Outsourcing Board Member and AML Officer Services? TAX RISK WARNING!

Hiring a board member and a local AML/Compliance officer is one of the requirements for the crypto license applicants.

These requirements are also the ones which the license applicants in general like the least. It means ongoing cost. No one likes ongoing costs. And naturally, people try to find shortcuts or optimize the costs.

As a result, there are a couple of companies that provide a board member and AML officer services as an outsourced solution. How does it work?

The service provider issues an invoice for the annual cost of the board member. They will have someone from their office to become a board member in your company. On the outset, it’s not a bad solution.

However, if you look deeper, there are risks that aren’t being communicated to you.

For one, if the hired board member (who has to be the active board member managing the company in Estonia for the licensing purposes) does not get a salary, then it can result in a decision by the tax office that orders you to pay all the salary taxes on the paid sum.

Let’s say you paid 10 000€ to the service provider as an annual fee for giving you the board member. If the tax office decides that this “service fee” is actually the salary of the board member, you need to pay the income tax 25% on the net sum and social taxes (33%) on top of that. This means you’d need to pay 6625€ for taxes, plus any accrued interest.

And if you pay that fee for three years, they can tax you retrospectively – plus interest.

You might accept the risk and go with this kind of solution anyway, but the service provider should at least inform you about these risks. If they don’t, then it’s likely they’re more interested in making the sale than your success.

Acting as a board member in multiple companies

The second issue with this kind of solution is that the same person acts as a member of the management board for other clients of the service provider as well. For example, one person is on the board of four different crypto exchanges.

While you may not have an issue with the potential conflict of interest, loss of business secrecy, etc, then consider the underlying reasons why this requirement (of having a local board member) was introduced to the crypto exchanges.

The FIU wants to be able to supervise the crypto exchanges. They want the crypto exchanges to have an actual place of business in Estonia. It’s a requirement for the company to be managed in Estonia.

How believable is your application, if they see the same person, who already “manages” 6 other crypto exchanges, on the board of your company? Is it really possible to manage six different crypto exchanges? Remember, the local board member has to be the “active” one, who carries out the daily management tasks.

While there are some very capable people out there, then six crypto exchanges might be too much for even them.

Nominee Directors Aren’t Allowed

One small thing, though it’s more of a trivial matter in practice, is that nominee directors aren’t allowed in Estonia. There are many ways to organize the cooperation, hence, it’s going to be very difficult for anyone to prove that the director is in fact just a nominee director. But it’s useful to know that.

And it might not hurt to ask your service provider if they offer the board member service that if nominees aren’t allowed, how do they plan to approach the setup of the service.

Why Pay For Nothing?

I know it’s a stretch. You aren’t paying for nothing. If someone agrees to be a board member, even if only due to regulatory requirements, they’re still taking the risk and liability for company actions.

Yet, 10k or 8k or any other “k” for that matter, is not a small sum of money. And you’re not getting much in return if the person isn’t contributing to the growth of the company.

Why not pay a bit more, find a person who can contribute, and pay for the actual value? There are plenty of eager, hungry, and capable people out there who are ready to help you to build a business.

Why not change that cost into an investment? The return on this investment can be a lot more than just receiving the license.

Conclusion

To conclude, we advise you to be aware of the potential tax risks when paying a service fee to a company for the board member services. Estonian tax office looks into the actual relationship between the parties. There are plenty of cases domestically where taxes have been applied due to the nature of the transaction is different than the formal agreement. At a minimum, the service provider should inform you about the potential tax risks.

Make sure the board member isn’t a board member in many other crypto exchanges or license applicants at the same time. It will hurt your chances of getting the license. And remember that nominee directors aren’t allowed in Estonia.

Last but not least, it might be a good idea to hire a person who will actually contribute to the business. The return on investment could be a lot higher than just getting the license. You will have actual substance if the setup of the company isn’t artificial.