The European Union (EU) has many advantages, but its disadvantages have increased disproportionately in recent years.
The European Union has gone from making great achievements, such as a common internal market for goods and the opening of borders for people, to becoming a totalitarian paternalistic regime that does not stop even in the most private areas of the lives of its citizens.
In today’s article we want to talk about the negative changes for the self-employed and entrepreneurs that have happened in recent years and what is being planned today.
At the request of the European Commission and the OECD, several measures have been taken that make it increasingly difficult to manage a successful company, and not only for EU citizens.
However, the sovereignty of many EU Member States remains high and, especially in Central Europe, there is considerable resistance to losing national competitions and transferring them to the EU.
To end the article we will briefly discuss the opportunities that entrepreneurs have despite the new regulations present within the European Union.
Cyprus is still the best option to protect oneself while living and having one’s company within the European Union, but in some countries it is still possible to produce and live without paying too many taxes.
You will find at the end a small list with the 5 most interesting countries in the EU, with a special focus on taxes and social security.
Abolition of bank secrecy by the FATCA law of the European Union
The automatic exchange of information international (CRS) is no longer the only enemy to your privacy, at least if you reside in the European Union. The EU states have agreed on a stricter and more transparent system, taking into account the US FATCA system. A system which, by the way, goes unnoticed by many.
Just as the automatic exchange of information worldwide continues to have some shortcomings that allow you to avoid it, these are still totally eliminated within the framework of the EU FATCA. Also included in the exchange are financial service providers, such as brokers or fintech.
The 28 EU countries regularly exchange information on account holders. The exchange is made taking into account the address with which you have verified yourself (place of residence) and, unlike the CRS, your nationality as well.
Therefore, all EU accounts, whether private or company accounts, are completely transparent to the tax authorities and to many other agencies.
Generally, the only way to prevent other EU countries from accessing your information would be to have a personal residence (and nationality) in the same country as your bank. In this case the bank would only provide information to the country in which you are.
Directive 2014/42/EU on the embargo
With regard to the possibility of seizing your accounts, this goes so far that a bailiff can easily access your accounts even outside the country.
All EU countries, besides Denmark and Great Britain, have signed the Directive 2014/42/EU on the embargo, which aims to facilitate the cross-border attachment of accounts.
Foreign accounts still enjoy some degree of protection even if they are in the EU. It is unlikely that Haciende will empty the account you have in another EU country from one day to the next without prior notice.
However, it must be clear that the accounts in the EU are not safe, that in case of debts the creditors could get access to these and, of course, thanks to the EU FATCA Agreement, the bailiffs know where to look and have a fairly accurate idea of the accounts and the amounts that you have within the European Union.
The transparent employer through the EU transparency register
Of course, transparency in the EU not only affects bank accounts, but also the companies themselves. Even the general public can access this information.
Whereas in the past there was the possibility of avoiding appearing publicly in the commercial register by going to front men, in the future a transparency register of the effective beneficiaries will make this useless.
All EU Member States should introduce a transparency register that provides precise details about the so-called “final beneficiaries” of the companies.
From now on, using the typical fiduciary services will not make sense, the one that really cannot or does not want to appear in the registry must be able to fully trust in another person and give him all the power.
SEC standards in all countries of the European Union
If until now only the Western countries with strong fiscal pressure from the EU have their rules regarding controlled foreign companies (SEC or CFC rules), all other member countries of the EU should have the same for the year 2021.
The SEC standards (CFC rules) are intended to prevent the management of ghost companies abroad, taxing them as if they were local companies (effective management) or applying additional taxes (if they have passive income).
Until now, a person with residence in Eastern European countries would not have any problems managing foreign companies. It remains to be seen how this will develop after the introduction of the CFC-Rules.
Be that as it may, there is hope: the EU has not imposed any minimum conditions on the CFC rules. Thus, Cyprus has introduced CFC rules but only at company level; that is, they do not apply to companies controlled by people.
That said, it remains to be seen how the legislation will develop in the countries of Eastern Europe.
Exit tax in the EU
As with the CFC rules, all EU Member States should also introduce exit taxes by 2020. This would apply in the case of a taxpayer abandoning the country and moving to a non-EU country.
The idea is to apply an exit tax to all the shares in companies that exceed 1%. This will occur as soon as the taxpayer has been subject to taxation for personal obligation in the respective EU country for at least 5 years in the last 10 years.
As a general rule, the exit tax assumes that the shares in the possession of the person who emigrates are valued and subject to taxation as if their sale had taken place at the time of departure.
The sale of the company does not have to be real (no one forces you to sell), what is real are the taxes that you will have to pay on the capital gains (the difference between the acquisition value and the sale price).
However, the EU Member States still have some room to maneuver in order to introduce the exit tax.
Poland, for example, exempts companies with shares of less than one million euros from having to pay exit taxes. Other countries require a certain minimum participation, a period of permanence or other factors.
Obligation to inform in cases of international tax optimization – DAC6 (directive on fiscal intermediaries)
In accordance with the DAC6 Directive (on which we have an article in preparation), tax advisors, lawyers or any other type of professional resident in the EU must inform a national authority of internationalization projects for the tax optimization of the company from those who know about it. The obligation to inform is transferred to the client in those cases in which the tax advisor relies on his duty to maintain confidentiality or if he is an advisor based outside the EU.
General Data Protection Regulations
In 2018, the general data protection regulation caused a stir. In practice, the new regulations have not been as fearsome as expected. Those that adhere to the new data protection guidelines of the GDPR, even superficially, are safe in most of the Member States. This article describes the options you have to adapt or avoid the GDPR.
At this point it is worth mentioning that the EU is far from having satiated its regulatory eagerness as far as the Internet is concerned. In particular, the copyright law for press editors, recently approved, with the introduction of a possible load filter, is a cause for concern and poses problems for many EU online entrepreneurs.
Be that as it may, it remains to be seen how this law is applied; Google and other large companies in the US will not be limited to simply playing along. It will not be the first time that they close a service in the EU.
The end of the IP Box
The popular Patent Box that allowed many tax savings to be saved will continue to be able to be used in some EU Member States until 2021. All income coming from intellectual property rights are, according to these subjects, at a much lower tax than the common one.
In Cyprus this is a reduction of around 80%, that is, an effective tax of 2.5% (instead of the usual corporate tax of 12.5%). The Cyprus IP box is defined in a very broad way and includes the sale of electronic books, courses in video format and much more.
This fiscal practice does not fit well in the EU, so they have been forced to eliminate it. The new law for the IP box has been developed following the recommendations of the OECD.
Thus, it will still be possible to benefit from these, but in a completely different way that will only serve large companies. In particular, only patents and computer programs can benefit from the tax reduction, and only in a given country in proportion to the development costs.
VAT reform in the European Union
In 2018 a reform of the European Union VAT was adopted. This affects to a greater extent companies that are not part of the EU and creates what they call fairer competition, (now no one has advantages).
On one hand, the exemption from VAT tax will not apply for goods under € 22 sent directly to the EU from abroad. The typical case was shipments from China.
In addition, marketplaces such as Ebay and Amazon will be required to request and check the VAT numbers of the companies that sell with them.
The VAT was also revised for digital products that were automatically distributed. Unlike what happens with the other modifications, in this case we have a positive change: instead of having to charge VAT according to the country of the customer from the first euro, digital products distributed automatically can be charged VAT from the country of origin (of the company) up to a threshold of € 10,000 per country.
That is, if VAT is not imposed in the country of origin of the company, up to 10 thousand euros of sales in digital products will not be required to be charged VAT.
The black list of the European Union
To combat international tax evasion, the EU has prepared a blacklist of tax havens. Currently, this list is only symbolic. However, it is possible that in the future it will entail sanctions against the countries in it.
Currently the list includes the following countries:
Samoa, Trinidad and Tobago, American Samoa, Guam, Virgin Islands, Aruba, Barbados, Belize, Bermuda, Dominica, Fiji Islands, Marshall Islands, Oman, United Arab Emirates, Vanuatu.
As we already stated at the time, the package of actions of the OECD BEPS Directive goes even further than the CFC rules and the DAC6.
Be that as it may, the majority of actions refer mainly to large companies.
Some of the actions include:
- Avoiding imbalances due to hybrid structures
- Variations in the definition of the place
- Denial of benefits of the Double Taxation Agreements (Limitation of benefits clauses)
- Transfer Pricing
In Perspective: General Corporate Tax
There is no doubt: the European Union has not yet tired of regulating. After trying to avoid tax evasion and fraud by all means, it is expected that the next step will be sooner than later.
We are talking about the introduction of a general corporation tax for the entire EU.
Currently, important debates are already taking place on the change of the principle of unanimity in fiscal matters of the EU Member States to a majority principle (simple majority).
This change will make it easier to legislate in the EU and make it difficult for the States that give the companies the best fiscal conditions to protect their national tax legislation.
Right now, the minimum company tax allowed in the EU is 10%. However, many countries have made exceptions for smaller companies, which tax their turnover to a certain minimum volume or have a certain number of employees.
Other countries, such as Malta, have a complicated tax refund procedure that converts 35% of corporation tax into an effective tax of 5%.
Poland and Hungary, the most “rebellious” states in the EU, openly rebelled with a corporate tax of 9%.
In the debates about a common corporate tax there is now talk that this is around 28% and that, of course, it will apply to all EU countries.
In Perspective: Tax of the European Union according to nationality
In the end, this could also amount to a tax of the global income of EU citizens based on their nationality.
As of right now, only the United States of America and the African country Eritrea apply this system of taxation to their citizens. No matter where in the world they live, they must pay taxes to their countries of origin.
In the USA a tax exemption of approximately $ 100,000 is applied, provided that the taxpayer has a tax residence abroad and passes a maximum of 35 days of the calendar year in the US.
From that amount, Americans must pay taxes in the United States as well. Of course, double taxation agreements are taken into account.
The tax according to one’s nationality turns out to be a very difficult tax to avoid.
In Eritrea’s case, the country’s citizens are not directly allowed to renounce their nationality and their families are subjected to torture in case the Eritrean abroad does not pay the taxes in their country of origin.
The US follows a somewhat more civilized system: they do allow you to renounce your US citizenship (and do not torture relatives of tax evaders), but you have to pay a processing fee of $ 3,000 and go through cross-examination with trained American officials who want to prevent you from making this decision.
Oh, and you also have to pay an exit tax.
By renouncing US citizenship you are forced to pay all income taxes for the last 5 years at one time.
Once you have abandoned your nationality, going back to your country of origin will not be easy, as they will give you a hard time at the border.
It is likely that at some point, Germany and other EU states will want to use this tax system according to nationality. The only thing that currently prohibits this tax system is the EU legislation.
The European Union does not allow this type of tax according to nationality if it comes about as the initiative of a single country. Of course this all changes if the majority agrees, in which case all countries would be forced to adapt this system.
It is not surprising that efforts are already being made at the EU level to tax EU citizenship.
There is a working group of the European Commission that is working on this issue. After all, the EU’s long-awaited dream of having its own tax can be achieved through this type of intra-community tax.
The introduction of a tax by nationality across the EU would probably have the consequence that EU citizens in other continents would also have to pay taxes to the European Union.
In Perspective: Greater integration in the European Union
Undoubtedly, a decentralized Europe formed by small Liechtensteins would be very beautiful, but that is not what the fans of a European Superstate are looking for, an idea that even some allegedly liberal parties support.
Most of the political parties in the EU seek greater integration of their respective countries in the European Union.
Thus, it will not be surprising that in the coming years the European Union will increasingly interfere in the different areas of the lives of its citizens.
Taxes are only a small part of all this, although they are especially important for entrepreneurs and self-employed workers.
The 5 most interesting countries for those who want to stay in the European Union
Despite all the changes that the European Union has experienced, it still offers many advantages.
In some cases, continuing in the EU is necessary to make the jump to a total tax exemption in a country outside Europe.
This is mainly due to the exit tax in countries such as Germany, Austria and of course Spain, which have retained many entrepreneurs.
However, thanks to the possibility of postponement of the exit tax in case of a transfer to other EU countries, these entrepreneurs can get sufficient tax advantages.
Below you will find what could be the 5 most interesting countries in the European Union, which offer, generally, the lowest taxes.
This ranking is designed for entrepreneurs with an annual benefit of € 100,000 or more. For self-employed workers and small entrepreneurs who are below this minimum, there are other countries that can be equally or more interesting. In this list you would find, for example, countries such as Lithuania or the Czech Republic.
The higher the benefit before taxes, the less important are the costs of the structures in cases like Cyprus and, above all, Malta.
There is no doubt that you will have to make a minimum investment to be able to enjoy the tax advantages of certain States in the EU. But as a rule, the costs are well below the tax benefits.
By the way, before you ask: yes, Andorra could be on this list because of their tax benefits, but it does not meet the requirement of being in the European Union.
As for Portugal, the future of its NHR program is uncertain (in addition, it is not easy for entrepreneurs to meet the requirements), so for the moment we will also leave this option out.
Cyprus remains as the non plus ultra in the EU. It is the only EU Member State where you can live without long-term taxes.
In addition, because Cyprus has already reacted to all the EU measures mentioned in this article, there is a framework that will ensure long-term legal security.
A possible future agreement on raising minimum taxes in the EU would also not influence the attractiveness of Cyprus, since the EU itself has guaranteed to maintain the taxation of Cypriot non-doms for at least 17 years.
The Cypriot non-dom program has already been described in detail in the past, and has undergone several changes in recent years.
The main advantage of non-doms in Cyprus is that they are free of taxes on interest income, dividends and capital gains.
Profits on the stock exchange (except for the forex) are tax-free in Cyprus (also for those who are not non-dom). In addition, you have a minimum of € 19,500 per year tax-free.
Be that as it may, the best option to remain tax-free in Cyprus is to set up a company abroad in order to collect the benefits via dividends.
For a long time it was not clear how Cyprus would do with the CFC rules that (like all other European states) they were required to introduce.
It is now clear that the CFCs in Cyprus apply only at the level of companies, not at the level of private non-doms.
Although taxes are not paid in pure form, a small part of the social security contributions cannot be avoided. In the end there are at least 120 euros per month that you must pay.
In addition, in 2019 Cyprus changed its health system to the model of the British NHS (National Health Service). In this way, a solidarity tax of 1.65% will be applied in 2019, and starting in 2020 it will be at 2.6%. This rate has a maximum after which you no longer pay. By 2019, the cap you may have to pay is € 3,600, € 4,770 as of 2020.
In Tax Free Today we have already helped more than 300 entrepreneurs in the last 3 years to emigrate directly to Cyprus (and we have supported many more indirectly).
If you additionally would like to know the last tax-free paradise that remains in the EU, write us whenever you want.
Currently, Malta is far behind Cyprus. The non-dom system of Malta works in the same way as the English model: you are tax-free while not using the income within the country.
With this option, you will always have to pay taxes, since you will have to introduce a minimum amount of money to cover subsistence expenses. It does not matter in this case that you cover the expenses by paying by bank transfer, credit card or cash.
The amount introduced is taxed with the Maltese progressive normal income tax up to 35% plus social contributions (around 10%).
To avoid anyone cheating on the tax return, from 2018 a minimum tax of € 5,000 will be applied, which would cover the first € 35,000 used in Malta.
Malta, unlike Cyprus, pays a lot of attention to the foreign companies of its residents, so to not have problems they must have enough business substrate (at least the administrator and office).
As a non-dom in Malta, the easiest way to go about this is to use their tax return model, which is equivalent to an effective corporate tax of 5%.
Maltese companies first pay a corporate tax of 35%, but then, if requested, they are reimbursed 30%.
Officially, this process should last only 2 weeks, but according to experience, the return can take from several months to 2 years to process, which is a great disadvantage in terms of liquidity.
Another problem is that the reimbursement is not directed to the company, but to its shareholders. If you are an individual residing in Malta and you receive the money directly, you would have to pay tax on the money introduced in Malta, in addition to the local social security contributions.
To avoid this situation, a holding company in possession of the shares of the Maltese operating company is used, but the cost for the structure increases.
A good option is to use the British LP as a holding company. The tax refund and benefits from the operating company in Malta would remain tax free provided they are not introduced or used in Malta.
As a general rule, the Maltese company will pay a salary of € 35,000 to cover the minimum tax of € 5,000 (remember that this is the minimum tax that you will have to pay). This will allow you to at least deduct this amount.
In principle you could also choose to use foreign companies, but they should have the proper business substrate and the effective management should be outside of Malta.
In the case of Malta, the minimum stay required to be considered non-dom in Malta is 183 days. This figure is far from the minimum in Cyprus of only 60 days, which gives you much more flexibility when deciding where you spend your time.
As in Cyprus, in Malta there is also the option of the non-dom HNWI (residence for the wealthy). In this case, a minimum stay is not required.
Of course, for the HNWIs you must acquire a property of at least € 275,000 or € 220,000 in the south of Malta or Gozo.
You can also become a HNWI by renting a property. In this case, the minimum price is € 9,670 or € 8,750 per year. In addition, the HNWI must pay a minimum tax of € 15,000 per year. Any income generated in Malta would be taxed with a fixed tax of 15%.
Ireland has a non-dom tax system similar to that of Malta, based on the English model. Although there is no minimum tax here, the world income must be declared annually. Likewise, it will not be credible that a person with 200,000 USD of annual benefits is living with only 35,000 euros per year.
As a general rule, attention is paid to the business substrate of controlled foreign companies.
The recommended structure for non-domestic residents in Ireland is to use an Irish limited as an operating company and then add a foreign holding company.
The Irish limited is subject to a 12.5% corporate tax and pays a salary to the administrator in order to reduce the benefit.
The salary should be a maximum of € 35,300, since that is the barrier from which the number jumps from 20% to 40% of income tax. Of course, you must pay social security for the salary paid.
The profits of the Irish Ltd are transferred, as we said, to a foreign holding. A good option would be to create an LP in the United Kingdom, since no type of retentions would be applied.
With this solution, while the money is not used in Ireland, the non-dom resident will not be required to pay taxes in Ireland or the United Kingdom.
As for the length of stay, in Ireland you must spend a minimum of 183 days to be considered a tax resident. Alternatively, 280 days spread over 2 years is also sufficient.
Bulgaria has the advantage of being a very cheap country in Eastern Europe, and despite being forced to pay the world income, the overall costs are much lower than with the other residences.
The income tax of Bulgaria is 10%, a tax that is even reduced to 5% when dividends are involved.
People with a Bulgarian company pay a 10% corporate tax. Then the company pays the administrator’s minimum salary (and the social security contribution, about 18%). The rest of the money earned is distributed in the form of dividends, taxed at 5%.
The use and administration of foreign companies is still possible even without business support, but this will probably change in the near future due to the introduction of CFC rules.
To be considered a tax resident you must have a minimum stay of 183 days or some credible proof that your center of vital interests is in Bulgaria (for example: property owned, local businesses, children of school age, etc.).
As in Bulgaria, in Romania you also pay a dividend tax of 5%.
However, Romanian microenterprises offer even better conditions for certain entrepreneurs. You only pay 3% on billing when it does not exceed one million euros. In case you have a Romanian employee, the tax falls from 3 to 1% on billing.
For other cases, the corporate tax in Romania is 16%. The minimum salary is € 4,900, on which you will have to add the contribution to social security (approximately 25%).
The general income tax is 10%.
To be considered a tax resident in Romania, you must spend at least 183 days there or be able to prove that your center of vital interests is in Romania.
Of course there are more options in the European Union; depending on the case Hungary, Portugal, Poland and other European countries can also be interesting.
If you want to know which is the best option for you, surely you will be interested in our ebook, the encyclopedia for the emigrant in which we analyze more than 60 countries for your personal residence.
Or if you prefer that we help you analyze your situation and find the best option for your case, you can directly book a consultation.
Because your life is yours!