Mr. Rusu is a Romanian citizen, student in IT field, who owns several websites. He also launched a free online game that has lately become increasingly popular. The growing number of users and visitors, both on websites and the online game, made the opportunity to profit from the sale of advertising and fees for users.
Achieving efficient structure in terms of taxation for commercial purpose for the websites Mr. Rusu owns as an individual.
Dema Partners LTD proposes setting up a company in the residency country of Mr. Rusu and another two offshore companies in Seychelles and Cyprus, in order to optimize income taxation. Therefore Mr. Rusu will be the shareholder only for the Romanian company and Seychelles one. The Cypriot offshore company will have as shareholder the Seychelles offshore company and a Cypriot director and will operate the websites business (sell and collect) and pay royalties to Seychelles offshore company.
All the websites will be owned by the Seychelles Offshore Company, while the Romanian SRL will provide maintenance as subcontractor to Cyprus Offshore Company.
In this situation we have to deal with the EU "E-Business Directive" (Council Directive 2002/38/EC) which came into effect on 1st July 2003. The effect of this directive is to implement the imposition of VAT in on Internet delivered information or services within the EU. This amounts to a tariff of between 13 and 25 percent on items such as software or music downloads any transactions as part of online auctions and subscriptions to internet service providers, sold over the internet anywhere within the European Union.
The Directive applies to non-EU companies and providing Internet delivered information or services within the EU. In this case the company is liable to criminal prosecution for tax evasion, money laundering, false accounting or similar offences.
Non-EU vendors must register for VAT in one of the European Union Members States. The VAT authorities of the Member State in which the Non-EU vendor has registered will remit VAT collected to the states in which sales have been made. The rate of VAT and rules relating to VAT vary from state to state. The home address of every customer will need to be obtained, the rate of Vat applied will be dependent on that information and records would to be maintained for the VAT authorities. But establishing all customers' location could be an administrative nightmare.
Therefore establish a subsidiary in a Member State where VAT is low or there are other fiscal or operational advantages is the best option for a Non-EU vendor. This will circumvent the need to clarify the location of each customer as local VAT regulations would apply and the subsidiary would be regarded as a normal EU enterprise.
In the first year of activity Cyprus Offshore Company made 100,000 euros revenues. Of this amount the offshore company must pay to Romanian SRL 10,000Euro management services for the websites and 80,000Euro for royalties to the Seychelles Offshore Company. In the Cyprus Offshore Company there will be a 10,000 euro profit left, on which a 10% tax will be applied. Of the remaining 80,000Euro the Seychelles Offshore Company will pay no tax.
If Mr. Rusu would be establishing only the Romanian company, then paid tax structure would have been the following:
90,000Euro x 16% income tax = 14,400 Euro
(90,000Euro-14,400Euro) x 16% tax on dividends = 12,096 Euro
Total tax paid = 26,496 Euro
Therefore our proposed business structure has streamlined Mr. Rusu business with 25,496 Euro.