Are there really benefits to registering your LLC in Estonia (or another country) when you reside in Austria? Most people think so but the risks might not be worth it. Even though many business owners in Austria increasingly consider registering their small business in a different country, like Estonia, USA, or the UK – the advantages of registering your business outside of Austria, whilst living in Austria, are not as beneficial as you might think.
In this blog:
Legal Foundation and Risks of registering your LLC in Estonia (or outside of Austria)
Here you are – highly skilled, recently moved to Austria and wanting to start your own business as a one-person company.
You’ve done a quick Google search “how to set up an LLC in Austria”.
You’ve also posted your question in business groups on social media.
And now, between Google and the overwhelming number of comments under your post,
you are convinced that
- It is super expensive to set up and run a limited liability company
- It might not be super complicated to register one, but understanding the tax and social security regulations is more challenging than you had realised.
- You are better off registering: a) an LLC in Estonia b) a Delaware company c) an LLC in the UK d) basically setting up your business anywhere else except in Austria.
While points 1 and 2 have a lot of truth in them, point 3 is actually not appropriate in most cases and can backfire big time, getting you in a lot of trouble.
It has something to do with one of the core EU principles – the freedom of establishment.
(Yes, you read that right – for once, it is not Austria overregulating the issue)
The freedom of establishment in the EU means that self-employed people and professionals or legal persons who are operating in any one EU Member State may:
- carry out an economic activity in a stable and continuous way in another Member State;
- offer and provide their services in other Member States on a temporary basis while remaining in their country of origin.
The main thing to focus on here is the word temporary.
Naturally, you will ask what exactly temporary means. And naturally, like everyone who holds a law degree, I will answer with: “it depends”.
The European Court of Justice (ECJ) has dealt with a high number of cases regarding the freedom of establishment (Article 49 from the Treaty on rh the Functioning of the European Union. In case you’re looking for something to help you get to sleep at night!)
Based on these rulings, , we know that the concept of establishment, within the meaning of the Treaty, is a very broad one. This means there is a lot of room for interpretation and decisions are made on a case-by-case basis.
Here is the explanation from the ECJ in all its full, official and legal, glory:
“The temporary nature of the activities in question has to be determined in the light, not only of the duration of the provision of the service, but also of its regularity, periodicity or continuity. The fact that the provision of services is temporary does not mean that the provider of services within the meaning of the Treaty may not equip himself with some form of infrastructure in the host Member State (including an office, chambers or consulting rooms) in so far as such infrastructure is necessary for the purposes of performing the services in question.”
Double Taxation Rules in Austria for foreign businesses
This is not an unusual ruling – the same logic is reflected and implemented in most of the Double Taxation Treaties, for example.
Take a look at the section titled “Permanent Establishment”. Nearly every Treaty I have read defines a permanent establishment as “a fixed place of business through which the business of an enterprise is wholly or partly carried on, including place of management”.
The Double Taxation Treaty goes on to explain that a permanent establishment pays tax in the country where the permanent establishment is located.
So, if your main residence is in Austria and if you run and manage your business (i.e. conduct meetings, send business emails, post to your business social media or even sign your contracts whilst in Austria) then, guess what – your business is considered a permanent establishment in Austria. And your business will need to pay Austrian corporate tax.
In simple terms, if you are managing your (one-person) company from Austria, your company will be taxed here.
In all my years of experience, I haven’t stumbled upon a treaty that uses a different principle. If you have, please let me know about it.
Overlooked costs : paying social security in Austria when you run a foreign business
Early on in this article, I highlighted that Austria was not to blame for the fact that setting up an LLC in Estonia, whilst being fully resident in Austria, is not a viable option for you. Before we hand over a ‘thank-you’ medal for this – you should know that the Austrian regulations still manage to go the extra mile to make things more complex. And by more complex, I mean more expensive.
It generally doesn’t surprise most people to learn that they have to pay tax in the country they live in and in which they carry out their business-related tasks/work. But foreign business owners are often unaware of the social security payments that are triggered when living and working in Austria.
Imagine the following business scenario:
In our fictional story, you are the Managing Director of a company registered in a different country. But you, personally, have your place of residency in Austria.
And if your company would be required to hold a business licence IF it were registered in Austria – then, you would be required to pay compulsory social security insurance. It’s a common mistake to assume that if your company is registered outside of Austria, that you will be able to avoid the social security payments for yourself or for any Austria based employees you may have.
And we haven’t even begun to go into detail you will have to do a whole bunch of paperwork in two different countries and deal with the suspicion that you are hiding something.
So, UNLESS your company abroad has a real structure – with real employees, real business partners, real clients, offices, and you are not the managing director – it will not necessarily be easier or a lot cheaper to register your business abroad.
What to do if you are thinking about registering your LLC abroad and what to avoid
But Miglena, everyone is doing it. Why can’t I? Well, just because a lot of people are doing it, does not make it legal. If anything, it means they are temporarily ‘lucky’ -they just haven’t gotten on the tax office’s radar yet.
What can you do instead if you really want to set up your business outside of Austria?
What should your next steps be?
- Identify if you have a proper business operation in the country where your company is registered.
If the answer to point 1 is no, you don’t have a proper business operation in another country, you have some decisions to make. Work out which will be more beneficial for you – setting up a Limited Liability Company in Austria or registering as self-employed in Austria. Here’s my 7 step system to work out which option is best for you
-> Register your business with your chosen legal form.
If your answer to point 1 is that you do, in fact, have a proper structure in the other country, simply notify the tax office and social security about it.
-> Get started on the rest of the paperwork.
And if you’ve got a headache at the thought of it all and you just know don’t want to deal with any of the above but DO want to have a business in Austria – you’re in the right place.
Hire me to do what I do best – make having a business in Austria easy (and headache free).