays is Western Union, yes, that’s how low they have fallen. Contacting them and having an informed conversation with one of their staff is an ordeal. They’re either suffering the effects of being understaffed or just plain incompetent.
This leads me to the crucial point you need to keep in mind when setting up in Malta: who you work with. Despite my negative view of Malta, it is still a very viable option for those who want to set up a tax-efficient structure, particularly involving Portugal.
So how can you manage it?
Given how difficult it has become for supposedly simple things like opening a bank account, and the frequent inspections being done by the MFSA, it’s essential that you work with someone with significant clout and whom you can trust 100%. Malta has always been a country where it’s who you are and who you know that counts above all. It’s a very small country where everyone knows each other. That’s why corruption and nepotism happen so easily in Malta.
So here’s what happened when Malta became popular for its tax benefits. Many one-man-band lawyers and accountants decided to forego the hard work of dealing with local companies and their issues, and instead focus on attracting foreign companies to Malta, offering boilerplate setups and fixed prices that made everything look super easy. Typically these people will offer the whole package, including virtual office, directors, secretary etc. for a one-time fee plus yearly maintenance costs. This model basically made them rich, and the game was successful for a while. Until it wasn’t.
Nowadays, more than ever, I would advise in favor of going with a long-established consultancy/accountancy/law firm that provides many services apart from incorporations. Make sure you have a reason for setting up in Malta, and are ready to employ some locals, possibly rent an office and find local directors that are separate from the firm that is setting up your company in Malta. Yes, it will cost more, and the costs might be more variable, but you will be much more protected.
Remember, the Maltese firms have nothing to lose when they set up your company in Malta. But if/when the tax authorities of the place you live in decide to probe into your setup, they will very quickly identify whether the setup is a sham, because the characteristics are well-known to everyone in the financial industry. Then you’ll face the extra tax and fines due in your country of residency, or at the very minimum have to face the task of explaining why you set up such a structure.
Personal Residency in Portugal
Portugal’s NHR scheme is very attractive. While in previous years it was most popular with retiree ex-pats, in recent years it is becoming more and more popular with a younger crowd. The holding of the Web Summit conference (the biggest tech conference in Europe) every year in Lisbon has helped young tech entrepreneurs discover the city and the country, and has served to attract some of these entrepreneurs to move to Portugal and benefit from the NHR scheme.
There are more than 20,000 people who are on the NHR program as of 2020. You need to spend 183 days in Portugal or you should have the Portuguese address be your main address worldwide. This latter option is ideal for digital nomads who might not want to spend 183 days in Portugal. Proof of address can be a residency contract or ownership of property in Portugal.
Portuguese authorities have also confirmed that there are no taxes on long-term holdings of cryptocurrencies such as Bitcoin, which is excellent news for a lot of younger people who hold cryptos and might find themselves with a significantly higher net worth in the near future if they continue to rise in value.
Arriving and registering yourself in Portugal is very easy and can be done in a few days (the contrast with Spain is huge in this area) and you get NHR status for 10 years. You can also leave Portugal for a period and resume your NHR status when you come back, however the period of 10 years does not get extended under any circumstance.
Since you have till March following the year that you become a resident to become an NHR, you cannot have one spouse be NHR and reserve another NHR for the other spouse in the future. It, therefore, makes sense for both to become NHRs right from the start.
Lisbon is the most popular area for new ex-pats as it is the place with the most activity and entrepreneurship (45% of Portugal’s GDP comes from there). However, Portugal is a relatively small country so you can also live in other cheaper areas without feeling totally isolated.
There are also no wealth taxes in Portugal apart from a similar tax on real estate assets of high value. Neither are there any forced declarations of foreign assets (like modelo 720 in Spain. You only need to inform Portugal about any bank accounts (and not their value) held abroad.
As with any other tax structure, the place of effective management of a company remains of utmost importance, so you cannot just place a company in a low tax jurisdiction and move to Portugal to obtain tax-free dividends. There should be a strong reason for the company to be placed in that jurisdiction, so as to satisfy the place of management rules and economic substance.
To become an NHR, you will need a rental contract of 6 months or longer, or a property in Portugal in your name. You can move to Portugal at any point during the first part of the year, so as to satisfy the 183 days residency test that most countries use to determine fiscal residency.
Negative Perceptions of Malta and Portugal
Big European countries are typically keen on throwing dirt on the smaller countries that are trying to compete with them via tax advantages. This leads to negative perceptions about countries like Malta, Portugal, Cyprus, Bulgaria etc.
Malta is frowned upon by certain people who think that it is some sort of blacklisted tax haven. However, this couldn’t be further from the truth.
Malta was and has consistently been transparent about its tax system: it is aimed at creating an attractive system that provides comparable benefits to domestic and foreign investors. In addition, the European Council has not brought any cases against Malta related to a violation of the “four freedoms” or the principle of non-discrimination. Malta has fully implemented and complied with all of the E.U.’s tax directives, which are unanimously approved by the Member States in E.C.O.F.I.N, and the Maltese tax system has not been found to infringe on the E.U.’s State Aid rules.
Globally, Malta has applied all O.E.C.D. initiatives to combat tax evasion, including the directives on mutual assistance between tax authorities, automatic exchanges Insights Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 305 of information, and the exchange of tax rulings and advance pricing arrangements in the field of transfer pricing.
Malta is also an early adopter of the Common Reporting Standards and Country-by-Country Reporting obligations. Under Phase II of the O.E.C.D.’s Peer Reviews, Malta has been classified as “largely compliant” in matters of transparency and exchange of tax information. The United Kingdom, Germany, the Netherlands, and Italy received comparable clarification. In June 2016, together with other Member States in E.C.O.F.I.N., Malta approved the Anti-Tax Avoidance Directive (“A.T.A.D.”). Throughout its presidency of the European Commission, all Member States gave approval for the A.T.A.D. 2 in February 2017.
You can listen to a discussion about Malta’s tax advantages between me and CPA Chris Grech on the Mastermind.fm podcast.
Portugal has also been attacked and blamed for unfair competition with Nordic countries, since under the NHR retirees who moved to Portugal paid way less tax than they would in their home country. Portugal has, since 2021, appeased these concerns by introducing a minimal level of taxation for retiree expats in the NHR scheme who receive their pension from abroad. This does not affect the NHR scheme for entrepreneurs with the setup I mentioned in this article.
Place of Effective Management
Opening a company abroad has certain caveats. One important concept is the “place of effective management”. You can’t just open a company wherever tax is lowest and operate from there while living in another country. Your company in a foreign jurisdiction needs to have substance since many countries operate under CFC rules (controlled foreign corporation). I wrote about this topic in my article about digital nomad taxation, as this is the biggest concern for digital nomads or expats when opening companies abroad.
The country where you reside may attempt to tax the profits of an overseas company if such company is deemed to be a resident in its territory because its effective management or/and control is exercised therein.
How do you add substance?
The criteria of “place of effective management” is widely used under many OECD based double tax treaties. The place of effective management is usually considered to be the place where key management and commercial decisions are in substance made. An entity may have more than one place of management but it may only have one place of effective management at any one time. In determining the place of effective management all relevant facts should be considered. These include:
- Where board meetings of directors are held. The frequency of meetings, and whether they actually exercise control over the company are also relevant factors;
- Where senior day to day management is carried out;
- Where the company’s headquarters are located;
- Where the company’s accounting records are kept.
Furthermore, you can add more substance to your company’s presence in that country using the following strategies:
- The company’s income & expenditure passes through a bank account in that country;
- The company may possibly employ one or more individuals, possibly a local resident director. According to EU law, social security contributions are normally paid in the place where the worker works: therefore paying social security contributions in that country may possibly help to prove that the particular individual employed by the company (who may be the director) actually works in the chosen country.
- The company rents premises and has other expenditure (e.g. telephone bills, internet connection costs, accountancy costs, etc).
It is very important to consider the effect of any double taxation treaty existing between the chosen country for your company and your country of residency. A double tax treaty is essentially an agreement between two countries that determines which country has the right to tax a person or company in specified situations. Therefore, the main aim of double tax treaties is to ensure that the same income is not taxed twice.
A few more thoughts on this topic
Ultimately, from my experience, the vast majority of companies opening up in tax-friendly jurisdictions have little reason to be doing so besides the tax advantages. There are exceptions of course, and sometimes the tax advantages are the initial hook only. Sometimes it’s about the tax advantages plus the legislation (for example the online casino and gambling companies operating in Malta). Keep in mind that most people have almost zero knowledge about countries like Malta, Liechtenstein, Cyprus, Luxembourg etc. Throughout the process of research and after getting enticed by the tax law in any of these small or emerging countries (Bulgaria as another example), they might realise that, for example, the quality and cost of labor in such country is really good, and it would make sense for them to relocate part of their operations even if there weren’t any tax advantages in play. This ultimately makes it a big win for medium to big companies as they end up lowering their tax bill as well as also lowering their salary expenditure or improving their operations by such a move.
For smaller players, this rarely is the case, especially for solopreneurs who have no need or intention to hire people in the country where they intend to incorporate. This is what John, like many other freelancers and solopreneurs, had in mind. For such cases, ultimately it’s a question of risk tolerance. The theory says that such a setup would not work as the company is actually managed and operated from another country. However, in order to counteract such an eventual argument, the solution is to appoint local directors, rent offices, have the AGM in that country, and a host of other steps one can take to improve the looks of the setup. This is an open secret, and many companies in Malta, Cyprus, etc. actually offer such services (directorships, office space rental, mail management and forwarding, etc). The tax authorities in most countries have a limited budget and the chances of them going after such setups are quite low, in my opinion. They would have to dedicate resources to investigate the resident’s affairs plus his company ownerships in other countries, which is not a very straightforward task. They will be looking at how likely it will be that they will win the fight to relocate the company’s taxation, as well as the potential revenue in terms of extra taxation that their employer (the tax authority) will gain. It doesn’t make sense to go to any trouble for small amounts.
In practice, if you look at real cases, they’re either involving big companies when the “lost” tax revenue runs into the millions, or it’s quite an obvious case. What would be an obvious case? Well, imagine you’re a rich and famous personality and paparazzi are following you around on a daily basis, hence it is easy to understand where you’re really living and operating from. Let’s say that you now decide to open a company in a low-tax jurisdiction to channel some of your revenue from there. If this comes to light, it is likely that the general population will be angered by the move and it becomes a tabloid soap opera, whereby the tax authorities have all the incentives to enter the fray and not only recoup the lost tax but also send the message to the general public that they are doing a great job at curbing tax evasion. There are a number of famous cases of this sort involving the world’s richest and most famous football players, including Ronaldo and Messi. Even then, where one would think the outcome should be obvious, we see tough and protracted cases where the outcome is uncertain. In such cases, the tax authorities have an ace up their sleeve, in the fact that they know that any court appearance (even if the case is unjust) will damage the personality’s reputation, hence they are likely to use that to their advantage to ultimately cut a deal with the accused person, even if they know the chances of them winning the case in court are slim. I’ve seen a particular case of this type, whereby a TV personality was basically bullied into an out-of-court settlement in order to avoid being dragged to court and thus have his TV career cut short.
To recap, we live in a world where very few things are black or white, it’s all about shades of grey and you need to do a lot of independent thinking in order to arrive at the best solution.
Alternative 1 – Residing in and running a company from Andorra
If you like mountains and a quiet life with a high standard of living, Andorra might be a good option for you.
Andorra is an attractive proposition for many individuals who have high incomes and are seeking a more tax-friendly jurisdiction to reside in.
The new Andorran tax framework has been approved by the OECD and triggers the development of the tax conventions, the first of which have been established with France, Luxembourg and Spain.
Companies in Andorra pay a nominal rate of 10% on corporate revenues. As for individuals, they pay a 10% rate. There is an exemption on the first €3.000 of savings income. There is no wealth tax, inheritance tax, donation tax or property tax.
The strategy of accumulating non-distributed profit in an Andorran company owned by nonresident shareholders is very usual in order to avoid individual taxation in the countries where the shareholders have their tax residency.
The second step to make is some years later, when the shareholders can become Andorran tax residents for one year and perceive the accumulated dividends with a total tax exemption. This is because there is a total exemption for dividends delivered by an Andorran entity to a resident shareholder.
If they decide to re-enter their origin countries as tax residents, they can repatriate their capital without any taxation, due to the fact that the obtained revenue was once subject (but exempt) to the Andorran Personal Income Tax during the distribution year.
A similar strategy can be employed whereby the company owner lives anywhere he wants and withdraws money from his company based in a low tax jurisdiction, but he would only withdraw enough money to sustain himself year by year. The accumulation of profits is allowed to happen in the holding company. When he needs a big lump sum of cash to make a big purchase, he would move to Portugal for one year, where he would withdraw the cash from the company as a dividend, and pay zero tax. The next year he would be free to move back to his previous country or any other country without any questions and be able to repatriate the money to that country.
With that aside out of the way, let’s continue talking about Andorra. If you don’t want to actually move there and spend most of your time in this tiny state, you can become a non-lucrative resident. This is the more common way of having residency in Andorra, as it gives you most of the important benefits without requiring you to live there. It does come with a few requirements though, and you have to have some decent savings to be able to achieve this type of residency. Here are the requirements:
- Deposit at the INAF (Andorran National Finance Institute) worth 50.000€, recoverable and non-remunerated; Deposit at the INAF worth 10.000€ for each dependent;
Availability of enough resources for the titleholder and dependents’ sustenance in Andorra;
Purchasing or renting a dwelling in Andorra;
- Medical, disability and old-age insurance with coverage across Andorra (underage and people over 65 years- old only need medical insurance);
- Minimum of 90 days’ residence per year;
- 400.000€-worth Investment on Andorran assets
Andorra is, therefore, a good option for those with a high net worth. You will find many cyclists, for example, who take up residence in Andorra.
For company owners, I think residing in Portugal is the best right now, although it does require you to actually live there. If you’re more into traveling and being a digital nomad, then Andorran residency is actually better since it only requires you to be physically present in Andorra for three months a year.
I’ve visited Andorra several times and it’s indeed a beautiful place to live in, with the main disadvantages being the colder weather and relative isolation, with the nearest airports in France and Spain being a good drive of around two hours away.
Alternative 2 – Opening a Company in Estonia
Estonia doesn’t tax companies when they make profits but taxes them instead when they distribute dividends. This encourages companies to re-invest in themselves. You definitely shouldn’t confuse that with 0% corporate tax though. Estonia wants you to grow so you can (happily) pay even more taxes in future.
Many people confuse Estonia’s laws and think that there is no corporate income tax, but that’s not exactly correct, as the 0% tax rate applies only on retained and reinvested profits.
This means that Estonian resident companies and the permanent establishments of foreign entities (including branches) are subject to 0% income tax in respect to all reinvested and retained profits and a 20% income tax only in respect to all distributed profits (both actual and deemed).
Distributed profits include:
- corporate profits distributed in the tax period
- gifts, donations and representation expenses
- expenses and payments not related to business
- transfer of the assets of the permanent establishment to its head office or to other companies
Its tax system is fully OECD-compliant and it boasts an extensive tax treaty network while also exchanging tax-related information with more than one hundred jurisdictions in the world on the basis of the relevant OECD convention, which also means such information exchange is also available to those with whom it has no valid tax treaty.
Estonia still collects a sufficient amount of corporate income tax from its tax on distribution of 20% on sporadic or 14% on regularly distributed profits (7% withholding tax adds to the latter if distributed to natural persons).
A Warning about Estonia
I feel compelled to include a warning about Estonia, because I have mixed feelings about the way this country promotes its tax system.
I find it useful to compare Estonia’s marketing versus that of Malta here. Both countries have very attractive tax systems, but Malta generally does not promote it much beyond describing how the tax law actually works. It is then the entrepreneurs, companies, and HNWI who take the tax laws and conduct their own research to find out if they can setup a system that would work well for them.
On the other hand, Estonia as a country, and the many Estonian private tax and consultancy firms that have sprouted there, make a big splash about the benefits of doing business through Estonia. I feel that they many times neglect to explain things properly and focus too much on how easy it is to get an e-residency and open a company there to start operating.
The result is that I see many people opening companies in Estonia or operating through other schemes where they are unwittingly taking significant risks and going against basic tax law principles.
Estonia’s taxation system does have favorable features for investors — including a unique corporate income tax system that has worked well for almost 20 years — but a company can only benefit from it on its profit attributable to Estonia. This is the same thing I described in Malta’s case above. If your activities create a permanent establishment elsewhere (a fixed place of business in a foreign jurisdiction), this may give rise to taxation there.
If, for example, a French entrepreneur opens a business in Estonia through e-Residency, but all of his or her physical operations are from France, the work is carried out in France, and all of the sales are done to France, then with 99,9% probability there will be a permanent establishment in France and all of the profits on these fully French operations will be taxable in France. No one must have any misconceptions about that. In addition, should there be international operations the profits of which would be taxed in Estonia, then the dividend paid to a French resident will be subject to tax according to the French tax rules on private individuals (and the French authorities will receive adequate tax information from Estonia).
To further dig deeper into the nuances of operating through Estonia, I interviewed the CEO of Xolo on my podcast Mastermind.fm. Here’s a link to the episode. Xolo is a company that specializes in getting solo businesses set up and running in Estonia. I love the UI of their service and they offer good support according to entrepreneur friends of mine who use their services. They also have different levels of service and prices to suit your needs.
However, even after having this discussion, I remain really skeptical about the whole Estonian e-residency and tax scheme. The Estonian setup is frequently marketed to solo freelancers when in many cases these types of workers would be liable to tax in their country of residence and can’t just open a company in Estonia and shift all their profits there to avoid taxes back home.
If anyone can prove that my thinking is misguided, please do get in touch or leave a comment below. However, so far and after speaking to several entrepreneurs and tax lawyers both in Estonia and in other countries, I have not been convinced that this is a viable long-term setup. If you opt for this setup as a freelancer, you might very well get away with it, but you will probably run into difficulties long-term.
To be clear, I am happy that Estonia has made it so easy to open a business and operate within Europe, and I think there are definitely cases where Estonia is a good option. Digital nomads who spend most of their time outside Europe but want to operate within the continent are good candidates, for example (and again, you need to check things properly with a tax lawyer before). It’s just the way the tax system is marketed that feels off to me.
Also, if you’re actually thinking of moving to Estonia and living there, you might want to ask a few people how that feels like before taking the plunge. Here’s one account of life in Estonia, where it seems the author made the wrong choice in moving there expecting one thing but getting another. I would chalk his disappointment to being unprepared rather than any serious issues with the country or the Estonian people themselves.
Alternative 3 – Residing in Cyprus + Company in Malta
Cyprus is very attractive to entrepreneurs via the non dom scheme. The Cyprus Non-Domiciled Tax Status provides a number of tax advantages, mainly the exemption from capital gain tax on income from dividends and interest.
The minimum stay is 60 days.
An individual enjoys the Cyprus Non-Domiciled Status if he/she is tax resident of Cyprus and has not been a tax resident of Cyprus as per the Income Tax Law for a period of 20 consecutive years prior to the introduction of the law (i.e. prior to 16 July 2015).
The tax payable by a Cyprus resident non-dom on dividend income will be zero.
Cyprus is a nice place to live a relaxed life surrounded by nature and nice beaches, but it’s obviously not an international business hub and it’s farther from central Europe than Malta. Also, if you’re looking for active city life, then I would say Portugal would be a better choice under the NHR scheme.
English is not as widely spoken in Cyprus when compared to Malta, and Cypriot banks have a far worse track record than the Maltese ones. However, these two facts are less of a problem if you opt for only residing in Cyprus, while basing your company elsewhere, for example Malta.
Alternative 4 – Residing in Gibraltar
Gibraltar does not impose any tax on dividends, so you can receive your dividends from your company located elsewhere tax-free. Note that Gibraltar’s relationship with Spain is a bit tricky so it’s best not to mix the two. There is also the question of whether Brexit will change things going forward, since Gibraltar is now no longer part of the EU.
Alternative 5 – Residing in Sark
This is definitely an option that will seem attractive to only the most adventurous out there, but it’s a valid option nonetheless. Sark is an island in the English Channel and home of investor Swen Lorenz, and its residents are exempt from paying UK tax.
Alternative 6 – Italy
New tax resident individuals who opt for the regime shall pay an annual flat tax of € 100,000, that absorbs and replaces any tax (income and wealth tax) on non-Italian sourced income and assets (both financial and income from a working activity), even if remitted to Italy;
Italian-sourced income is taxable under ordinary rules.
The regime lasts maximum 15 calendar years.
Nevertheless, an antiavoidance rule is applicable to gains deriving from sale of significant holdings in foreign companies, within the last 5 years.
HNWIs that keep foreign entrepreneurial activities (e.g. through holdings) are not subject to CFC (look-through) and place of management rules.
HNWIs can also elect to exclude from the flat tax regime income sourced from selected Countries (“cherry picking”), that becomes fully taxable in Italy, thus benefiting from foreign tax credit rules.
Individuals can elect to apply the regime if they have been resident out of Italy for tax purposes for 9 out of 10 of the previous calendar years (of course the regime applies to individuals that have never been resident in Italy). It is also applicable to Italian nationals, and additional family members can be included in the scheme by paying an extra €25,000 in yearly tax for each member.
Alternative 7 – Greece
Greece has a similar program to Italy, whereby under their non-dom program for HNWI you would pay annual global taxes of €100,000,. There are no inheritance or gift taxes on foreign assets. The program can be used for 15 years, and additional family members can be introduced to this scheme for €20,000 each.
For those who have a foreign company and obtain their income through dividends, they’d pay just 5% in tax.
Greece is a nice place to live but there are still serious problems with the country’s financial infrastructure, so it wouldn’t be anywhere near my top choices.
If you do some reading, you will undoubtedly come across even more alternatives. I’ve researched a lot of them and even visited the places, and for some reason or another, I don’t consider them a good idea.
Here are some of them:
- Monaco – This article sums up my feelings about the place quite nicely.
- Bulgaria – Too much of an emerging country feel for my tastes, although I know people have successfully set up there with the right experts guiding them.
- Georgia – Same as Bulgaria.
- Dubai – One of the most popular solutions among Europeans looking for tax respite outside Europe. Contact me if you’re interested in this option. Only downside is I wouldn’t live in Dubai.
- Ireland – Good corporate tax rates, but a better deal can be had in Malta or Cyprus, even due to professional fees being much higher in Ireland than in competing jurisdictions.
- Spain – Many expats use the “Beckham law” which lets them pay 24% tax on their income for a period of 6 years, plus no obligation to pay wealth tax nor fill in the modelo 720. For everyone else, Spain is not a good place due to the many forms of taxation it levies. On the other hand, it is a candidate for the best quality of life in Europe, so you should also keep that in mind. Contact me if you need tax advice in Spain, I know some good tax lawyers there.
The Non-Optimized Alternative
In this article, I have focused on optimization from a tax perspective, but we might also talk about optimizing for other factors, such as overall quality of life, or kids’ education, just to mention two other examples.
I do not recommend focusing only on tax when optimising your life and choosing your flags. Of special emphasis is the place of residence – you want to make sure that it’s a place you love. In my case, I want to live in my favorite city/country on earth irrespective of the tax conditions, and then optimize given that constraint.
Even though some countries might have very inefficient and outright oppressive tax laws, you can still go far with optimization. For example, if you decide to live in a country that imposes high taxes on income, you can give yourself a relatively small salary or amount of dividends, while keeping most of your company’s profits in a tax-efficient country where you would in turn base your company.
The only major problem with this setup is when you need to make big purchases.
Let’s say you want to buy a house to live in with your family. There are two options – you can either buy it in cash or get a loan.
If you want to buy it in cash but don’t have enough savings in your personal bank account, you are going to have to make a potentially big withdrawal from your company via salary or dividends, which means you’re also going to have to pay a good chunk of tax.
The main solution to this problem is to move abroad for a year or two to a country like Cyprus or Portugal, which don’t tax foreign dividends. You would then make the big withdrawals and then go back to your previous country with money in your personal bank account, being free to make the purchase without any tax consequences. It is important to talk to a good tax lawyer if you opt for this option, to make sure that there are clear cut off points in your residency and that no suspicions are raised. However, it is a totally legal option that many people use every year.
I’ve also seen people who are bound to make a big inheritance use this strategy to avoid paying a substantial amount of inheritance tax. Malta, for example, does not levy inheritance tax, but Spain does, so it would make sense for someone to move to Malta for a couple of years if it wouldn’t really disrupt their lifestyles and would result in massive savings on an inheritance.
On the other hand, if you decide that it would be more beneficial to obtain a loan and use your company’s cash reserves for investment purposes, you will encounter another problem. Most if not all banks will not grant you a loan if you are not registered as self-employed or own a company in the same country where you’re living and buying the property. Unless you can show monthly payslips it will be hard to obtain any financing, even though you are the owner of a company in another jurisdiction that has plenty of cash reserves.
Here your options depend on your banking relationships. It might be possible to get a loan anyway, or maybe get a loan from your home country where you have long years of banking relationships. Another option is to buy the property from the company’s side as an investment, in which case you would be able to obtain a loan from a bank to the company. You would then need to rent the house to yourself paying the market rate in rent. You would then pay tax at the company level on that rental income, so it’s not the most elegant solution either. In some countries, there are also disadvantages of buying property via a foreign company setup.
Another possible option would be to obtain a loan by putting up some other type of collateral, for example stocks or even crypto. For big holders of cryptocurrencies, this has become a very attractive option, although crypto borrowing and lending platforms are available to everyone.
Do you know of any other solutions to this “problem”? Chime in with your thoughts in the comments section below.
Extra tip: Opening a company in the United States
For some businesses, opening a company in the United States can have important advantages. People I know have used Firstbase to get set up in the US (LLC and SCorp, Delaware and Wyoming for 399$ with Mercury.co account).
One big advantage is the ability to use Stripe for payments, if your country does is not yet in Stripe’s list of supported countries. This was the case for companies based in Malta until Stripe finally opened its doors to them in 2021.
You can get a 5% discount on Firstbase services by using the code GALEA5 at the checkout stage.
Set up a US company with Firstbase (code: GALEA5)
There are many other advantages of having a US company, including tax benefits, an easier way to make investments in the stock market, crypto etc, as well as making better use of the tons of online e-commerce stores and services that only serve US-based customers.
Apart from Firstbase, you can also take a look at Stripe Atlas, which was a service that was set up by Stripe to help foreign companies incorporate in the United States. The benefit for Stripe is that they get access to more companies without needing to go through the regulatory process to register in the countries where those foreign companies are established. It’s a very nice hack by Stripe in order to expand globally in a rapid manner. It will become less important for them as they eventually do go through the regulatory hoops of each individual country where they want to operate. Over the past two years, they have in fact greatly expanded their operations globally.
While these made-for-you services are a nice first step for small businesses or individual entrepreneurs who want to learn more about forming a company in the United States, I would always advise that you consult with a US-based international tax consultant before you implement any such structure. There may be hidden costs or downsides that you need to be aware of, and such an expert will be able to immediately tell you whether your plan is feasible or not, and also help you set things up correctly and manage the yearly filings.
If you want me to connect you to my trusted international tax consultant who specializes in U.S. company formation, just get in touch and I’ll be glad to make introductions.
If you’re interested in tax optimization and personal freedom and sovereignty, I would highly suggest you read about flag theory.
Flag Theory is all about diversifying your life and staying protected. The Five Flags deal with residency, citizenship, banking, assets, and business. It’s a strategic internationalization process designed to increase your freedom, protect your privacy and grow your wealth in leading jurisdictions.
I learned about flag theory many years ago in my days as a digital nomad, and it has influenced my choices ever since. As I mentioned in my thoughts about nationality, I think we are moving towards a future where people actively choose where they want to live and do business.
This is totally contrary to the traditional view that you are born in a country and being patriotic to that country (even to the point of dying for your country!) forever. I think that many countries are not run efficiently and put an ever-increasing burden on their citizens due to their politicians’ ineptitude and abuses, and that is not acceptable.
The modern workforce is becoming increasingly mobile, and if you’re an entrepreneur especially, you have a lot of freedom that you might not have considered before.
If you want to learn more about flag theory I suggest you open these blogs and just read as many of their blog posts as possible. I bet they will change the way you think about things in a significant way.
- Flag Theory
- Nomad Capitalist
- Tax Free Today
- Freedom Surfer
- Offshore Living Letter
- Escape Artist
- No More Tax
- Offshore Citizen
A good forum worth visiting on the topic is Offshorecorptalk.com.
A word of warning, though. Keep in mind that all these websites are promoting flag theory. It’s an important concept to think about, but you don’t need to go overboard.
Here’s what I think are some of the biggest wins you can get by implementing flag theory and sovereign individual principles:
- separate your business from yourself i.e. create a company
- create the company in a tax-friendly jurisdiction that’s different from where you live
- live in a great country with good weather, culture and economic freedom, low taxation, good air connections, in a convenient timezone
- have bank accounts outside your country of residency
- opt out of fiat money, hold a decent amount of bitcoin and multiple fiat currencies at the minimum
- invest outside your country of residence, in developed economies, keeping an eye on the developing ones too
On Opening Bank Accounts
Bank accounts have become very hard to open and maintain all around the world over the past few years. Be prepared to explain all big incoming and outgoing transfers and have documentation on hand.
You should also know the difference between the so-called “digital banks” and real banking institutions.
For example, two popular app-based digital banks are:
While I’ve used both and they are excellent for what they’re meant to be used for, they should not be mistaken as an equivalent to a bank account.
In fact here is what Revolut itself says about their accounts.
…when we hold Electronic Money for you, us holding the funds corresponding to the Electronic Money is not the same as a Bank holding money for you in that: (a) we cannot and will not use the funds to invest or lend to other persons or entities; (b) your Electronic Money will not accrue interest, and (c) your Electronic Money is not covered by the Financial Services Compensation Scheme.
As an FCA authorised institution, your funds are safeguarded as per FCA requirements, the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.
In the event of an insolvency, you will be able to claim your funds from this segregated account and your claim will be paid above all other creditors. We’re not a deposit taking institution, we’re an E-Money Institution and clients funds are safeguarded pursuant to safeguarding provisions of the Payment Services Regulations (regulation 19 of the PSRs).
More or less the same thing is said by TransferWise:
Your TransferWise multi-currency account is an electronic money account. It’s different from a bank account because:
you won’t be able to get an overdraft or loan
you won’t earn interest on your account
although your bank details are unique, they don’t represent real bank accounts, but simply “addresses” for your electronic money account. You can still use them to receive payments though, like a real bank account
your money is protected and safeguarded, but not guaranteed by the Financial Services Compensation Scheme (FSCS) that you may get with a bank account
The main benefit of using your TransferWise account over traditional accounts is that you won’t be charged international transaction fees or outrageous exchange rates.
You can send, receive and convert currencies all in one account. You’ll always get the real exchange rate and the lowest possible fees.
So while I love and use both of these services, they are not a substitute for a real bank account. If, say you want to open a company in Malta, you will want to open a bank account at one of the few local banks there, and it won’t be easy to open and maintain the account unless your accounts are squeaky clean and everything you do is well-documented.
There are many possible setups for optimizing your tax situation both on a personal and a corporate level. Not discussed in the post above are places like Dubai (zero corporate and personal tax), the Baltics (generally low taxation) and Eastern Europe in general (10-20%). There are many considerations in structuring things and you need to see what’s best for you and your family not only from the taxation aspect but also from other aspects.
In general, I think it is a good idea to separate things as much as possible and have backup plans, and these are part of the flag theory idea. For example, Spain is a horrible place to be if you want to invest outside of Spain, so it might make a lot of sense to conduct your investments through a company in another country while keeping your personal situation plain and simple in Spain. That will reduce your accounting fees and also many headaches.
Note that this is just a summary of my research on the topic and my discussions with various tax consultants. It should not be taken as tax advice.
If you would like to set up an appointment with a professional to discuss how you can set yourself up using the strategies above, please contact me.