This is an interview with Austrian investor Bernd R. about the experiences he made when he created a company in Estonia to benefit from the advantages that investing as business on Bondora brings. Note that these are his personal experiences and should not be construed to be investment or tax advice. The circumstances for other investors will be different and investors should seek tax advice by qualified and certified tax advisors.

How did you get the idea to setup a company in Estonia for your Bondora investments?

I read a lot about Estonia its business friendly environment, simple tax system, huge start-up culture and the efforts to make administration processes available online.

Setting up an investment vehicle in Estonia would allow me to combine an uncomplicated taxation system with the advantages of a legal entity and all that at low costs.

What are the main advantages when investing as a company rather than an individual on Bondora?

There are several advantages.

• The corporate tax rate in Estonia is 0%. Only dividends are taxed with 20%. This means that your retained profits will generate additional profit. Double taxation agreements with your home country protect you from being taxed twice and usually limit the total taxation to the tax rate for dividends of your country of residence.
• In Austria interest income of private loans is treated in a different way than regular interest income (e.g. from a bank saving account). Interest income of classic bank saving product are taxed with a 25% flat rate, “private loans” fall under progressive taxation. On-top income of a full-time employee is easily taxed with 43% till 50%. So depending on the individual situation the tax savings can be up to 25%.
• Provisions for bad debts or write-offs reduce the taxation basis.
• Profits and Losses of different activities can be consolidated, e.g. losses generated with stock trading can be consolidated with your Bondora interest earnings and reduce the taxation basis.

How does the tax situation improve in your specific case?

I reduced the tax rate by 25% compared to my individual tax rate.

In addition I will generate more profit in absolute numbers due to untaxed retained earnings invested and at the same time reduce the taxation basis with bad debt provisions. The impact of these 2 factors depend on the future default- and interest rate of my Bondora portfolio.

To setup the Estonian OÜ you used a company formation service. Did that require you to travel to Estonia?

No, it was not necessary. A power of attorney does the job.

But actually – if I would do it again I would travel to Tallinn. Then the company formation could have been completed quicker. The money you spend for the flight and hotel you save, as you don’t need a notary and an apostille of your country of residence anymore. And of course you can combine the pleasant with the useful and check out a new city.

How long did the process take and were there any challenges?

You will be surprised but the only issue was to invent a name for the company.

In my case to set up the company and the corporate bank account took around 6 weeks.

But I am a bad example as I went for vacations and some documents had to wait.

When you attend in person the whole process can be completed much faster.

You had a personal account on Bondora before. Did you transfer the investments from the personal account to the new business account? Or did you just start new and left the personal account running?

A transfer of the portfolio was not possible. So I decided to move the returns of my private portfolio to my business portfolio. A portion I sold to my corporate account on the secondary market as savings exceeded costs involved. Currently the portfolio has a size of 10K EUR but the transfer is not completed yet. However the break-even (corporate vs individual account) can be reached at a portfolio size of approx. 5K EUR (assumptions: 20% net return, individual tax rate 50%, running costs of 400 EUR per year, costs of setting up the company not considered).

You outsourced company accounting and tax reporting to the formation service too. How much work is left for you to maintain the company’s accounting and reporting duties?

Not much.

Bondora provides excellent reports which can be used as a basis for accounting. I use the “monthly overview” report which contains almost all relevant data.

The only numbers I have to calculate manually are the premiums and discounts paid/received out of secondary market activities as they are not reflected in the monthly overview report.

In addition it is necessary to provide bank statements and invoices.

When you are familiar with it, this job can be done in one or two hours per quarter.

Can you share the approximate costs? How much did it cost you to setup the company and how high are the monthly costs?

With the company I used, setting up the company required a one-time payment of 840 EUR.

In addition you need to consider costs for notarizing the POA and apostille. In my case around 50EUR.

The legal address plus mail forwarding service is 240 EUR per year.

The accounting service costs depend on the volume. If you mainly invest in Bondora’s primary market the quarterly costs are around 40 EUR. Together with the fees for the annual reports the total annual accounting costs are around 180 EUR.

When you break down all costs (except the formation one-time costs) to one month you will land at around 35 EUR per month.

For each secondary market transaction Bondora is issuing an invoice for fees. These invoices cause more accounting journals and raise your accounting costs.

Do you plan to use your company for investments on other p2p lending marketplaces?

Yes, but I am not only focussed on p2p lending marketplaces. In the meantime I set up also a securities account for stock trading.

My goal is to create a financial vehicle, investing into different asset classes.

Reviewing your experience so far, do you have any tips you would want to give investors with similar plans?

Sure!

• Create a proper calculation of the expected income and costs. Always consider that costs for running the company can increase and returns of your p2p platform can decrease. In that situation your financial plan should still be positive compared to your individual situation.
• It is very important to have a competent and reliable partner in Estonia providing the legal address and mail forwarding but still for a reasonable price. You will find many of such companies on the internet. I am very happy with the company I am using.
• When your business activities are limited to Bondora (or any other platform) only, the accounting is easy to manage. You can save some money when you have the accounting done on a quarterly basis than on a monthly one.
• It cannot harm to have some basic knowledge about accounting, tax rules and the double taxation agreements between Estonia and your country of residence.

Useful links:

www.rik.ee/en Centre of Registers and Information Systems

www.koda.ee/en Estonian Chamber of Commerce and Industry

P2P-Banking.com thanks Bernd R. for the interview.

If you are interested in the service Bernd R. used and says he is very satisfied with, send me an email and I will put you in contact with this service. For comparison purposes I will also put you in contact with another service offering company formation in Estonia. Note that I do not offer advice, I will just establish contact.