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Best Country for Trading (Tax efficiency)
- Thread starter ET873
- Start date
What do you mean? If they indeed abolish the dividend tax altogether and not just on listed stocks, then if you own a company that pays regular corporate tax, then you may pay as little as 11% on the profits with your company and you may be able to withdraw all the profits as dividends, free of any tax. If you would choose the other tax scheme for your company which allows you to pay zero tax on retained profits if you meet the conditions, then you can still declare a dividend of any amount that your company can afford to pay from its profit and profit reserves.Any idea what's the max you can withdraw per annum?
By the way, another thing that may be introduced is a 0% corporate tax rate for up to three years for small and medium sized companies. What will be a small and medium sized company have to be seen but if this gets implemented, then it is even better. In ideal situations it could mean 0%/0% tax.
I think in a few months we'll see if they're going to implement these changes or not.
Summary of the proposals:
- 0% tax rate on dividends. Whether it'll be applicable to private companies' stocks too or only to listed stocks is still not clear.
- 0% corporate tax rate for three years for small and medium sized companies. I think there may be other requirements to be met in order to benefit from this incentive.
- Single digit flat personal income tax rate. In other words 9% flat personal income tax. The government has been talking about this for three years now but couldn't implement it without bumping up the deficit so it has been delaying this reduction. Based on yesterday's proposals it may happen from next year.
I think the tax moral is already pretty good in Hungary compared to how it was even just 5 years ago. The flat rate taxes and other incentives helped many businesses to be able to function efficiently. The present government lowered the social security levies on employees by a big margin and are planning to lower them even further. The income tax has first been set to a flat 16% from 2011 (it was marginal up to 32% in 2010 and up to 60% in 1988) then lowered to 15% about 2 years ago and now they're planning to lower it to 9%. The corporate tax first has been set to 9%/19% (the higher rate was applicable above approx. €1.6 million of profit) then further to flat 9%. They introduced simple tax schemes for small entrepreneurs whereby they pay a fixed monthly tax of about €160 on revenues up to about €38,000 a year and the whole amount is VAT exempted as well. In other words if someone has a revenue of €30,000 in a year and €20,000 of that is profit then he or she may don't have to pay more than €160x12=€1,920 in a year. There are many other tax incentives and other forms of help that both companies and employees can utilize.Sounds good. thanks for the update. At those rates it's not even worth to cheat on taxes (probably why they doing it?)
For instance if you open various special retirement accounts and you transfer X Euros every month there, then you can get back up to 20% percent each year of the income tax you paid up to about €1,200 a year across the three accounts. So it's like you can get back approx. €1,200 a year from your own income tax, to your special retirement accounts.
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In January 2017, corporate tax was unified at a rate of 9% — the lowest in the European Union.[8] Dividends received are not subject to taxation, provided that are not received from a Controlled Foreign Company (CFC). Capital gains are included in corporate tax, with certain exemptions.[9]
Source
By the looks of it dividends are already tax free starting Jan1 2017?
You're mixing personal income tax with corporate tax. Companies in the EU does not have to pay corporate tax on dividends received from their EU subsidiaries and in Hungary, companies in certain circumstances may not have to pay tax on dividends from non EU subsidiaries either.
However, individual shareholders of companies, whether it's a Hungarian or a foreign company, must pay tax on the dividends they receive. As of today, there is no exception to this rule and whenever you take money out of your company in the form of dividends, you must pay tax.
By the way, this page that you linked is factually wrong in many tax categories so I wouldn't rely on it.
This thread has helped me a lot so I thought I would try to contribute to the best of my knowledge. The Baltic countries have already been mentioned here, I'll give some more details that I gathered.
Estonia
Trading in as a legal entity is still a compelling option with 20% CIT on distributed profits only. 20% is the final tax rate, there is no other tax of any kind on dividends for a natural person.
Being employed as director and paying yourself a salary is required if you are actively trading. (Investors don't have to, they can stick to dividends.) Tax authorities do investigate companies that only pay dividends to make sure there is no work involved, but they have the reputation for not being too aggressive with penalties.
This salary has to be in line with the average salary one would receive for this sort of activity in Estonia. This salary will be subject to PIT (which is a flat 20% with some deductions that makes it slightly progressive) as well as 38% social security contributions, which are not capped.
Compliance and accounting costs should be lower than in most countries.
The benefit of tax free compounding comes with the risk of a change in tax rates. All the undistributed profits would be subject to this change at time of further distribution. Things do not seem to be shifting in that direction and one might argue that this doesn't happen overnight.
dw31583 mentioned a potential way to mitigate that risk :
Btw, just thinking, how could the Estonian authorities stop you from becoming a non resident once you have millions of accumulated profits and then you relocate to the Bahamas for a few years where you setup an LP in which the Estonian entity is a limited partner for a 0% profit share and you're the general partner for a 100% profit share. In practice what happens is you kept your Estonian company which invested all of its funds to another company in which you as the fund manager gets a 100% profit share. They'd have a hard time challenging this no matter how aggressive this looks like. You can play safer and adjust the numbers but the point is you may be able to mitigate the effects of the reversed corporate income tax of Estonia.
That is not an option anymore. Some new anti-avoidance legislation has been adopted to effectively eliminate all ways to avoid taxation on hidden profit distributions through tax havens.
Trading as a natural person is a possibility but less favorable for obvious reasons. Also not advised if you have a large amount of transactions : due to the details required in tax returns for every trade, it takes forever.
Latvia
Didn't go into great details because I personally don't want to live there. But it should be noted that Latvia has completely changed its CIT. It is now very similar to Estonia. Only distributed profits are taxed at 20%. Dividends are not taxed anymore at the individual level.
Lithuania
It is generally more favorable to trade under your own name. Profits would be subject to PIT : 15% up to 136k€ then 20% (and 27% further down the line, I believe). Social security contributions would not apply.
However, while trading financial derivatives is allowed under your own name, a legal entity is necessary to trade spot forex.
Trading via a legal entity :
5% CIT up to 300k€ turnover (NOT profits), 15% otherwise
BUT dividends are also subject to PIT at 15% for individuals.
Estonia
Trading in as a legal entity is still a compelling option with 20% CIT on distributed profits only. 20% is the final tax rate, there is no other tax of any kind on dividends for a natural person.
Being employed as director and paying yourself a salary is required if you are actively trading. (Investors don't have to, they can stick to dividends.) Tax authorities do investigate companies that only pay dividends to make sure there is no work involved, but they have the reputation for not being too aggressive with penalties.
This salary has to be in line with the average salary one would receive for this sort of activity in Estonia. This salary will be subject to PIT (which is a flat 20% with some deductions that makes it slightly progressive) as well as 38% social security contributions, which are not capped.
Compliance and accounting costs should be lower than in most countries.
The benefit of tax free compounding comes with the risk of a change in tax rates. All the undistributed profits would be subject to this change at time of further distribution. Things do not seem to be shifting in that direction and one might argue that this doesn't happen overnight.
dw31583 mentioned a potential way to mitigate that risk :
Btw, just thinking, how could the Estonian authorities stop you from becoming a non resident once you have millions of accumulated profits and then you relocate to the Bahamas for a few years where you setup an LP in which the Estonian entity is a limited partner for a 0% profit share and you're the general partner for a 100% profit share. In practice what happens is you kept your Estonian company which invested all of its funds to another company in which you as the fund manager gets a 100% profit share. They'd have a hard time challenging this no matter how aggressive this looks like. You can play safer and adjust the numbers but the point is you may be able to mitigate the effects of the reversed corporate income tax of Estonia.
That is not an option anymore. Some new anti-avoidance legislation has been adopted to effectively eliminate all ways to avoid taxation on hidden profit distributions through tax havens.
Trading as a natural person is a possibility but less favorable for obvious reasons. Also not advised if you have a large amount of transactions : due to the details required in tax returns for every trade, it takes forever.
Latvia
Didn't go into great details because I personally don't want to live there. But it should be noted that Latvia has completely changed its CIT. It is now very similar to Estonia. Only distributed profits are taxed at 20%. Dividends are not taxed anymore at the individual level.
Lithuania
It is generally more favorable to trade under your own name. Profits would be subject to PIT : 15% up to 136k€ then 20% (and 27% further down the line, I believe). Social security contributions would not apply.
However, while trading financial derivatives is allowed under your own name, a legal entity is necessary to trade spot forex.
Trading via a legal entity :
5% CIT up to 300k€ turnover (NOT profits), 15% otherwise
BUT dividends are also subject to PIT at 15% for individuals.
@dw31583
While reading all the answers, I had an interesting thought. What would be the tax implications if you move to an Italian village(if you don't fancy a long commute) on the border of Monaco, use the Italian non-domiciled fixed tax regime and commute to Monaco to day trade every weekday. You can use an offshore company with this structure as the company's domicile won't be Monaco and the trading is not happening in Italy. Any thoughts?
While reading all the answers, I had an interesting thought. What would be the tax implications if you move to an Italian village(if you don't fancy a long commute) on the border of Monaco, use the Italian non-domiciled fixed tax regime and commute to Monaco to day trade every weekday. You can use an offshore company with this structure as the company's domicile won't be Monaco and the trading is not happening in Italy. Any thoughts?
It seems like the personal income tax exemption in Hungary has been clarified. Previously it looked like any woman who has 4 or more children may not have to pay personal income tax to Hungary ever again. Today it has been clarified and it is only partially true. It applies to salaries only. In this case in my opinion this is not really ideal because of the other levies payable on salaries.