Amazon FBA is becoming increasingly popular as a business model. With low expenditure, high sales can be achieved quickly. Once the right product is found and the structure optimised, the expense is minimal in comparison to the potential profit. However, finding such an optimised structure is anything but easy.
From a bureaucratic viewpoint, “Fulfillment by Amazon” is rather negative. Not only do you have to circumnavigate countless VAT and customs regulations (“how to get a VAT number for Amazon FBA” is one of the most asked questions from our readers), you must also adhere to Amazon’s strict guidelines at all costs. Not to mention the risk of product liability.
Anyone who wants to start an FBA business or optimise their existing structure should keep an eye on this.
Depending on Amazon guarantees certain restrictions that classic dropshippers like Shopify do not have. In particular, the choice of countries and jurisdictions for potential company registration is limited and not consistent worldwide. When it comes to selling within the EU with sales tax, you are left with little potential for optimization (or so it seems).
Nevertheless, there are also various opportunities for Amazon FBA to better establish its own tax and legal operations. And, of course, it is essential to not only minimize the tax burden but also to minimize the financial risk.
For defective products or accidents with your products you could have to respond with your own personal wealth, thus ending up in bankruptcy. This is because trading is a fast-paced business and what makes millions today can plummet into debt tomorrow.
Why personal and company residence are connected
Hopefully you will get to read this article before entering into business with FBA. For those of you who are already successfully making money with Amazon, you won’t have problems paying for the best company set-up, but you have one big problem.
With Amazon FBA, trying to move an already existent Seller Account to a different company is a really risky venture. Whilst moving your seller account could happen very easily, in the past this process has even resulted in the blocking of accounts.
At the very least, you can bank on the sudden losses of certain, hard-earned account features – like good seller feedback.
If you would like to take the risk or maybe even just tap into new markets with a new company and seller account, the first thing you have to consider is your residence.
Depending on the country of residence, different laws apply regarding companies abroad. In most high-tax countries worldwide there are CFC rules and rules of effective management. This rules are explicitly incorporated as anti-avoidance regulations or implicitly as case law.
Therefore, companies whose sole purpose is to achieve a tax advantage are not permitted. Pure dummy corporations are therefore treated like domestic companies for tax purposes.
For example, if a resident in the UK would set up a shell company in Malta, sooner or later he would be taxed like a UK Ltd. Therefore, simply accumulating profits without distributing them is easier said than done, even abroad.
However, when the company is more than a shell company and has his own office and director, this can be a very different story.
Within the EU, because of Freedom of Establishment, there are the least amount of requirements for this so-called “substance”. For countries with double-taxation agreements, there are an average amount of requirements and for countries with no agreements, the highest amount. Whether the country is a tax haven or not also plays a part.
“Substance” ultimately means that the company headquarters were chosen for genuine business interests, that office premises exist and that business management is primarily handled from that country.
For example, the annual board meetings should be held there, essential contracts signed there and employees should be present there. Under no circumstances is the company allowed to be “remotely controlled” from abroad.
The cost of building legally sound business “substance” should not be underestimated by any entrepreneur. Many company registration agencies offer trustee directors and other “substance solutions” for a few hundred Euros per year. This may work for some time, but will not withstand close scrutiny from the tax authorities.
A managing director should only work for one company exclusively and receive a salary that is typical for both the country and the sector. In typical tax havens like Malta, you can expect five-figure expenses.
Nevertheless, a construct like this can pay off. Eventually, if you find the right person, you can hire an employee who can take on most of the work for you. And if you go to less expensive countries like Bulgaria, the cost is also very low.
This means that you can perhaps set up a small office and recruit a part-time workforce who inspects the deliveries of goods before they are sent on to Amazon or carry out other tasks.
However, the FBA sellers who have moved their residence to a country without CFC rules and foreign tax laws, and of course also those with no taxes are much better off.
They are free to register and use their foreign companies as they wish, even when it is just a shell company. Only the distributed profits and salaries could be taxable depending on the country.
Structural risk minimisation for amazon FBA retailers
Before we come to the selection of tax-suitable countries for Amazon FBA, you should still pay attention to structural factors relating to asset protection. After all, Amazon FBA is definitely a risky business model where liability can quickly become expensive.
To minimise the risk, it is therefore advisable not only to have as many companies as possible but also to release them from their own possession.
In the usual structure of a holding company, you only own the parent company, all the subsidiaries are owned by the holding. A clever choice of jurisdictions can also be very advantageous thanks to the EU’s parent-subsidiary directive and double taxation agreements.
It is even better, however, when your own company does not even belong to you anymore. It is enough for you to just control it. After all, as an FBA user, you usually conduct your business to cover your own lifestyle and asset accumulation, not because you want to sell it as quickly as possible. Therefore, you sell it at the beginning to a foundation or an association or even better allow these to establish the companies.
Foundations, trusts and associations have the advantage of belonging to themselves. Therefore, both company and private assets are separated. It’s true that you can no longer distribute profits, but at least your own assets are kept very safe in case of disputes or issues.
In this article we are not going to go into the advantages of trusts, foundations and associations in depth here. However, I would like to mention some of the options anyway. The Swiss Associations are particularly versatile and cost-effective as are the Private Interest Foundations of Panama and the Bahamas.
The best countries for registering a company for Amazon FBA
Before we come to the choice of company registrations, we must look at what opportunities are actually offered to us. After all, the Amazon FBA program already limits the potential choices of countries.
Depending on the target market there are different opportunities and only a few good options that work for all markets. Nevertheless, as we said before, it may be wise to diversify and have different companies for different target markets so we can minimize risks.
Depending on the country in which you sell, there are many specific characteristics to consider.
Due to the absence of VAT and the potential avoidance of local sales taxes, Amazon FBA is not only more lucrative on the US market but also significantly easier from an administrative point of view. Amazon USA is also much more open to classic shell companies such as those established in Panama or the Caribbean.
Amazon FBA in the EU is more complicated, there are customs and the EU VAT area particulars to consider. Here you can read about EU VAT legislation on physical products.
You often also need local telephone numbers but these are easy to obtain from VOIP services. You should also pay attention to bank account restrictions. For Europe FBA you will need an account in the US or the EU.
As you can see, there are some overlaps between the US and the EU list of accepted company jurisdictions. However, there are relatively few overlaps which are really good options.
Possible tax-free companies for your FBA business include:
However, there is a big problem with Amazon Europe for the majority of companies outside of the EU. They do not get a VAT number in the country of sale or rather they only receive one when they build a permanent establishment, which then makes them subject to local taxation.
So, if you depend on a VAT number for Amazon, this can be problematic.
Luckily, there is an interesting country in Europe that is accepted by Amazon Europe. This is the Isle of Man, a British Crown Colony situated between England and Ireland.
(Please, don’t forget about the Brexit and the consequences this will have soon on this option).
This tax haven not only has the unusual feature of having no corporation tax but also the ease of getting a British VAT number. However, without the obligation to actually pay VAT.
No wonder large purchases made by the rich from all over the world – such as ships and planes – are preferably processed through this little island.
Paying no VAT on transactions worth millions but still claiming input taxes is a key competitive advantage. Unfortunately, with the British leaving the EU (Brexit), the future of this program is still unclear.
If you look at the classic EU companies, they not only have to claim VAT but also pay corporate taxes.
Nevertheless, there are numerous layout options, even within the European Union, especially if we look at the small business regulations and delivery thresholds.
Taking advantage of the small business regulations and delivery thresholds
Small businesses can really make use of the advantages offered in the Isle of Man. As a small business, they do not have to request, pay and process VAT.
However, companies are not small businesses for an extended period of time, especially in the lucrative FBA business.
In Germany, the small-business threshold for VAT-exemption is a turnover of €17,500, and in many other EU countries, this is even lower. There are, however, three exceptions. The threshold is £85,000 (around €95,000) in the United Kingdom, €75,000 in Ireland and RON300.000 (around €65,000) in Romania.
While Great Britain’s position is subject to certain legal uncertainty due to Brexit (note the exception: selling from abroad to UK, trade revenues are subject to sales tax from the very first Euro), Ireland and Romania are also currently very interesting options because of their taxation.
Ultimately, even €95,000 worth of sales can be achieved very quickly in the FBA business, but a saving in VAT, at least at the beginning, can definitely make a difference.
However, small business regulations must always be seen in conjunction with the so-called delivery thresholds. In most cases, these cancel the regulations out because the delivery thresholds are very low.
If you exceed the delivery threshold of a country, then sales taxes (at the local rate) are automatically added. Even if you don’t exceed the threshold, you can opt to pay it voluntarily.
For example, Germany is an outstanding exception with a delivery threshold of €100,000, but a comparatively low VAT rate of 19%.
Although, theoretically, sales tax is in force at the company headquarters, most entrepreneurs decide to pay the tax that is a few percentage points lower in Germany. In conjunction with the small business regulations, however, this can be exploited and a British company can sell up to €95,000 worth of sales in Germany VAT-free.
For successful FBA businesses, both of these points are hardly an issue. You will probably pay VAT in the countries where you sell your products. Therefore, you should not be put off by countries with a higher VAT rate on paper. You only incur Hungary’s high 27% VAT rate if you sell to Hungary.
In all other countries, you can choose the lower local VAT.
Why Eastern Europe is typically considered to be a tax haven
Eastern European countries are generally preferred when a permanent establishment with “substance” is required. In those countries the establishment can be set up for a significantly cheaper price, whilst the countries, in spite of lower taxes, are rarely condemned for being tax havens.
Some of the best options for your Amazon FBA business in Europe are Hungary, Bulgaria and Romania.
In Romania you can build a valid permanent establishment with very little money. According to Romanian law, every company that has a turnover of less than €1.000,000 is a micro-company.
These micro-companies are taxed at only 3% on sales, resulting in a simplified quarterly accounting and payment system. As soon as a Romanian employee is on the payroll, the taxation sinks to 1%.
Many companies kill two birds with one stone: they only pay 1% tax on sales and have a well-trained workforce who often have a good knowledge of English at a very low cost, which gives them the necessary “substance” for recognition of the foreign company residency. It will take some time until you get to a €1,000,000 turnover as an FBA seller.
Bulgaria is also a really nice place for your FBA business. There you can get easily your EU VAT number and find many well-trained workers with good English command who will work for a very low salary.
Profit is taxed at a flat rate of 10% in Bulgaria, but you can also deduct a variety of costs and there are many ways to transfer some money to offshore companies. Dividend distributions to shareholders are subject to withholding tax of 5%, just like in Romania.
Further opportunities for FBA entrepreneurs
There are plenty of other interesting countries in Europe. Classic tax havens, such as Malta with a corporation tax rate of 5% or Cyprus and Ireland with a rate of 12.5%, are attractive as well as lesser-known exceptions.
For example, the special zone in Portuguese Madeira with a rate of 5% or the Spanish enclaves of Ceuta and Melilla with a rate of 12.5%, or only 7.5% in the first two years (half of the normal Spanish rate).
For entrepreneurs who are able to run a letter-box company legally thanks to their living situation, certain private companies like the English-influenced Limited Partnerships are very interesting.
These only pay income-tax on earnings made within the country, and for those made outside the country, they pay the income-tax rate of their country of residence. In a country with tax-free foreign income like Panama, an Irish LP would also be tax-free, as long as no money was earned in Ireland.
Unfortunately, in order to obtain a VAT-number, sales must be made in the same country as the company headquarters. Nevertheless, if properly designed, despite relatively low taxes in the company’s location, a partnership can make a lot of sense.
Basically, sales taxes are very difficult to avoid as an FBA user, but the corporation taxes on profits are significantly reduced. In addition, you should keep in mind that there are numerous differences in company law depending on the country, such as in the liquidation of companies or in liability law.
For these reasons alone, you should consider a relocation of company headquarters. Most options are available to you if you combine this relocation with a change of domicile.
Examples of tax optimisation for fba entrepreneurs
What would be the example of a successful FBA entrepreneur in this case? Imagine that David already uses FBA very successfully for his German GmbH, but he complains about the heavy tax burden and strict regulations. He is prepared to relocate his main place of residence but he must pay attention to the typical features of German tax law. So, in a fictitious sale, an exit tax in the amount of the withholding tax threatens the estimated business value of his company.
David, therefore, decides to relocate within the European Union, since exit taxation is considered unlawful and will therefore not be collected.
In Cyprus, he establishes Non-Dom status by setting up a company and renting an apartment. There is no minimum stay there. He can merge his German GmbH with the Cyprus-Limited through the complicated process of share exchange and shareholder debt financing.
Even though he pays 12.5% corporation tax on the profits, he enjoys more generous deductions. He is also happy to be free from the constant company audits that take up time and are a real strain. There are only TWO state tax auditors in the whole of Cyprus.
David personally is a Non-Dom, meaning that he uses a special programme in Cyprus that guarantees him tax-exemption on domestic and foreign dividend earnings. He only has to pay social security contributions from his manager’s salary, which is still measured in the generous tax-free allowance of €19,500.
Strengthened by his new freedom in terms of time and money, he even decides to sell his products on the American market. Through a company in Hong Kong – ultimately getting his products from China – he manages to do business without any taxes. This is because he neither pays VAT in the USA, nor corporation tax in Hong Kong nor withholding tax on his distributed profits to Cyprus.
Alternatively, imagine a British entrepreneur who, after many other projects, has become interested in Amazon FBA.
Thanks to non-existent exit taxation in the UK, he takes the plunge and expands to Dubai. The United Arab Emirates offer complete tax-exemption for both his business and his private life.
In order to obtain a residency visa, he has to found an internationally-recognised Free Trade Zone company, for example in the Dubai South Zone (DWC). This will cost him around €12,000 in the first year with administrative costs of about €8,000 from the second year onwards.
However, he is able to operate his business completely tax-free. He only has to travel to the Emirates every 183 days so as not to lose his residency visa. If he avoids having a main place of residence in another country, he will enjoy complete tax-exemption in this desert state.
Let’s look into an Austrian who wants to stay in Austria. Due to high expenses, he decides against the example of the Cyprus integrated company, which allows for the income tax-free distribution of profits of a Cyprus Limited to a private person in Austria through the special double taxation agreement.
He prefers to set-up in nearby Hungary with its corporation tax rate of 9% and rent a cheap office space there.
Because of the proximity to the border, he can mostly do without “substance” by making daily commutes across the border and conducting his business from Hungary. Since he does not sell to Hungary, he is not affected by the Hungarian sales tax rate of 27%.
These three options are only a drop in the ocean. Despite certain restrictions, Amazon FBA users can regulate their tax situation extremely well. However, it is essential that you expect to save only relatively small amounts in corporation tax, also because of the expenditure you may have to make for “substance”. The much greater leverage lies in the change in your personal residence which may allow for tax-free letter-box companies with tax-free profit distribution.
The tax-free ideal example
Our ideal example as FBA entrepreneurs resides perhaps in Thailand, where only foreign profits brought into the country in the same year are taxed. Here, you are structurally well-protected by running your corporate empire through a Bahamian foundation which keeps you away from potential liability issues in your companies. This foundation is fully involved in its parent company in Holland which administrates its numerous subsidiaries.
While the Netherlands are rather inconvenient for operations due to high corporation taxes of 25%, they are an optimal location for a holding company due to absent withholding tax and a variety of double taxation agreements. Thanks to the EU parent-subsidiary directive, you can transfer all profits from your Austrian GmbH to the Dutch parent company completely tax-free and from there continue to distribute them tax-free to the Bahamian foundation, whereas a direct distribution from Austria would be linked with a high withholding tax equal to the amount of capital gains tax. Numerous other companies, both inside and outside of the EU, would also belong to this foundation.
As a full beneficiary and protector of your foundation, you control everything but have nothing on paper. This protects you from the ill will of your competitors who, apart from an almost desperate lawsuit against apparent infringements, have nothing to gain.
As fictitious as this example may seem, it sums up nicely something that every FBA entrepreneur should take note of. The first mantra of the Flag Theory is: “Go where you are best treated.” The second mantra of asset protection is: “Possess nothing, but control everything!”
Entrepreneurs who follow these two pieces of advice can enjoy starting new projects and bring their customers additional benefits. Tax-free, risk-free and above all stress-free. Because it is not only about the amount of taxes, but the extreme time and energy it takes to manage them.
If you are interested in optimising your FBA taxes or need a VAT number, we can put you in contact with our partners for a Cyprus or Bulgarian company registration or if you have questions you can hire our consulting services.