Investing through a legal entity can offer significant advantages, including tax efficiency, asset protection, and streamlined management. Estonia’s unique corporate tax system, where undistributed profits are tax-exempt, makes it an attractive jurisdiction for establishing such entities.
Getting started
Establishing a legal entity for investment purposes allows investors to separate personal and business assets, potentially leading to tax benefits and enhanced asset protection. This structure can be particularly advantageous for managing a diversified investment portfolio.
Choosing the right legal entity
Before transferring your investments, it’s important to choose the right legal structure. Different jurisdictions offer different options, each with its own tax treatment and regulatory requirements. Whether it’s an Estonian OÜ, a UK LLP, or a German GmbH, selecting the right entity depends on factors such as your investment goals, risk tolerance, and administrative preferences.
Funding your legal entity
Once you’ve set up your legal entity, you need to capitalise it effectively. This can be done through direct cash contributions, asset transfers, or even non-monetary contributions.
- Monetary contributions: Investors can inject capital directly into the entity, providing funds for various investments.
- Non-monetary contributions: Transferring assets like stocks or real estate into the entity can be done tax-efficiently, depending on jurisdiction-specific regulations. With non-monetary contributions you do not need to sell your investments or positions.
- Loan contributions: Lending personal funds to the entity offers flexibility in funding and potential tax planning opportunities.
Managing investments within the legal entity
Once funded, the entity can open brokerage accounts, acquire assets, and manage investments. In Estonia, retained and reinvested profits within the entity are not subject to immediate taxation, allowing for efficient capital growth over the long term.
Withdrawing profits and accessing funds
For long-term investment goals, withdrawing funds is not the main objective but there are multiple options available to use the profits earned if need be.
- Salary vs. dividends: Owners can receive income through salaries or dividends, each with distinct tax implications.
- Loan repayments: Repaying loans made by the owner to the entity can be a tax-efficient method of withdrawing funds.
- Other strategies: Utilizing business expenses and benefits can provide additional avenues for accessing funds.
Challenges and considerations
While the benefits are significant, investing through a legal entity also comes with challenges every investor needs to consider depending on their location, strategy and growth goals. The most common challenges with investing through a legal entity comes down to bureaucracy that no-one really wants to deal with. As you want to focus on your investments, the last thing you want to do is deal with any administrative burdens.
- Administrative requirements: Operating a legal entity involves ongoing compliance obligations, such as accounting and reporting.
- Annual fiscal reporting: Regular financial statements and tax filings are mandatory, necessitating accurate record-keeping.
- Cost of services: Engaging professionals for accounting and legal services incurs additional expenses.
- Higher friction for account setup: Establishing investment accounts for a legal entity may involve more stringent requirements and longer processing times compared to individual accounts.
- Non-monetary contributions: Transferring personal assets into the entity requires careful planning to ensure compliance with valuation and tax regulations.
To address these challenges, specialized structures like Investor 2.0’s Investment Purpose Vehicle (IPV) focus solely on holding investments, thereby reducing operational complexities and costs. By limiting activities to investment holding, IPVs streamline compliance and administrative tasks, offering a cost-effective solution for investors.
Conclusion
Building your investment portfolio within a legal entity offers numerous benefits, including tax efficiency and asset protection. However, it’s essential to carefully consider the associated administrative responsibilities and costs. Leveraging specialized structures like IPVs can mitigate some challenges, making this approach a viable option for many investors.
