Estonia E-Residency & CFC


#1

So, I’ve been looking into e-residency and moving my business to Estonia the past few weeks.
I’m still a tax resident in Germany and therefore fear I’ll be suspect to CFC laws. I somehow can’t find any reliable info on this and I don’t feel like reading through the whole law, so just wondering if anyone knows how CFC laws in EU countries come into practice. What taxes do I need to pay exactly? As soon as I cash out (dividends), as far as I can see I need to pay 20% income tax in Estonia. Then what? Of course, I would need to pay income tax in Germany. What taxes do I need to pay besides these?
And if I keep the money in Estonia/reinvest it, am I right that I wouldn’t need to pay any taxes at all? Only for the money I cash out of Estonia/the business?

I’m by the way not doing this to evade taxes, taxes are secondary. I primarily simply want to move my business activities out of Germany + the all-digital concept and the bookkeeping service of agencies like leapIN are interesting.


#2

You will get some varying responses to this, but I did some pretty extensive research on the e-residency possibility last year.

My opinion is that unless you are from outside the western banking world, Estonia E-residency is worthless and expensive. The single benefit it has is giving access to the EU banking system, which could be invaluable for a startup from Nigeria or Kazakhstan. Otherwise, it is simply another step in between you and your income, and it will end up costing you 20%.

For someone from Germany, or the US (like myself) it is literally just an extra tax. The accounting and business registration services are handy, but available almost anywhere else.


#3

I don’t really get how it would cost me an extra 20% though. Sorry for the really dumb question, but I’m not really familiar with CFC & double taxation. Aren’t double taxation treaties in place to safe me from paying double tax? So, wouldn’t every tax I’d pay in Estonia (the 20% income tax?) be offset in Germany, so I don’t have to pay that again? I don’t see how it would cost me more than running the business in Germany.


#4

I’m no tax expert, but for me specifically the double taxation only applies on a personal income level. We have multiple companies registered in different countries, but we are not able to use one company to reduce our tax load.


#5

Hello friedelio, my name is Reinis and last 8 years I have been working in management consulting area in Baltics. Since the e-residency is a big thing in Estonia, we are consulting customers from all over the world about this subject.
gilgildner is partially right about double taxation - it applies on level of personal taxation, therefore by definition you wouldn’t be able to avoid taxation in Germany, however, it is incorrect to state that there would be simply 20% more, because it always depends on double tax agreements between involved jurisdictions - in this case DTA between Estonia and Germany.

I wouldn’t agree that e-residency is a useless tool and even more - I wouldn’t agree that it is a useless tool for people from USA and / or Germany. However, it can’t be considered as tax evasion tool as well.

It always depends on type of your business. If you are working as a freelancer, then there are many benefits to obtain e-residency. Especially when you compare tax administration systems in Estonia and Germany. You would be surprised how easy and convenient it is to do all legal proceedings in Estonia.

If you set up your Estonian company in a right way and you are oriented on development of the business, then overall costs would be lower than business costs in Germany. If you wish to discuss this in private, then feel free to look me up on Linkedin or on facebook and I could tell you more about this depending on your specific business model.


#6

Thanks for all the information. I’ve been wondering about how this works for a while.

When I discussed foreign companies with my German tax consultants last year they told me that the German authorities do a legal fiction and treat a foreign company as if it was in Germany as long as I (officially) live in Germany. If I live in another country those authorities might treat the company as if it was there.

Is that what you guys mean with the additional cost?


#7

There is a difference between CIT and PIT and, different taxes apply to dividends and profits from a company and salaries.

Your Company and You are separate entities:

You pay PIT on all income + social contributions from salary, usually where you live.
Your Company pays CIT, usually wherever it’s registered.

CFC will only affect companies moving out (at least that’s the requirement, i.e. Poland hits everyone and everything with CFC regulations, which are nothing else than anti-competition laws in the end.).

If you stay in Germany you will pay PIT in Germany, however you will pay your CIT in Estonia. Estonia only charges CIT on the profits you pay out as dividends. And this is tricky to understand. Think of it, the other way around: Estonia charges the company 0% tax on profit that stays in the company, but the company pays 20% tax on profit payed out to shareholders. It’s not you that is subject of that tax, it’s your company.

After that you’re subjected to tax of dividends as part of your PIT in Germany. Dividends are usually taxed more preferentially than salaries. Still, Estonia is very tax expensive if you pay out most of your profit.

Alternative is to pay out salary from Estonian Company. However if you’re only beneficial owner of the company - a big chunk of your salary has to be a bard member salary (30% I have been told) which is subject to Estonian tax 20% + 30% Estonian Social Contribution, unless you pay social contributions in another EU Country (in your case Germany). Rest can be payed as salary for any services you provide to the Company, and taxed as salary in Germany.

As you can see it does add a lot to complexity, but might save you few EUR.

Saying that if you do business in Germany for German Clients your company might be deemed a shell company which is real tax avoidance scheme, and charged CIT in Germany.

I was looking into that, I even got the e-residency, but I recalculated and it’s cheaper to incorporate in Romania, Bulgaria, or other. For me Gibraltar is the best option, but I travel and I will aim for tax residency in Portugal.

Th real benefit of Estonia is that you can do most signature requiring activities online, and it is supposedly easy to run things from legal perspective.

I heard that German Revenue office is becoming more and more aggressive as taxpayers flee the system, actually over-taxation of Germany and France is the main reason EU is introducing exit tax. They are afraid that Britain will introduce preferential rates.

PS> I’m not a consultant, all of the above is my opinion based on some research I did. I might be wrong :slight_smile:


#8

Is the online banking and online tax filling in english? How is the estonian gov to do buisness with? I wonder if its as good as its sounds