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.
THE PROBLEM:
Achieving efficient
structure in terms of taxation for commercial purpose for the websites Mr. Rusu
owns as an individual.
THE SOLUTION:
Oneworld MidEast Ltd (Dubai
branch) proposes setting up a company in the residency country of Mr. Rusu and
another two offshore companies in Dubai and Cyprus, in order to optimize income
taxation. Therefore Mr. Rusu will be the shareholder only for the Romanian
company and Dubai one. The Cypriot offshore company will have as shareholder
the Dubai offshore company and a Cypriot director and will operate the websites
business (sell and collect) and pay royalties to Dubai offshore company.
All the websites will
be owned by the Dubai 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 Dubai 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 Dubai offshore company
will pay no tax.
NOTE
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.
Regards
Winston