Business owners - are you planning to expand your business to serve the European Union market – and the European markets in general? If so, read on to learn how to do so efficiently, especially in term of compliance with the EU laws and regulations, corporate tax planning and company asset protection.
Please note that the context of this article is expanding to the EU by the mean of establishing a second location, not moving your headquarters to the EU. However, in some cases, the tips below may be suitable for both situations.
Expanding to EU: Should I set up an office in EU?
The first thing you should discuss with your stakeholders is whether setting up an office in EU makes good (economic) sense. While in general selling to EU doesn't require you to establish your operations HQ in an EU country, in some cases, establishing a physical presence in the EU region offers substantial ROI.
You need to answer these questions: Do you need to source local talents? Does setting up a regional office brings any value to your company? Does setting up a regional office means securing a large chunk of business for you, in such a way that you may need to move your HQ to the jurisdiction of your choice in the near future?
If your answers to the questions favourably point toward setting up an offshore presence in EU, then read on.
The big question: Where?
Once you've decided that setting up a second office in the EU makes sense in many areas, then your next decision-making process is on answering this big question: Where to set up the second office?
When you think of EU, it's easy to say that some of the major EU countries make sense – e.g., Germany, France, etc. While such jurisdictions matter, especially in term of branding and access to resources, you might want to reconsider several other factors, such as tax laws and operational costs.
How about The United Kingdom? While setting up The referendum changes everything, with the second referendum is on the way, the potential laws and regulation changes in the future regarding doing business with the EU countries make it less desirable.
The bottom line is this: If setting up an office in a major country doesn't impact (much) on your corporation, then you may want to consider less-fancy options. Countries like Bulgaria, Cyprus, Malta and some other smaller countries in the EU are appealing due to various reasons, mainly slower taxes, and higher political/economic stability.
Highly recommended: Bulgaria and Cyprus
If you're looking for a recommendation, we actually highly regard Bulgaria and Cyprus. Here is the brief info on each.
Bulgaria: Fastest growing economy in EU
Bulgaria is Europe's 16th largest country located in the south-eastern part of Europe. It's surrounded by several countries – Romania to the north, Serbia and Macedonia to the west, Greece and Turkey to the south (source). Due to this strategic geographical location, Bulgaria in an interesting jurisdiction for setting up your company.
There are a number of reasons for that:
- - Bulgaria is the member of EU since 1 January 2007, which means you can request the all-important Intra-Community VAT number, which allows you to do business in EU. The VAT rate in Bulgaria is at 20 percent.
- - Bulgaria boasts approx. 3.9 percent GDP growth rate in 2017 – up from 3.4 percent in 2016 - which makes the jurisdiction one of the fastest growing economies in Europe.
- - Your business operations in Europe is taxed favorably; at 10 percent, Bulgaria's corporate tax rate is the lowest in EU. Interestingly, the jurisdiction's personal income tax rate is also 10 percent.
- - Bulgaria is in the SEPA (Single Euro Payments Area) zone, which means that cross-border payments – including cashless payments – are more efficient and effective.
Cyprus: Recovering economy
Cyprus is an island country in the Eastern Mediterranean. Just like Bulgaria, it's surrounded by several countries – Turkey to the north, Syria and Lebanon to the east, Israel to the southeast, Egypt to the south and Greece to the northwest (source).
As a member of EU (since 2004) and Eurozone (since 2008,) Cyprus makes an attractive jurisdiction for a company doing business in the EU.
Cyprus is still in the recovery phase, but the outlook is very positive. The jurisdiction was struggling to stay in the black until the fiscal year of 2014. But Cyprus' economic growth rebounded in 2015 and continued the upward growth trend for three fiscal years in a row – 1.7 percent in 2015, 2.8 percent in 2016 and 3.1 percent in 2017. The robust growth trend is expected to continue in 2018.
More upsides getting incorporated in Cyprus are as follow:
- - Cyprus' 12.5 percent of corporate tax rate is among the lowest in Europe.
- - As an EU country, getting incorporated in Cyprus will also give you Intra-Community VAT number.
- - Cyprus' VAT rate is at 19 percent, but can be reduced to zero depending on the type of your business.
- - No minimum capital requirement and flexible company structure.
Choosing one: Bulgaria or Cyprus?
Both Bulgaria and Cyprus are two of the fastest growing economy in Europe. What's more, both jurisdictions' tax rate is very attractive, at 10 percent and 12.5 percent, respectively.
If you're after convenience, Bulgaria and Cyprus allow you to set up a company and bank account remotely; you don't have to personally come to the bank's physical address to structure a company and open a bank account.
Now, to answer the all-important question; Bulgaria or Cyprus?
The cliché answer would be: It depends on what your company needs and your plan for the future. But here are some things that you might want to take into considerations:
- - If you actually want to move to where your company is headquartered in EU, Bulgaria might be a better option as your personal income is also taxed at a flat rate of 10 percent. To compare, your income tax in Cyprus is at 0 to 30 percent, depending on your annual income figure.
- - If your business in the service sector, you may want to choose Cyprus, as it offers reduced VAT rate from the standard rate of 19 percent – even to zero percent – depending on your business' niche. For example, if you're a travel agency, your VAT is reduced to 9 percent; if you're supply books, your VAT is reduced to 5 percent; if you're a health-related business, you might be exempt from VAT.
- - If your business involves the use of fleet or moving products across the EU, Bulgaria might be a better choice, thanks to the extensive road network connecting the jurisdiction to the surrounding jurisdictions.
Bulgaria and Cyprus are ideal for your EU operations HQ. The low tax, the stable economic and political climate, and the ease of doing business are appealing, whether you're planning to move your HQ to EU or establishing a second office in EU.
Moving forward, you should consult with your trusted financial and legal adviser to learn the financial and legal implications of establishing a presence in the EU. As to which jurisdiction is the best for you, you may want to consult your trusted offshore company formation specialist with proven track records.
To get an idea or two about setting up a presence in EU via Bulgaria or Cyprus, you can consult with us (free consultation).
Read also "Top 5 Offshore Jurisdictions for 2018"