Expanding abroad: Business environment and taxation in the USA and Europe
What to pick and how to register
At some point, business growth and development lead to thoughts of entering the international market and opening a company abroad. Besides, the realities of the war are a strong impetus for this. Therefore, the first question will always be about the country, and the next one is "under what conditions?" With this in mind, the markets of the United States, Poland, Estonia and Cyprus are the most common jurisdictions that always raise a lot of questions. Nataliya Gaikalova, an IT tax expert and founder of Finevolution, told Mind about the nuances of taxation and business registration in these countries.
Let's start with business registration in the United States. For the IT business, the US is a Mecca for most startups planning to attract investment or businesses that see their strategic development in the US market.
Step 1: Choosing a business form
This is the place to start if you are thinking about registering in the US. If you are a Ukrainian planning to register a company, you have a choice of two forms for non-residents: LLC and C-Corp.
An LLC is a form of limited liability company, a simple form of company organisation, ideal for businesses that plan to operate in the United States or globally. The founder can be a single owner, who is also a member of the company, or several people – there are no restrictions.
LLCs have only one level of taxation. There is no corporate tax at the federal level. Accordingly, personal income tax is levied at the end of the year according to a progressive taxation scale from 0% to 37%.
The next form is C-Corp. It is more beneficial for a highly profitable business that plans to actively develop, and its founder wants to open a corporate/personal account in a US bank or immigrate.
The main difference with an LLC is taxation, which in this case is carried out at two levels: federal corporate income tax at a flat rate of 21% plus withholding tax if you withdraw dividends. Withholding tax is a tax that arises when a company pays dividends, royalties, and interest to citizens of other countries. In the case of Ukraine, the withholding tax, according to the Convention for the Avoidance of Double Taxation, is 15%. Then you declare it in Ukraine, where you are also obliged to pay 1.5% military duty.
Moreover, for C-Corps, each state has its own taxation in addition to the federal level. Income tax rates vary from state to state and typically range from 1% to 12% (although some states have no income tax).
Read also: Ukrainian business outlines the main problems in its relations with the government
Step 2: Choosing a state
There are usually two most popular states for business registration: Delaware and Wyoming.
Delaware, thanks to its developed legal system and laws protecting shareholder rights, is in general focused on large, complex corporations – the Big Bosses of sort. Wyoming, on the other hand, is more attractive to small private corporations and LLCs. Delaware's laws mostly protect the rights of boards of directors and shareholders, while Wyoming tends to favour management.
Delaware is an easy-to-understand state for corporate investors. Wyoming and other zero-tax states (i.e. those with no state tax but still federal taxation) are more attractive for operating businesses that want to save on taxes and get up and running faster, as Delaware currently takes a long time to register a business (15-35 business days).
Delaware also has an additional state income tax of 8.7% and a franchise tax that is paid annually. It amounts to approximately $450 on average for a corporation, the exact amount is calculated based on the number of shares issued, etc.
In Wyoming, the situation is simpler, with franchise taxes ranging from $50 to $200, which is slightly cheaper, and there is no additional corporate income tax.
Poland is the nearest country to us, which has hosted a lot of Ukrainian immigrants and is now one of the best options for doing business. First of all, because in Poland, you can get a reduced income tax rate for small companies. To do this, you can register a limited liability company (Spółka z ograniczoną odpowiedzialnością, Sp. z o. o.) – an independent legal entity that has the right to conduct business activities, including foreign trade.
Rules for opening a company in Poland
The founder of a Sp. z o. O. can be one or more foreign nationals. The recommended number of founders, however, is two or more. By doing so, you will save more than EUR 300 per month on social tax.
To establish a Sp. z o. o., you need to declare a share capital of at least PLN 5,000 (approximately EUR 1,100), although paying it is not mandatory. There is no legal limit to the maximum amount of the share capital.
A Sp. z o. O. must have a registered address. If you are not opening an office at the moment, it is worth buying a virtual address or, as we used to call it, a registered address (coworking spaces with a few square metres that a company rents to receive correspondence from government agencies).
As for taxation: if your income is up to EUR 2 million per year (a tax year is equal to a calendar year), the income tax rate is 9%. If your turnover exceeds EUR 2 million, then the tax rate is 19%. That is, if the total turnover for the year is more than €2 million, then 19% applies to the entire year, rather than being calculated quarterly.
The standard dividend tax rate is 19% if you are a Polish tax resident. If you are a tax resident of Ukraine, the Convention for the Avoidance of Double Taxation can be applied to you as a business owner. In this case, the tax rate will be 15% (plus 1.5% military duty).
VAT in Poland is 23%. When buying and selling goods and services within Poland, it is mandatory to charge and pay VAT within the country. When exporting or importing services outside of Poland, the rules of Council Directive 2006/112/EC on the common system of value added tax apply. The company must obtain a VAT number.
Registration of a Sp. z o. o. in Poland takes from 1 month. To achieve this, you need to:
- provide copies of the company founders' passports and a completed company registration application form;
- obtain a PESEL tax number;
- obtain EDS keys;
- submit a registration application;
- open a bank account (takes 1 day).
There are three ways to open a company in Estonia: for instance, to come to Tallinn in person, to open a company using the E-Residency programme or to open a company remotely through a notarised power of attorney.
The type of taxation is a tax on withdrawn capital, which means that even if you have a profit, you do not pay tax on it. Instead, we pay it only when we distribute income to business founders as dividends. In this case, we pay 25% of the net dividend amount or 20% of the gross dividend amount.
For companies that distribute profits over three years, starting from the fourth year, a rate of 16% can be applied. In addition, a 7% withholding tax is withheld. In Estonia, you also need to register a VAT number. The authorised capital reaches 2500 euros. There is no requirement to pay it in immediately, but it is important that it is paid in at the time of dividend distribution.
Unfortunately, it is very difficult, and sometimes even impossible, for non-residents to open bank accounts in Estonia for their business, so Estonian companies work very well with a corporate account with Payoneer or any other payment platform. Also, in Estonia, there is no obligation to accrue and pay a director's salary, and bookkeeping is quite easy and inexpensive compared to, for example, the United States. The monthly cost ranges from 50 to 150 euros per month.
Despite the ambiguous reputation associated primarily with offshore companies in the past, taxation in Cyprus is among the most favourable tax regimes in the EU. The standard corporate tax rate is 12.5%.
If a company receives dividends from its subsidiaries (provided that they are active, i.e. conducting their economic activities), the tax on the income received in the form of dividends will be 0%. In other words, Cyprus can and should be considered if you have a complex structure to avoid taxation of income from sub-companies.
If you pay dividends from a Cypriot company to an individual, no tax will be withheld in Cyprus, it will be 0%. Instead, the individual declares dividends in the country of his or her residence and pays local taxes. In Ukraine, this is a 9% tax on dividends from a non-resident and a 1.5% military duty.
An important difference in accounting in Cyprus that I want to draw attention to is the mandatory audit of the company. An annual report is submitted once a year, plus a mandatory audit. For the audit, the holding company must submit registration documents and annual reports in other jurisdictions.
There is also a difference when registering a company in Cyprus. They request a larger package than the other jurisdictions we are considering today. This includes a utility bill, a letter of recommendation from a bank. We also write a letter of recommendation from accountants, lawyers, a CV, fill out a KYC (Know Your Client) registration form – it will ask for information about marital/financial status, confirmation of sources of income, what kind of business, business address, etc. This means that it will take a little longer to prepare a package of documents.
The process of company registration in Cyprus can be divided into 2 stages.
- choosing a company name and checking it in the public register;
- approving the name by the Registrar of Companies;
- filling in and signing the KYC questionnaire by the beneficiary;
- submitting documents for the beneficiary of the signatory to Due Diligence (passport, passport registration or utility bill, etc.).
- approving the company's structure (composition of directors, shareholders, secretary, company's registration address);
- submitting an application for company registration to the Company Registry;
- signing the Indemnity Letter by the beneficiary;
- apostillation of documents received from the Companies Registry (4 certificates and a memorandum);
- execution of other necessary documents (trust declaration, apostillated power of attorney, etc.).
Entering international markets through opening a company abroad provides numerous new opportunities for your business development. However, there is no one-size-fits-all solution when choosing a country. To decide which jurisdiction to register your business in, you need to conduct an individual analysis, considering such issues as where your customers are located and what the main purpose of your business is. However, due to the regular changes in legislation and tax conditions for doing business, an independent analysis can be time-consuming. Therefore, we recommend that you contact specialists with legal and tax expertise in the jurisdiction you are interested in at the right moment.
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