Today’s article is aimed at those people who are not ready to give up the comforts and simplicity of living in Europe in exchange for tax benefits. We will explain how you can live in Austria without paying personal taxes.
Multiple Tax Free Today customers have already taken advantage of this legal tax loophole which you can use whether you are an Austrian national, a citizen of the European Union or any other country in the world.
Different to what happens with other tax regimes like in Cyprus, Portugal, Spain or the typical nom-dom, your nationality does not matter nor is it a problem if you have been tax resident the years before in order to be able to take advantage of this tax benefit. All you will need is a legal residence permit in Austria and the appropriate foreign company structure.
This arrangement is somewhat more complex, but it has proven its effectiveness in practice, and Austrian tax authorities deem it legal. Similar to the Double Irish Sandwich (used by Apple and other large corporations), here it is a three-company arrangement, where all the companies are from Cyprus.
As we know, usually a certain business structure is needed for the foreign company to be recognized. This structure is only achieved by having a local office, employees and having the business address of the company’s headquarters.
Creating a sufficient structure entails large costs and to make sense from an economic point of view, your business needs to make at least around €30,000 in profits.
After all, entrepreneurs with companies abroad but with residents in strong tax pressure countries only reduce their corporate taxes and still have to pay the corresponding taxes in their country of residence when dividends are distributed.
No income tax in Austria thanks to the tax integration of companies in Cyprus.
This is not the case with our tax integration structure with companies in Cyprus, which we will discuss in the following paragraphs. With this structure in Cyprus it is possible to reduce personal income tax to zero without taking any risk.
Corporate taxes and VAT are all that needs to be paid in Cyprus, but even here there are exceptions. Tax free and without minimum holding periods Cypriot companies can collect profits from their investments in shares and trading.
This simply means that stock investors and traders can also live tax free with an Austrian residence. Considering that since 2011 Austria has demanded the taxation of capital gains generated by individuals, this is an interesting alternative.
Living tax free in Austria exists thanks to the double taxation agreement between Austria and Cyprus.
The double taxation agreements are an extremely interesting subject in itself, which, we have already dealt with in several Tax Free Today articles (one on the tax optimisation of royalties and another on how to reduce withholding taxes on dividends). In the future we will dedicate at least one more article to it (don’t forget that you can sign up for free to our newsletter to stay informed).
So, for example, in the case of Portugal, the possibility of taxing dividends in the Contracting State in which the foreign company is located creates a tax exception for certain groups of people who have obtained the status of non-habitual resident in Portugal.
The tax exception is because, according to the double taxation agreement, a country has the right to tax, but for different reasons, for example, to attract investments.
There is a similar tax exception in the double taxation agreement between Austria and Cyprus, which makes the tax integration of companies in Cyprus possible. There its stated:
(1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.
(8) The term „profits“ as used in this Article includes the profits derived by any partner from his participations in a partnership including a participation in a sleeping partnership.
As mentioned above the tax integration of companies in Cyprus is made possible under section 8. So, when a Cypriot partnership company distributes benefits it is not considered a dividend distribution, but a withdrawal of benefits.
The benefits of the partnership companies are always delivered directly to their owners, like with the North American LLCs. Therefore, the double taxation agreement regarding dividends is not applied, since it is not about dividends.
Now, in the first section it says that the benefits can only be taxed in the country where the company has its headquarters and, therefore, Cyprus has the possibility of requesting taxes on the benefits of partnership companies in its region.
However, it turns out that Cyprus renounces its right to demand such taxes provided that the owners of the partnership companies do not live in Cyprus. This is also common in other countries like the United Kingdom and Canada where (as we have already seen in other articles) LPs do not pay taxes on foreign income.
Cyprus, therefore, has the right to demand taxation on benefits of partnership companies, but does not use it. Consequently, these benefits are tax free not only in Austria, but also in Cyprus.
Section 8 of Article 7 considers the benefits of a partnership company in terms of business tax, and that it can only be taxed where the company is based.
In order to implement this structure, 3 companies are needed in Cyprus. At the centre of that arrangement is the partnership company in Cyprus, which works in collaboration with two other limited Cypriot companies.
The three-structure arrangement in Cyprus
The tax integration for companies in Cyprus consists of a pyramid of 3 corporations and an individual living in Austria.
In the top of this pyramid you will find the operating limited company (individual), which is established for the operation of the business in Cyprus. 100% of this company’s shares are managed by a Cypriot partnership company that, as a counterpart, makes possible the distribution of all the benefits to this partnership company.
For its part, the Cypriot partnership company needs two partners that, as in the Spanish partnership company, can be designated as a limited partner and a collective partner.
The limited partner is an individual who lives in Austria, who participates as a non-voting partner and cannot be involved in any administration activity. The administration, on the other hand, is taken up by another limited Cypriot company that acts as a collective partner with total responsibility, however, does not hold any share in the capital or profits of the Cypriot partnership company. This limited company must have an office or commercial establishment in Cyprus.
In practice, the sales of the operating limited company are made in Cyprus, and are taxed with the current corporate tax rate (currently 12.5%).
The after-tax benefit is fully transferred to the Cypriot partnership company, a company in which the non-voting Austrian individual participates.
This means that the individual receives all tax-free dividends in Austria from the operating limited company through the partnership company.
Of course, even though these Cypriot revenues are not taxed in Austria, they are taken into account when deciding on which personal income tax (PIT) or tax classification the resident in Austria is for their other income.
Therefore, all additional income that does not enter through this tax arrangement in Cyprus will be taxed under the maximum tax rate in Austria.
Next, we explain in detail the role of all the companies of this tax integration.
The operating limited company in Cyprus
This company represents the intended corporate purpose. It is a normal company with its location in Cyprus, and pays the taxes of the corresponding companies. You can, for example, get licences in Cyprus for businesses that require them. A license to offer Forex services in Cyprus costs only €50,000.
We have talked about Cypriot companies in detail before, but the taxation of these companies will be reiterated here.
In general, the Cypriot limited company is subject to a corporate tax of 12.5%. However, Cypriot authorities are very favourable with businessmen and are among the most generous in Europe, that means that almost any tax expense can be deducted, which reduces the pre-tax benefit considerably. Also, VAT of only 18% is very low compared to other EU countries.
There was a special regulation for income from license and intellectual property rights. 80% of these revenues could be saved with the so-called IP-Box regulation. Thus, it was an effective tax rate of only 2.5% on copyright income including books, digital products, trademark law and much more. Unfortunately, that known IP-Box is no longer possible in Cyprus (or anywhere in the EU) other than for certain software and patent cases, but again is restricted.
Be that as it may, the most interesting part of the Cypriot limited company is complete tax freedom for capital gains and dividends. This freedom makes the Cypriot limited company the ideal medium for asset management.
In particular, the tax freedom over capital gains derived from the purchase and sale of financial assets, combined with economic Forex and brokerage licenses, are the reason why so many brokers and traders operate with Cypriot companies.
Capital gains derived from the purchase and sale of financial assets are tax free, and are without exceptions and minimum term periods, regardless of the way the financial operations are carried out.
For investors and traders residing in Austria, the tax arrangement of the Cypriot companies we are talking about today is therefore the best solution, but, in general, any entrepreneur residing in Austria can benefit from it greatly. After all, it reduces the tax rate of your corporate tax by at least half and allows you to receive business benefits without paying personal taxes.
The partnership owns 100% of the operating limited company. Therefore, it receives all its dividends. Here there are no withholdings at source, either at the level of the operating company or at the level of the partnership.
Since it is a partnership, the benefits are not subject to corporate tax, but are transferred directly to the partners. These partners are, the collective partner with total responsibility (another Cypriot partnership) and the limited partner with restricted accountability (the resident in Austria).
The limited company (collective partner) does not participate in the benefits, so at this level you do not have to pay taxes either.
Remember, all the benefits flow to the limited partners, which is the individual living in Austria without the right to vote. Due to the tax exception stated in the Double Taxation Agreement, Austria cannot demand this benefit be taxed and Cyprus, which could, does not.
Consequently, there are no taxes of any kind at the level of the partnership and its partners.
The administration of the partnership as a collective partner
In order to recognise the tax integration of Cypriot companies, it is essential that there is another Cypriot limited company as a collective partner of the partnership. This limited company is a partner with full responsibility of the partnership but has no share in capital gains. In addition, this limited company adopts the administration of the partnership. This makes sense since it takes on full responsibility.
It is essential for the success of this Cypriot tax arrangement to have a minimum of funds for the limited company that acts as a collective partner. After all, the administration must be carried out from Cyprus, you cannot have complete control over the partnership from Austria.
In any case, on Austria’s part, the requirements for the corporate structure in Cyprus are not very high. In general, setting up a small office which can be used for about €300 a month and consists of a simple private space that has a desk and a computer is enough. For the rest, it is advisable to hire an administrator to manage this limited company as a collective partner.
Of course, setting up a private company that operates as a collective partner brings additional costs which can be reduced if trustworthy people are available in Cyprus.
If you happen to know a businessman in Cyprus, you can ask him, in exchange for a small fee, to include his company as a collective partner in the partnership. Of course, according to the corresponding threats, charges are necessary since that company would accept the risk of full responsibility. With this solution, the business structure would no longer be a problem.
Taxing the limited partner in Austria
The limited partner of the partnership is a person who lives in Austria. This person participates without the right to vote and can receive all dividends distributed to the partnership. Cyprus nor Austria require the taxation of these dividends because of the aforementioned double taxation agreement.
If you live in Austria, you can live without paying income tax thanks to this Cypriot arrangement. However, you should keep in mind that you will pay taxes for all the income you have outside of this arrangement.
This means that in the tax return you will indicate all the partnerships benefits in a completely transparent way which will be used for the calculation of the tax base but will not be taxed itself. This probably means that outside the tax integration of Cypriot companies you would pay Austria’s maximum tax rate for all taxable income.
This is most likely not a problem because one way or another you would already be at the maximum tax rate. Of course, you can receive your income through the Cypriot arrangement, which would also be the best solution for private pension plans thanks to the tax freedom on dividends and capital gains.
This way, the tax base of Austrian taxes may amount to several million in extreme cases, but still, you will not have to pay anything in taxes.
Is it worth creating this arrangement of companies in Cyprus?
As we have already mentioned, the tax integration of Cypriot companies is a legal concept with full security, which the Austrian tax authorities already recognise. Several judicial resolutions in favour of the tax integration of Cypriot companies have confirmed its legitimacy.
So why are there no more entrepreneurs who take advantage of this arrangement? This is a very valid question, which can be answered by how widely unknown this structure is. After all, it is only possible thanks to a section of the double taxation agreement between Austria and Cyprus. Tax advisors who operate at a local level simply do not deal with international taxation issues.
Another reason may be, of course, the costs incurred by the entrepreneur to form the tax integration of Cypriot companies. In the end, it is a three-sided agreement, which not only must be set up but also managed.
Tax Free Today is in a position to offer, through a single supplier, the creation and maintenance of the Cypriot companies’ tax agreement at an exceptional price.
For only €13,500 the first year, which includes the creation of the 3 companies and €7,500 in administrative expenses from the second year, the total exemption of income tax in Austria is possible.
Through our partner agency in Cyprus, significant discounts can be applied for the 3 company agreement in Cyprus. In fact, the costs of setting up a single Cypriot company now amounts to €6,000 (annual costs included).
In the case of the tax integration of Cypriot companies, our partners register the 3 companies for only €6,000. Additionally, each year they charge a fee of €7,500 for the administration of the 3 companies. You must have about €300 per month of additional expenses for the local office.
The €7,500 per year includes registration fees, administration, accounting, bank accounts and tax and legal advice for the 3 companies.
And the result, remember, is that hardly any taxes are paid, or even none.
In this sense, this tax agreement in Cyprus is worth it for any businessman who pays more than €7,500 per year in taxes in Austria, not only for their business but also at a personal level, which securely includes any Austrian entrepreneur, however small the business. We would say, from a benefit of about €30,000, it will be worth a tax integration in Cyprus in any case.
You just have to collect €13,500 of constitution and administration expenses in the first year, but if we compare it already with the €25,000 that is needed as an initial contribution to establish a GmbH (equivalent to an LTD) in Austria, a tax free future is worth 13,500 euros.
Is this tax agreement for Cypriot companies worth it?
Well, what has been said, if you have a business and the business is distributing benefits (via salary or dividends) without a doubt it is, but if you are starting a business or are reinvesting all the profits, it is probably not.
Of course, do not forget that there is a fundamental conditional for the agreement to work: you have to actually live in Austria, because in other countries, including German speakers like Switzerland or Germany, the double taxation agreement has a different style, and unfortunately it does not allow this type of tax agreement.
So, if you are not afraid of the German language or if you at least speak good English, moving to Austria can be an interesting alternative (you have many more options for moving residence in our recently published Emigrant Encyclopaedia).
Whatever your case, Tax Free Today will be happy to help you make the right decision through a consultation or, in case you already know that you want to live in Austria, to create a tax agreement of Cypriot businesses that will allow you to live tax free. Simply write to us if you are interested.