Relocation of business abroad during the war from Ukraine
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In our previous articles we covered the tax consequences of our fellow citizens moving abroad. This publication will be devoted to the issue of relocation of legal entities.
So, in connection with the protracted war in Ukraine many business owners today are thinking about moving their business abroad: temporarily or permanently, depending on the development of the situation in the country.
Depending on the specifics of the business, in some situations the relocation can happen fairly quickly and smoothly, for example if we’re talking about companies that provide services and are “mobile”: IT-companies, accounting and auditing firms, advertising agencies, etc.
In other situations, the relocation of a business can be a rather difficult, time-consuming and costly process, especially for businesses with production facilities in occupied territories.
Nevertheless, many owners are asking this question, interested in the specifics of doing business in other (mostly European) countries, and before making an important decision, trying to understand the intricacies and nuances of a particular jurisdiction, which in general is the right approach.
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What are the criteria that most owners follow when choosing another jurisdiction?
The first thing the owner will henceforth pay attention to is the stability of the political and economic situation, the “non-conflict” status of the country on the world stage, and guarantees of security for the business of the foreign investor (as far as these guarantees can be provided, of course).
From this position, it is obvious that European countries (especially Western European countries) get the “palm”.
In addition, the entrepreneurs are usually interested in the tax burden that arises in another country compared to the one they bear in Ukraine. And in this context we are talking not only about the profit tax, but also about:
- Income tax, which the employer has to pay on behalf of the employee;
- Repatriation tax, which arises when the company’s profits are paid to its members;
- VAT and its reimbursement mechanisms;
- Local taxes (land tax, property tax), etc.
In case of moving trade processes to the European Union, customs clearance of goods when importing and exporting from the territory of the EU, as well as when moving within the EU, the issues of payment of customs duties become topical issues.
In addition, entrepreneurs, of course, will be interested in such issues as:
- ease of establishing and further running a business;
- access to the banking system and the ability to easily manage bank accounts;
- strictness of compliance and financial monitoring;
- loyalty of banks to beneficiaries from Ukraine (by the way, note that some banks have stopped accepting companies whose beneficiaries are citizens of Ukraine in connection with the fact that Ukraine is currently a warring country: for example, some banks of the UAE);
- the costs incurred by the entrepreneur in connection with the arrangement of the office (office rent, payment of employees’ salaries, etc.).
Note: Each country in the European Union has its own minimum wage thresholds that the employer must meet. This is the minimum amount of an employee’s salary. Of course, in most European countries the minimum wage is much higher than in Ukraine, therefore the employer’s expenses will also be higher (including wage taxes).
For example, while in Ukraine the minimum wage is 6,500 hryvnia, in Germany – 1,621 euros, in Poland – 655 euros, in Holland – 1,825 euros and in France – 1,603 euros. I an employer in Ukraine pays 18% (income tax) and 1.5% (military tax) from an employee’s salary, plus social contributions (but this is separately, we do not take them into account now), then in Germany with a salary of 1,621 euro the tax is 45%, which equals almost 23,000 hryvnia.
As you can see, depending on the country, the tax burden can be very different – from moderate (in countries such as Poland, Bulgaria) to very high (Belgium, France, Germany, the Netherlands, Britain, Italy, Austria, etc.).
All this should be taken into account when deciding where to “move” a business.
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A general comparison of European jurisdictions in terms of tax rates and profitability for the Ukrainian entrepreneur
In terms of income taxation, all jurisdictions that may be of interest can be roughly divided into three categories.
- Countries that allow you not to pay income tax, until the distribution of dividends: Estonia, Latvia, Poland, Georgia.
- Countries with low income tax rates: Hungary, Bulgaria, Cyprus, Malta, etc.
- Countries that allow you not to pay income tax at all, regardless of the circumstances: e.g. UAE.
Below we’ll briefly elaborate on each category in more detail.
These are countries that allow you not to pay tax on profits until such profits are distributed. Literally, this means that as long as a company's profits are reinvested back into the business, such a company can pay no taxes at all in the country of incorporation. But as soon as profit is paid out in the form of dividends in favor of the members, the company’s profits are subject to full taxation.
In particular, in Estonia at the time of distribution of profits you will have to pay a profit tax of 20%, in Latvia – malso 20%, in Georgia – 15%, in Poland – 10% (provided that the taxpayer has a turnover of no more than 2 million euros a year or it is a start-up, that is, it is its first year of operation).
In addition to profit tax, repatriation tax may be additionally applicable. In particular, this is the case in:
- Georgia – 5% is applied in case of payment in favor of a non-resident individual member);
- Estonia – 7% is applied in case of payment in favor of a non-resident individual member, if the company is entitled to a reduced income tax rate of 14%.
The tax service of these countries strictly monitors compliance with these rules, and during the inspection it carefully checks all transactions performed. In this case, many payments can be reclassified as hidden distribution of profits: for example, granting a loan to a member, conducting the transaction without providing supporting documents, etc.
Thus, the first block of companies may be of interest only if the company will be used as a “purse”, i.e. for the accumulation of profit and its subsequent channeling (profit) to the business. All payments on behalf of the company must be carefully checked.
The second category of companies, as we mentioned above, consists of companies with low profit tax rates: Hungary - 9%, Bulgaria – 10%, Cyprus and Ireland – 12.5%, Poland – 9% (this rate applies to companies with a turnover of no more than 2 million euros a year and startups).
The profits of these companies are regulated by expenses:
- the lower the expenses, the higher the profit;
- the higher expenses, the lower the profit.
Consequently, when choosing a jurisdiction from this block, it is important to think in advance what the company’s expenses will be. If there are no or few expenses, the tax burden, despite the low rate, can be quite significant.
The third block includes companies from jurisdictions where there is no income tax. Traditionally, this category includes the United Arab Emirates.
Indeed, this country is attractive because, in fact, until recently, there were no taxes: no profit tax, no income tax. Plus, the tax authorities of the UAE are quite reluctant to exchange information with other countries, due to which this jurisdiction has traditionally been considered such that it can provide confidentiality to some extent.
In addition, the fact of establishing an Emirati company gives the founder the opportunity to get an investment visa, which in turn made it possible, until recently, to get a certificate of tax residency in the UAE for an individual without adhering to the requirement of staying at least 183 days a year in the country. It was enough to enter every 6 months for a couple of days to maintain the investor visa, and you’ll get the certificate of tax residency “in the pocket”. Interesting, isn't it?
However, as you know, recently the UAE introduced a VAT of 5%, which is not applicable to all companies, but only to those that conduct the relevant activities (subject to VAT). There are also plans to introduce a 9% profit tax next year. They say that this tax will not apply to companies which are registered in free economic zones and which do not operate in the local UAE market. But it’s still six months until the end of the year, and a lot can change during that time. In any case, the gradual introduction of taxes in the UAE indicates that this country will cease to be completely tax-free in the near future.
Choosing a jurisdiction to relocate a business is a very responsible issue that needs to be approached thoughtfully.
Choosing a country “intuitively” or “by hearsay” can lead to a serious tax burden and various unforeseen circumstances “on the spot”.
We offer an analysis of your case and recommendations not only on the jurisdiction attractive for your business, but also on the process of business relocation to the desired country.