Comment by fl7305

5 days ago

> As somebody from Germany, establishing a company is a bit tedious and bureaucratic.

I'm fairly sure the German tax authority will claim that you have a local German branch office since you live and work there.

That might be OK tax wise?

But I'd recommend starting with the tax situation in Germany.

Having limited liability through some kind of corporation can be nice.

But on the other hand, it becomes harder in Germany to pay out a varying salary as profits fluctuates throughout the year since the German tax authorities will see that as an illegal dividend payment from your company.

From this perspective it can be easier to set up some kind of sole proprietorship. Easier accounting etc and can pay out profits easier. But you get the personal liability.

This is not hard advice, just some things to point out that it gets complicated fast. So I'd recommend spending a few hundred euros on getting advice from a tax professional to begin with.

9 comments

fl7305

Reply
codethief  5 days ago

> I'm fairly sure the German tax authority will claim that you have a local German branch office since you live and work there. That might be OK tax wise?

If you work from home, your office at home usually does not qualify as a company office unless you make it one. In particular, that alone would not force you to pay Gewerbesteuer to the city, which is the tax specifically addressing local presence.

However, you're touching upon a very important point: If you live in Germany and your Estonian company pays you a salary (as opposed to dividends), you will be a proper employee and your company will also have to pay social security for you, and this might complicate matters significantly. In fact, this will likely (in the German tax authorities' eyes) establish that your Estonian company partially operates in Germany (which is a much broader thing than having an actual physical branch office). This then brings you back to square 1 – your company having to file taxes in Germany, too. Someone below linked https://eidel.io/posts/estonias-e-residency-is-awesome-and-s... which seems to confirm this.

> German tax authorities will see that as an illegal dividend payment from your company.

Could you elaborate? How is this illegal if you declare taxes?

  • fl7305  4 days ago

    > Could you elaborate? How is this illegal if you declare taxes?

    As someone else mentioned, the taxes are different.

    Namely: Salary is taxed lower than dividends. So the German tax authorities checks very carefully that you don't pay salary instead of dividends. If they determine that you paid out dividends as a salary, then you'll be charged with tax fraud.

    Now you might say, "I don't care about paying a bit extra in taxes, so I'll pay it as dividends as they wish"

    The problem is that you can only pay dividends the year after you earn the money.

    If you can set a fixed salary which you can keep paying throughout, and then wait for the dividend payments next year, that's fine.

    But what if you want to pay yourself wildly different amounts of money each month based on how much you managed to charge your customers? You can't just keep adjusting your salary up and down every month with a corporation.

    So here's where something like a sole proprietorship may be simpler from that aspect?

    Another thing you want to look at is "how easy will it be to dissolve the operations?" With a GmbH/UG it takes several years and potentially many thousands of euros in accounting fees. Not sure about the foreign corps. I think German sole proprietorships are simpler in either case?

    Also, Germany has a "Moving away tax" where you get taxed on the fictious value of your company if you move away from Germany. This fictious value can be quite a lot more than what you'd actually get if selling the company.

    Yet another thing: Depending on your setup, you may be covered by different rules regarding health insurance and pensions. If you don't make a lot of money in the beginning, it may be best to stay in the government insurance. But if you think you'll make a lot of money, it can be better to be able to do private insurance instead? There are rules on how you can move back and forth between government/private, so this is another area to consider carefully.

    This is my understanding as a layman, please check this with a competent local tax expert before acting on any advice here.

    • codethief  4 days ago

      > Namely: Salary is taxed lower than dividends.

      That very much depends on your tax bracket but at high income levels salaries are usually taxed quite a bit higher (42% vs. ~27%). 42% being the highest tax bracket of course; the first ~69k€ of your salary are taxed at a lower rate.

      > If they determine that you paid out dividends as a salary, then you'll be charged with tax fraud.

      This might be the case if the company were in Germany, and then it might not even be the taxman that'd complain but social security since you don't pay social security fees on capital gains. However, I doubt German authorities can do much about an Estonian entity paying dividends.

      > You can't just keep adjusting your salary up and down every month with a corporation.

      Yes, you can. Many companies do that – it's called fixed vs. variable salary (bonuses).

      > The problem is that you can only pay dividends the year after you earn the money.

      You're right in general (and I assume also in the case of an Estonian entity). Though at least in Germany – surprisingly – this is not correct, look up "Gewinnvorabausschüttung".

      Either way, this is not a huge obstacle if you're pursuing this long-term: You only have to make it through the first year without any income. Afterwards you can live off of last year's dividends.

CRConrad  4 days ago

> Having limited liability through some kind of corporation can be nice.

I think this is the main point and benefit of the whole thing. It can be difficult and/or expensive to set up a limited liabilty company in many countries; as an e-Stonian, it's apparently cheap and simple.

Any possible tax benefits are just a bonus.