Best Countries To Open a Business

Business Context

While starting a company can be like running an obstacle course in some nations, other states seem to encourage entrepreneurship. Not only do you need to worry about what type of company you would be doing while choosing the nation in which to begin a startup, but you also need to read about administrative, legal and tax regulations. Several lists of the world’s best business-friendly nations are released each year. The recent decade had witnessed a significant transformation in how entrepreneurship is practiced and taught. This is manifested in the ‘New Venture Accelerator’ phenomenon, the ‘Lean Startup’ movement, and grassroots initiatives such as the Slush event and the Global Entrepreneurship Week. Billion-dollar startups or so-called unicorns such as Uber and Airbnb have captured public imagination while disrupting traditional industries. These developments are global: founders in new company accelerators, regardless of whether they are located in London, Bangkok, Tallinn, or Silicon Valley, seem to look the same and speak the same. Emerging markets like India are coming up with their utilities like Uber, and emerging market accelerators are already publicly supported by traditionally orthodox centrally organized economies like Vietnam.

Keywords: best countries to open a business; top countries to open a business; best countries to open a business in Europe; best European countries to open a business; open a business in Estonia; open a business in another country

Definition What are some of the most significant measures that a nation is ideal for investment and business development? Is it all about the Gross Domestic Product (GDP), the Consumer Price Indices (CPI), or is it all about a government’s form of foreign investment policy?

Studies, which are published annually, rank counties depending on how business-friendly they are:

• the Doing Business 2015 study, published by the World Bank Group, measures regulations affecting various areas of the life of a business in 189 countries
• the Global Entrepreneurship Index 2015, which is published by the Global Entrepreneurship and Development Institute (GEDI), ranks 130 countries depending on their overall entrepreneurship potential,
• the Bloomberg Best Countries for Business 2014 survey ranks the world’s 50 most attractive countries for Business.

Introduction

Entrepreneurship policy proposals are warranted where business processes struggle to effectively encourage the development of new businesses and related advantages, such as employment creation. There are several explanations why the conditions as mentioned earlier should be followed for developers and new firms. Most importantly, emerging businesses suffer from a ‘liability of novelty,’ which makes it impossible for them to obtain and mobilize capital and reduces their survival rates.

On the other side, the economic and social gains (e.g., work growth, creativity and economic dynamism) generated by entrepreneurial companies are often well known. New, small, and medium-sized businesses are a highly heterogeneous group. Although new firms’ roles in job creation and innovation have long since been recognized, this phenomenon’s full heterogeneity continues to be uncovered to this day. The continually evolving understanding of the role is reflected in SME and entrepreneurship policy’s different emphases and the definitions they use to describe their targets. Therefore, I review central definitions and highlight how these reflect the evolving understandings regarding how entrepreneurs and new firms contribute in the economy.

About Doing Business Report

Doing Business 2020 is the 17th in a series of annual studies investigating the regulations that enhance business activity and constrain it. Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across 190 economies— from Afghanistan to Zimbabwe—and over time.

The Doing Business 2020 report reveals that emerging countries can quickly do Business by keeping up with established economies.

Even so, the distance remains wide. In a low-income economy, an entrepreneur usually invests about 50 percent of the nation’s per-capita income in creating a company, compared with just 4.2 percent for a high-income businessman. In economies rated in the bottom 50 as in the top 20, it takes almost six times as long on average to start a company.

Doing Business acknowledges the substantial work that countries have undertaken to enhance their regulatory frameworks. Efforts were centered on beginning a company, coping with building permits, and exchanging across boundaries among the ten economies that progressed the most. Many characteristics are shared among economies that rank the best, including the extensive usage of automated processes and web channels to satisfy regulatory requirements.

At the same period, solving insolvency was the least-reformed sector. Putting reorganization processes decreases the loss rates of small and medium-sized businesses and stops insolvent but sustainable enterprises from being liquidated.

Doing Business is a useful weapon that can be utilized by policymakers to devise sound regulatory strategies. It encourages public discussion by offering lawmakers a means of benchmarking change, exposing future obstacles and recognizing acceptable practices and lessons learned.

Analysis reveals a causal association between economic freedom and growth of the gross domestic product (GDP), where wage and price freedom, land rights and licensing conditions are conducive to economic progress.

Of the 190 economies calculated by Doing Business 2020, 146 neglect complete regional coverage of privately held property in land registries. In just 3 percent of low-income countries, all privately owned land plots are officially registered. Overall, 92 economies have achieved a ranking of zero on the regional coverage of the private property index, 12 on the openness of the knowledge index and 31 on the infrastructure index’s durability based on the recorded property indicator collection. In the regions of South Asia and Sub-Saharan Africa, land registry systems are the most ineffective.

The difference in an entrepreneur’s experience in top- and bottom-performing economies is discernible in almost all business topics. For example, it takes nearly six times longer to start a business in the economies ranked in the bottom 50 than it does in the top 20.

Below are the first ten countries which are proper to launch a business according to Doing Business Report:

1. New Zealand
2. Singapore
3. Hong Kong SAR, China
4. Denmark
5. Korea, Rep.
6. United States
7. Georgia
8. United Kingdom
9. Norway
10. Sweden

Doing Business in the European Union

The majority of businesses expanding into the EU would have to set up a foundation in at least one of the 27 Member States. Choosing which Member State(s) demands that several vital considerations, including those listed below, be carefully considered.

The corporation would need to determine at a very early stage growing organization or arrangement would better suit its EU needs and growth plans. This would rely on variables such as the income model, the tax profile, the ease of debt and equity financing rises, and the market plan at all stages.

In particular, companies joining the EU will want to decide whether the introduction is better done by developing a new vehicle or the purchase of a local company already developed.

The EU facilitates the free exchange of products, services and staff and maintains a ‘harmonized’ regulatory regime intended to ensure that the Member States’ rules are compatible. However, essential disparities exist between individual Member States’ national legal, regulatory and cultural frameworks, which prove difficult for enterprises joining the EU sector. Furthermore, certain EMEA (Europe, the Middle East and Africa) countries (such as Switzerland and Russia) that are sometimes deemed ‘European’ are currently outside the EU and are subject to totally autonomous national regimes.

Raising finance and tax

When raising equity and debt funding, each Member State can face various difficulties, and the ease at which local finance can be collected would be an especially significant concern. Similarly, since specific institutional actions are tax-driven, local tax regimes’ effect would be quite substantial.

Companies need to consider, in addition to VAT (value-added tax) and sales taxes, how municipal tax systems affect business earnings, dividends and capital losses, shares or real assets, and benefits for equity. It also needs to discuss the availability of local tax relief.

PE Vs Subsidiary For Non-EU Based Businesses

First of all, non-EU businesses ought to determine whether the establishment of a subsidiary in an EU Member State is more acceptable or whether they are otherwise functioning as a foreign corporation with or without a permanent establishment, as well as the economic and tax repercussions of doing so.

This will include evaluating the particular, planned EU-related business operations of a non-EU organization and whether a permanent establishment (PE) will be considered in the EU.

The definition of PE is used to define a multinational business with a secure and continuous existence in a nation that produces local profits and has adequate facilities to function independently. The requirements for assessing a PE, however, will differ across jurisdictions.

In general, a multinational corporation with a PE in a specific nation is ordinarily responsible for taxation, i.e., the worldwide revenue from the PE’s continuing operations is subject to local corporate tax rates and registration provisions for value-added tax. To prevent taxes, the involvement of a foreign corporation in the EU will have to be confined exclusively to representative duties and not to direct trade.

The management position, the life of a warehouse, workplace, plant, workshop, or a mine, an oil or gas field, a quarry, or some other natural resource production place may be a fixed place of Business. Generally, it will not be deemed a PE to use facilities for transportation, show or distribution of products, store stock, or do another business process.

However, if the organization has no office in a given EU member state but has workers or representatives who negotiate, enter into and sign contracts solely on behalf of the company and periodically practice it, a so-called dependent agent could cause PE requirements. The same refers to businesses that regularly offer facilities on the field.

Besides, a defined tax treaty between countries can alter the criteria used to decide whether a foreign corporation’s EU operation is considered a PE. If a double tax arrangement (DTA) is in effect, taxes taxable at the PE stage are not taxed again at the company’s tax domicile.

The corporation runs the risk of being taxed twice on the same profits in the absence of a tax treaty. The majority of jurisdictions offer tax credits and international tax deductions, although their ranges can differ considerably.

Notice that the new PE requirement typically applies to any physical location in the revenue-generating authority and does not consider such ‘internet resources or goods’. Selling the goods and services online to consumers located in a jurisdiction does not cause a PE in that jurisdiction by itself, but as we can see below, this could alter.

Branches typically need to apply a comprehensive collection of reports of the parent corporation to the applicable tax authorities from a financial reporting point of view, where the division is licensed.

Instead, one can propose setting up a subsidiary based on the scale of operations and the long-term objectives. Unlike a branch, a division has a distinct legal identity and, as a consequence, the parent corporation would not be responsible for the debts and liabilities of its EU activities.

In addition, market and funding incentives can be given when working via a subsidiary; small companies and banks may be more comfortable interacting with local agencies.

From a tax point of view, the subsidiary will be a completely independent taxing entity of its own and would be liable, independently from the parent business, to taxation in the jurisdiction of incorporation and successful management.

As previously reported, accrued profits can be charged twice if the PE and the parent corporation are based in non-treaty nations (although tax credits for foreign tax paid might be available). Under such a scenario, the creation of a subsidiary may be more reasonable for tax purposes, mainly if no dividend withholding tax is owed at the subsidiary level and a participation allowance is required at the parent level for dividends earned.

Corporate Tax Residency for EU Companies

Either an EU-based company or a non-EU company forming an EU subsidiary may elect to set up their corporate vehicle and access the stock market throughout 28 jurisdictions (as of now). Freedom of establishment exists in the European Economic Area: a company can carry on economic activity on an ongoing basis in one or more of the EEA States.

Some jurisdictions provide more advantageous tax regimes than others. Cyprus, Malta, Ireland, Bulgaria, Romania, or Hungary have relatively low effective corporate tax rates, ranging from 5% to 12.5%, while others, such as Germany, France, or Portugal, levy high corporate tax rates, around 30-35%. We wrote an article a few months ago on setting up an international business in Europe and reviewed some of them.

Under the Freedom of Establishment principle, one can certainly look at the most tax advantageous jurisdiction for setting up shop and benefit from a lower tax regime.

There are, however, certain caveats linked to residency in corporate tax. Corporate tax residency is generally evaluated by the place of incorporation and the place from which the Business or operation is effectively controlled and managed. Also, most EEA countries have concluded DTAs between them, setting the rules for determining a given company’s corporate tax domicile.

If an EU-based company is incorporated into an EU jurisdiction but is controlled and managed effectively from another jurisdiction, it would be subject to the latter’s taxes. To assess corporate tax residency, the tax authority concerned would examine, among other factors, the personal tax residency of directors or controlling persons, the place of Business, the location of board meetings, and whether the company has an economic substance, such as staff or physical offices.

For e.g., a UK-controlled Cyprus corporation with a UK-based board of directors and without a place of Business in Cyprus may be regarded as a UK-based tax citizen. This often refers to non-EU groups who may want to exist for commercial purposes in a specific Member State but may wish to be incorporated for tax reasons in another Member State. This approach would not be a thriving option in the mid-/long-term.

Therefore, when evaluating incorporation jurisdictions, attention should be given to the appropriateness of creating economic content there, taking commercial matters into account and whether it makes sense to create a company existence.

To create economic substance, such agreements such as candidates or competent directors will not function. Professional and candidate directors typically serve as directors of various firms, and they would be considerably easier to spot if a tax audit were to take place.

The right solution may be to employ a local executive director with a local office, local personnel and local spending, who operates solely with the Business and has sufficient remuneration for their role.

However, even though the corporation has developed an economic substance and is regulated and operated from that same authority, permanent establishment regulations operate in the same way as non-EU businesses, as mentioned previously, if the company has offices or some form of commercial substance anywhere in the European Union.

When an EU corporation is deemed to have a PE in another Member State of the EU, the revenue credited to the PE will be charged locally.

A PE is a classification of a fixed place of Business, as previously discussed, which can be caused, among others, by the place of administration, division or departments, warehouses, workplaces, or by providing a dependent agent.

It should also be remembered that, while the EU and EEA are similar economies, tax issues are treated separately within the Member States. For more clarification, one requires to look at the particular DTAs between jurisdictions. Notice that all jurisdictions have not ratified tax arrangements with all their European equivalents.

The regulations related to corporate tax residence and permanent establishment should be closely considered when developing a tax preparation policy for both EU-based and non-EU-based corporations dealing with EU subsidiaries.

Offshore Companies doing Business in the European Union

Doing Business with EU counterparts via offshore companies could present some difficulties, mainly if we talked about B2B business services categories.

We apply to businesses incorporated in tax-neutral jurisdictions when we speak to offshore companies, whether the EU blacklists them or not, and are not registered elsewhere as tax-residents.

When deducting payments made to offshore firms, EU companies can have difficulties, and tax authorities can require a higher burden of evidence of the company. This raises some problems when performing B2B operations in Europe, as opposed to marketing a commodity or delivering a service to end-consumers who, in any event, are unwilling to deduct expenses for personal tax purposes.

The extent of burden differs based on the particular EU member state; for example, if a local corporation trades with offshore firms, Cyprus’ tax authorities may not be as inquisitive as German ones. Nevertheless, in general, higher regulatory regulation is a rising theme around the entire European territory.

In general, the essential considerations investigated by tax officials are the essence of transactions and economic operations.

There would be no difficulty for the EU corporation to have proof to subtract these invoices for tax purposes if the purchase principle can be readily proved, such as the procurement of products.

If the definition of expenditure applies to such activities, such as consultancy services, which are more complicated to show, the tax authority in dispute does not understand the cost.

For that purpose, based on the commercial operation, if your Business depends on B2B transactions with a specific EU member state, a single offshore company might not be the optimal platform. Using a broader framework can make sense.

To prevent heavier scrutiny by tax authorities and to provoke additional audits or inspections of their accounts, EU companies can refuse direct Business with offshore companies. Reputation and tradition still matter: in the EU, as compared to, for instance, in Asia, the ‘Offshore Shame’ aversion is rampant. Individual EU companies may, only because of this, decline to do Business with companies organized in some offshore jurisdictions.

Many EU countries apply large withholding taxes on dividends, interest and royalty charged by a subsidiary if the arrangement consists of an offshore holding-EU subsidiary.

An offshore corporation is a subsidiary of an EU business, CFC rules may apply, which may contribute to undistributed profits taxable to the parent company from the offshore subsidiary. However, the scope of the CFC regulations differs throughout the Member States, with some adopting a more lenient stance and others having a more stringent one.

Value-Added Tax (VAT) for Non-EU companies

We can only allow VAT enforcement with non-EU firms operating in the European Union for this portion. EU VAT specifications may be complicated and this piece is not meant to be exhaustive and, in some instances, merely describes specific requirements.

For VAT purposes, a non-EU corporation buying and/or exporting taxable goods in the EU may need to be licensed. It may need to nominate a tax representative in any of the countries with which it is dealing; the tax representative will be responsible for reporting duties and may collectively be liable for the company’s VAT payments. In all nations, naming a fiscal delegate is not obligatory. This provision has been waived by the Netherlands, Germany, the UK and the Czech Republic.

For a non-EU corporation, this renders VAT registration an administrative and cost burden. Among other factors, many non-EU businesses prefer to partner with an entity in Europe or to set up a subsidiary of their own for smoother VAT approval.

If a foreign business, whether recognized as a branch or not and trading with consumers of the European Union, has a permanent establishment, it must file for VAT. Exemption thresholds for small firms usually do not extend to multinational businesses.

A foreign company with PE will be required to levy VAT on its domestic sales of goods and services and pay VAT on its domestic purchases. For both their taxable transactions (input VAT) and their taxable sales, the corporation will need to plan and submit a VAT return (output VAT). The discrepancy between the input VAT and the output VAT would have to be forwarded (if positive) to the appropriate tax authority or refunded to the corporation (if negative). VAT reporting periods vary across countries, with the most common being monthly or quarterly. In firms with unauthorized trade, countries such as France need activity-based monitoring, whereas others require a single annual return.

Usually, if the products are imported directly from a non-EU market to the final customer and the final consumer is the record importer, VAT and customs duty would be paid, if necessary. The position of supply is known to be the non-EU nation from which the items are delivered.

However, the supply position will be the e-commerce site from July 2021 onwards (e.g., online shop). This ensures that VAT would be paid at the point of sale by non-EU e-commerce firms following the dropshipping model, irrespective of if products are purchased from non-EU countries by an EU customer operating as a licensed importer, whether the amount of the consignment does not reach EUR 150.

If the Business is the record importer, it would need to apply for VAT and EORI at the port of entry in question and charge the consumer VAT, as mentioned above. It is, therefore, compulsory to apply for VAT if the Business uses a distribution center.

Case Study: Why You Should Register a Company in Estonia

Estonia has been causing quite a stir worldwide, and it is arguably the perfect place to shape a future-oriented organization. The nation’s e-Residency program provides developers with a creative way to develop and operate their digital projects. E-Residency allows digital companies from anywhere in the world to start and run an EU-based business remotely. You have connections to the Estonian government’s e-services via e-Residency, enabling you to conduct regular operations 100% online and internationally.

There are many advantages to founding the company in Estonia. The four prime ones are below:

• 100% online formation and management– The most significant benefit of forming a company in Estonia, by far, is that you can start and run your Business from anywhere in the world until you get your e-Residency passport. You can digitally sign documents and contracts as an e-resident, declare Estonian taxes online, and use Estonia’s online banking services. To handle the enterprise, you do not need to be present in Estonia.
• 0% corporate income tax on profits kept in the company- Estonia has a particular structure that varies from conventional corporate income tax (CIT). In Estonia, revenues gained by a business are not liable to CIT automatically. Instead, CIT is only due if you take the money out of Business (e.g., in the form of a dividend). Profits held or reinvested in corporate funds and used for commercial purposes are not entitled to CIT.

This tax arrangement ensures that owners monitor what CIT taxes are charged by determining if and when revenues are allocated.

• Presence in the European single market- As a member of the European Union, Estonia is part of its most excellent single commercial economy. Member States and their residents enjoy the economic advantages of eliminating trade barriers and the freedom to fly quickly between the Member States. Shared currency and harmonized corporate laws between the Member States, including other EU Member States’ rights, promote trade and encourage companies to expand.

In addition, Estonia is part of the Single Euro Payments Area as a member state of the Single Euro Payments Area  (SEPA). Making electronic payments is as simple as making cash payments inside the SEPA. Businesses founded in Estonia will make easy and safe transactions anywhere in the euro area between bank accounts. The SEPA recommendations also imply improved financial facilities for all: transparent prices, valuable assurances to ensure that your payments are processed timely and in full, and banks that take liability if your payment goes wrong.

• Estonia has a great business environment- Estonia is regularly rated by different foreign rankings as one of the world’s best market ecosystems. For instance, the World Bank rated Estonia as the 18th best in the Ease Doing Business group in 2019. For the sixth year in a row, a report conducted in 2019 by the Tax Foundation, a US-based think tank, rated Estonia as having the most substantial tax code in the OECD.

Conclusion

The reform case study analyzes significant regulatory changes implemented by governments since the launch of Doing Business. Simplifying the requirements for starting a business, easing tax compliance burdens, increasing access to credit, and ensuring viable enterprises’ survival are among the most common regulatory changes over the past 17 years. The case study also discusses the effects of new regulations on different dimensions of economic development and investment activity.