A company abroad for a freelancer or consultant is a legal entity through which the specialist signs contracts with clients, issues invoices and receives payment, instead of working as a private individual. It is set up when corporate clients require it, when limited liability is needed or when the work involves several currencies. Registering in another country, including an offshore one, does not change the specialist's own tax residency: they pay personal taxes where they live.
When you need your own company
It is useful if at least one of these conditions applies:
- large clients sign contracts only with legal entities from certain countries;
- you need a bank account or payment service that is available only to a legal entity;
- a team works on the project, and you need a contracting hub for subcontractors;
- limited liability matters under contracts with high penalties;
- a sale of the business or the entry of a partner is planned.
If you have a few clients who pay directly into a personal account and do not require a legal entity, local self-employed or sole trader status in the country of residence is often cheaper. This is checked by calculating the break-even point.
How to compare the options
| Option | Profit tax | Mandatory costs and reporting |
|---|---|---|
| United Kingdom (Ltd) | 19% on profit up to £50,000, 25% above £250,000 | Companies House online registration fee of £100, confirmation statement at £50 a year, annual accounts and a tax return even with no turnover |
| United States (single-member LLC) | Depends on the state and the LLC's classification | An LLC with a foreign owner files Form 5472 with a pro forma Form 1120 for each year in which there were transactions with the owner, including contributions and payouts; the penalty for failing to file is $25,000 |
| Estonia (OÜ) | 22/78 on profit distribution | Tax is paid when dividends are paid out; e-Residency gives access to electronic services and does not give tax residency or a guarantee of banking services |
More about the forms: offshore company in England, OÜ in Estonia and the comparison UK Ltd vs US LLC.
Tax residency: of the specialist and of the company
This is the key question for a consultant who works alone:
- personal taxes. The specialist declares dividends and salary from their own company in their country of tax residency. Estonia states this directly in the e-Residency rules: the program does not give citizenship, tax residency or the right of entry;
- the company's residency. The United Kingdom treats any legal entity incorporated in the country as its resident. At the same time, the country where the sole director lives and makes all decisions may treat the company as its own resident or find that it has a permanent establishment there;
- CFC rules. The owner's country of residence may tax the undistributed profit of their foreign company.
For details, see our articles on a company's tax residency and CFC rules.
VAT and indirect taxes
VAT registration depends on the country where the service is supplied and on the client's status. Two examples of thresholds:
- Canada. A specialist or company with taxable revenue of up to 30,000 Canadian dollars over four consecutive calendar quarters is a small supplier and may choose not to register for GST/HST. Once the threshold is exceeded, registration is mandatory, and the application is filed within 29 days of the date it became mandatory.
- United Kingdom. A UK company registers for VAT when its taxable turnover exceeds £90,000 over 12 months. For a business outside the country that supplies services to the United Kingdom, there is no threshold.
How to calculate the break-even point
Add up the annual costs of the company: registration, the agent or registered address, accounting, tax returns, the bank and payment services, currency conversion. Compare them with the savings and extra income: the tax difference after all personal taxes, access to new clients, lower fees. If the structure does not pay off at the current turnover, it makes sense to postpone it until the business grows. The method for calculating the full cost is described in our article the total cost of a foreign company.
Example
A designer lives in Canada and works with UK clients. The clients are willing to pay a private individual by invoice through a payment service. In this situation, a UK Ltd would add reporting in two countries and profit tax in the United Kingdom, while personal taxes would remain in Canada. A UK Ltd becomes worthwhile when a client appears who works only with legal entities, or a team of subcontractors.
Common mistakes
- Registering a company in a country the owner never visits in the hope of changing their personal tax residency.
- Receiving payment for the company's services into a personal account.
- Forgetting about the annual reporting of a company with no turnover: in the United Kingdom, the confirmation statement and annual accounts are filed in this case too.
- Skipping IRS information returns for a US LLC.
Next step
If a team grows around you, see the guide to a company for an IT agency, where rights to code and where people work matter. A product team selling subscriptions should read choosing a jurisdiction for SaaS, and standard structures for exporting services are described on offshore structures for IT, consulting and trade. Why a business needs a foreign company in general is covered in a separate article.
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