Where to register a company and to set up a physical office? Comparing jurisdictions
5 November, 2020
112
Determining the optimal budget for company maintenance today is a key task for owners. The answer to this question, in turn, involves choosing right non-resident and specific bank to open an account.
Typically, our clients use a company as a tool aimed at optimizing settlements with counterparties. Despite development of a wide range of payment systems, most businesses (except some IT areas) still require a bank account for operations. This is due exclusively to banking services – trade finance, overdraft, bank guarantee, and letter of credit.
Bank, bank, bank
When creating the optimal business structure and choosing bank to open an account, we face some questions that the owner should answer:
1) Availability of an office at the company’s registered address;
2) Number of officially employed employees on the company’s payroll;
3) Confirmation of the company’s financial reliability, i.e. confirmation of reporting to tax authorities;
4) Correlation of operations with local counterparties.
While the first three points are usually easy to confirm, compliance with the fourth one encourages owners to establish a physical office (subsidiary, representative office, etc.) in the country of incorporation. This issue should always be approached carefully, weighing the pros and cons of a particular jurisdiction. Let us will highlight some nuances that require for close attention.
Office lease in the country of incorporation
It should be noted that such an office (unlike the long-standing practice) will no longer be virtual or minimal. Local employees will be based there; so, the office should have all the necessary amenities for comfortable work. Office lease costs are mainly the same across the EU. For example, in Estonia or Poland, it will cost in average 600 EUR per month, except the UK, where lease costs can reach up to 1,500 GBP.
Employee Costs
First, it is important to determine whether the employees will be predominantly local or whether the owner will relocate their own employees from the head office. From a practical aspect, there is more trust in one’s own people, but relocating personnel raises an additional set of issues, to be discussed below.
Employment of a foreigner
For example, in Cyprus, a company established by foreign residents (non-EU) for official employment of non-EU residents is required to obtain a special license. One of the conditions for obtaining a license is payment of a share capital amounting to 171,000 EUR.
In Bulgaria, Poland, and many other European countries, employment is easier. Current BLUE CARD conditions make it possible to employ highly qualified specialists without any problems.
On the other hand, in case of hiring local personnel for the purpose of business development in a new country, process control will still require the presence of a representative from the head office.
Furthermore, in order to attract highly qualified local personnel, it is necessary to offer competitive working conditions, which significantly increases the costs of maintaining such a foreign office.
Employee taxes vary significantly depending on the jurisdiction where the office is opened. For example, Cyprus and the UAE have no minimum wage. However, there are mandatory social security contributions and taxes on salaries. In Cyprus, it makes up ca. 19% overall, while in the UAE, it is equal to 12.5%.
Most European countries have statutory minimum wage guarantees: Bulgaria – 315 EUR, Poland – 610 EUR, the UK – 8.72 GBP per hour, Estonia – 584 EUR.
Also, one should take into account payment of taxes on employee salaries: Bulgaria – 13.7%, Poland – 20%, the UK – 13.8%, Estonia – 37.4%.
As a result, such a company in a foreign jurisdiction acquires all features of a real office and can easily open a bank account for operations at a local bank. However, the budget for such undertaking increases significantly. If such an office is not actually functioning in the framework of primary business in the country of its incorporation, such expenses solely for account management become unjustified.
For your convenience, a comparative table for several jurisdictions is set below.
| Jurisdiction | Corporate income tax (CIT) | VAT | Salary | Office (per month) |
| Poland | 19% | 19% | Minimum wage – ca. 610 EUR Social contribution: – employee – 14% – employer – 20% Personal income tax (employee): – 17% (up to 20,000 EUR per year) – 32% (over 20,000 EUR per year) | from 600 EUR |
| Hungary | 9% | 27% | Minimum wage – ca. 455 EUR Social contribution – 15.5% Personal income tax – 15% Pension contribution – 10% Health insurance – 8.5% | 200-600 EUR |
| Bulgaria | 10% | 20% | Minimum wage – ca. 315 EUR Social contribution – 13.7% Personal income tax – 10% | from 400 EUR |
| UAE | 0% | 5% | Minimum wage – not fixed Social contribution: – employee – 5% – employer – 12.5% | from 500 EUR |
| Cyprus | 12,5% | 19% | Minimum wage – not fixed Social contribution: – from the employee – 8.3% – from the employer – 8.3% Health insurance: – from the employee – 2.65% – from the employer – 2.9% | 500-800 EUR |
| Kazakhstan | 20% | 12% | Minimum wage – ca. 85 EUR Social contributions and fees – 15% (employer) Personal income tax – 10% (employee) Pension contribution – 11% (employee) | 10-15 EUR per sq. m |
| Estonia | 0% | 20% | Minimum wage – 584 EUR Social contribution – 33% Unemployment insurance – 2.4% Pension contribution – 2% | from 650 EUR |
| UK | 19% | 20% | Minimum wage – 8.72 GBP per hour Social contribution (Employer): – 0% up to 183 GBP per week (792 GBP per month) – 12% up to 962 GBP per week (4,167 GBP per month) – 2% over 962 GBP per week (4,167 GBP per month) Social contribution (Employee): – 0% up to 169 GBP per week (732 GBP per month) – 13.8% over 169 GBP per week (732 GBP per month) Personal Income Tax: – 20% (on annual income up to 37,500 GBP) – 40% (on annual income up to 150,000 GBP) – 45% (on annual income over 150,000 GBP) | from 1,500 GBP |
By Daria Liashenko, Interlegal associate attorney
