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Company Formation Jurisdictions for Saving Tax in Europe

Julia RichardsDecember 2020
Company Formation Jurisdictions for Saving Tax in Europe

Before anything else: This is not legal advice! Company formation in Europe is an intricate subject. If you are looking to optimise your tax structure by forming a company in one of the European member states, we suggest getting expert advice while doing it.

 

Tax optimisation and company formation

Depending on what type of business you’re planning on running, you might want to consider registering your company in a Europen country other than your home country.

The main reason for doing this is to save on corporate taxes. There are jurisdictions where corporate tax is extremely low. Places like Malta, Ireland, Gibraltar, Hungary, Lithuania and other jurisdictions offer some of the lowest corporate taxes in Europe.

But there is more to know about this. If it was just as simple as registering a company in Hungary to save on tax when you’re located in England, then everyone would do it.

 

You’re (probably) always going to pay some tax

Forget everything you’ve read about “not paying any tax”. It’s likely not going to happen. Pressure from bodies such as the OECD (Organisation for Economic Co-operation and Development) make reducing one’s taxable footprint to zero almost an impossibility.

A lot of developing European countries offer excellent tax advantages for companies, but remember that a company is a separate legal entity to an individual. Once you take that money out of the company you are then taxed on that income personally by whatever regime you are currently registered under — more often than not, where you’re physically located.

Setting up a company in, say, Hungary so you can pay lower corporate tax doesn’t mean you will have access to that money personally. The money belongs to the company which is a separate legal entity.

Once you take the money out in the form of a salary or dividends, you will be taxed on it by your local authorities.

 

What works for big corporations might not work for small ones

What works for big corporations might not work for small ones

“Base erosion” and “profit shifting” — which are basically methods of “eroding” one’s taxable base and “shifting” one’s profits into more advantageous tax regimes — are common practices amongst large megacorps. Just witness the number of tech companies who have made Ireland their home, or the huge number of banks that are based in Luxembourg.

But, for smaller businesses, such intricate manoeuvres are cumbersome and often bring little return when comparing the costs required to set it up.

Either way, if you’re planning on moving anyway, then Ireland has extremely favourable corporate tax rates (12.5 per cent, which is staggeringly low for Europe), as do Hungary, Romania, Lithuania, Estonia and a few other countries.

 

Where is the work actually being done?

This is the fundamental question to be answered when you’re looking to optimise your tax by forming a company in another European state.

There are exceptions to every rule, especially in legal matters. But, generally speaking, you or your company will be taxed wherever the work is actually being done.

That’s most often the case for service companies. If you’re selling a product, it’s a little different. Companies that sell a product must often follow numerous tax laws based on where the product is sold, and to where it is being delivered. In many cases, it does make sense to start a company in one of the lower-tax countries if you are selling a product across Europe.

 

Dividends

Dividends are taxed according to extremely complicated laws.

Each European Member state has its own “withholding rate” for dividend payments for foreign individuals.

The country you are personally registered in for tax then has its own taxation tables for dividends on the individual level.

Let’s follow that closely. There are three steps here:

  • Corporate tax (domicile of the corporate entity)
  • Withholding tax (domicile of the corporate entity)
  • Personal income tax applied to dividends (domicile of the individual)

Almost all European Member states have withholding taxes for dividend payments (nominally, Estonia and Latvia do not, but they levy a 20 per cent corporate tax when dividends are distributed). These withholding rates vary from member state to member state and can be mitigated by existing Double Taxation Treaties so that you are not taxed in two jurisdictions for the same income.

It is advisable to talk to a tax adviser about the best possible option for optimising your dividend payments.

 

What type of business do you run?

If you’re a one-person show, you’re unlikely to achieve many benefits from forming a company in a different European country because your money will need to stay locked in that company for you to benefit from the corporate tax savings.

If, however, you are planning on moving soon, or if you spend a tremendous amount of time in that country then, yes, registering a company in that jurisdiction might reduce your taxable footprint.

Again, it depends greatly on the type of business you’re running.

Romania might have stunning tax savings on both a corporate and an individual level, but it is a developing economy and the purchasing power of local consumers is not that strong. If you are planning on moving to Romania, Hungary, Lithuania or some other low-tax jurisdiction and do your business primarily in another country (e.g. via the internet) then a world of options opens up to you to optimise your taxable footprint through registering a company there.

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Julia Richards

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