In recent years, more and more Spanish entrepreneurs and businesspeople have chosen to establish companies in countries like Estonia or Cyprus. Their main motivations include favorable tax systems and agile corporate structures. These countries are part of the EU, which facilitates intra-community operations and offers a legal appearance that differentiates them from traditional “tax havens.”
This trend is mainly due to tax optimization. However, from a fiscal perspective, there are several risks, especially if the company’s partners or main activities are located outside those countries. In fact, the Spanish Tax Agency has increased oversight of these structures, applying criteria such as effective tax residence, international tax transparency, and anti-abuse rules, particularly in sectors like e-commerce, tech consulting, and digital freelancers with foreign clients.
Below are the key legal, tax, and criminal risks to consider when operating from low-tax jurisdictions such as Estonia or Cyprus.
Risks of Incorporating Companies Abroad
Registering a company in Cyprus or Estonia can be completely legal, provided there is real economic justification, actual operations, and sufficient resources. Simply incorporating online, opening a bank account, or using a postal address in those countries is not enough.
Effective tax residence in Spain: The Spanish Tax Agency may consider an Estonian or Cypriot company as a Spanish tax resident if:
- Its effective management is located in Spain (e.g., key decision-making).
- The majority of board members are Spanish tax residents.
- Its real business activity is carried out in Spain.
- It lacks real employees in Estonia or Cyprus.
- It does not have a physical office there.
- It lacks local clients.
- Profits are repatriated to Spain rather than reinvested in Estonia or Cyprus.
Additionally, the Tax Agency may apply the international tax transparency regime when the company is considered a shell entity without real business activity and is controlled by Spanish residents. In such cases, income generated in Estonia or Cyprus may be attributed directly to the Spanish shareholders—even if no dividends have been distributed. This applies when Spanish residents, alone or with related parties, own 50% or more of the foreign entity, and the entity pays less than 75% of the corporate tax it would have paid in Spain.
Even when a company is legitimately established in those countries, if it carries out business in Spain (with employees, clients, or offices), it may be considered a permanent establishment and taxed accordingly on the attributable profits.
Moreover, failing to declare income from such companies in Spain could be considered a tax offense. Penalties for hiding foreign income range from 50% to 150% of the unpaid amount. If this amount exceeds €120,000, it may constitute a criminal tax offense.
If you’re considering setting up a company in Estonia or Cyprus—or already have one—the tax lawyers at Navas&Cusí, with offices in Madrid and Barcelona, can help you review your case and design a safe, efficient tax strategy in compliance with Spanish and EU regulations.
Frequently Asked Questions
Is it legal to set up a company in Estonia or Cyprus while residing in Spain?
Yes. It’s legal, as long as there is genuine economic justification, adequate material and human resources, and real business activity in the country of incorporation. Simply registering online or opening a bank account is not enough.
When can the Spanish Tax Agency consider my Estonian or Cypriot company a Spanish tax resident?
If one or more of the following conditions apply: key decisions are made in Spain, most board members are Spanish tax residents, business activity is based in Spain, there are no real employees or offices abroad, the company has no local clients, or profits are systematically repatriated to Spain.
What is international tax transparency and how does it affect me?
If the company is a shell entity and controlled (≥50%) by Spanish tax residents, and pays less than 75% of the Spanish corporate tax, the income may be attributed directly to the Spanish shareholders—even without dividend distribution.
What qualifies as a permanent establishment in Spain?
If the foreign company has employees, offices, warehouses, or a significant part of its operations in Spain, it may be considered a permanent establishment and subject to taxation on those activities.
What are the penalties for not declaring income generated through companies in Estonia or Cyprus?
Penalties range from 50% to 150% of the unpaid tax. If the unpaid amount exceeds €120,000, it could be considered a criminal offense.
How can Navas&Cusí lawyers help?
Our tax team will analyze your corporate structure, assess effective residence risks, tax transparency issues, and permanent establishment factors, and develop a compliant tax strategy tailored to your needs.
