When cross-border living in Europe is the first step in an expatriation project

It is wrong to think that all foreign company owners aim to optimize their activities from a tax point of view.

Too often, this is a shortcut to other, more practical expectations and motivations, or to a personal or professional project, such as expatriation.

We meet more and more managers who want to leave their native country, or their country of tax residence, to conquer other places, other territories, if not for another way of life, to change their habits, to give another framework to their business, even other horizons, to discover other mentalities, to benefit from local aid…

At a time when the world is increasingly open to international business models (outsourcing, offshoring, specific extraterritorial rights, internationalization of processes, etc.), when borders are no longer a barrier to ambitious projects, when states compete with each other despite their desire for uniformity, the example is set for entrepreneurial daring.

A good number of managers, especially start-ups, have a well-considered reflex to set up a Company in Europe (in or near the European Union), in the desired country, in order to prepare and organize their future “migration”, which is often simply the result of a modern concept of globalization.

The creation of a cross-border Company in Europe (in or near the European Union), a legal framework already provided for by the legislator as early as 1992 (1), may well be the result of personal motivations, professional fulfillment, but also market needs.

The free movement of goods and people (2) is a natural but sophisticated doctrine, which takes on its full meaning here.

Expatriation is a life project that needs to be evaluated and well prepared.

At the stage of setting up an offshore company, the owner of such a company, insofar as he or she is not domiciled for tax purposes in the country in which the company is registered, and insofar as the company is not yet in business, is therefore the owner of a company which can be considered to be of a foreign type.

This company will have a more precise tax profile when it starts up :

1. Insofar as the owner expatriates for more than six months a year in the country where his company is registered, we no longer speak of offshoring but of cross-border activity in Europe (in or near the European Union); the owner and his company will be eligible for all the specific taxes of the said country.
2. If the owner of the offshore company remains a tax resident in his country of origin or in a country other than that in which his company is domiciled, and the latter has organized its economic substance (3) and sells its products and/or services outside the country in which it is established, this company will be a Company in Europe (in or near the European Union), delocalized, and therefore foreign; the owner will pay his taxes in his country of tax residence and the company will pay its taxes in its country of establishment.
3. If the owner of the above-mentioned company remains a tax resident in his country of origin or in a country other than that in which his company is domiciled, and the latter has not organized its economic substance (3) and sells its products and/or services within and/or outside the country in which it is established, this company will be a Company in Europe (in or near the European Union), delocalized, and therefore foreign; the owner will pay taxes in his country of tax residence, and the company will pay taxes in the owner’s country of tax residence. In effect, the company will then be deemed to exist, with regard to certain countries, only in the country of tax residence of the company’s owner. By default, the company’s activities will be considered to be organized in the owner’s country of tax residence. In such cases, depending on the country concerned, there may be double taxation.

   It is therefore the economic substance (the place where the activity is actually organized: premises, employees, etc.) (3), which predominantly determines the company’s country of taxation.

   Offshore relocation of an activity, without organization of the economic substance (3), de facto removes eligibility for corporate taxation in the country of tax residence of the company’s owner(s).

   When planning to set up a Company in Europe (in or near the European Union), or to expatriate, you need to think carefully about your business model and the tax consequences.

4. To think of setting up a company abroad, without setting up a business there (3), without living personally and fiscally in the country where the company is established, and being able to avoid taxes on profits and income, is pure illusion.
5. If the owner of the company is not resident for tax purposes in its host country, but the company sells its products and/or services in the country where it is registered and has organized its economic substance (3), then the company can be considered onshore; it will pay its corporate income tax in its host country. The owner pays taxes in his country of tax residence.
6. In the case of direct outsourcing, the company remains fully taxed in its country of registration, without the creation of a legal entity (subsidiary) in the country where the activity (manufacturing, administration, management, etc.) is partially or totally relocated. If a subsidiary is set up, it will be taxed in its host country, always based on the principle of the real existence of economic substance (3); if necessary, the parent company (holding company) will be taxed. In the case of subcontracting, undertaken by a company that is legally and fiscally independent of the ordering company (customer), it is the subcontracting company that will be taxed on its own activities.