Investco Texts - A Limited Company as an Investor's Tool

General
, , ,
1

Greetings, forum members!

Welcome to discuss Investco’s articles regarding investment companies, taxation, and ownership arrangements. Here you can read our first article, which discusses organizing investment activities from a taxation perspective.

Investco was founded when we noticed that information about investing through a company is scarce, and there are hardly any accounting firms specializing in investment and holding companies. We set out to fill this gap and are now continuing that work by providing related content to Inderes readers as well.

We are primarily an accounting firm for investment and holding companies, as well as funds. We offer statutory administrative services that take our specialized field into account, such as bookkeeping, financial statements, and tax returns. Additionally, we help our clients plan their operations from a taxation and administrative perspective. The most common planning topics include company capitalization, profit distribution, selection of investment asset classes, ownership structures, and preparing for various situations such as inheritance planning. We strive to be as good as possible in our specialty and we stick to it: we do not offer services for, for example, filing personal tax returns or financial management for companies other than investment or holding companies.

We have a handful of topics in the pipeline that we want to write about and focus on in the coming months. In the future, we would also like to consider reader comments when choosing writing topics, and we would love to hear your suggestions for topics that interest you. We also aim to answer questions related to our articles on this forum.

Enjoy reading our articles!

Tuomas and Sampsa from Investco

28 Likes
Inderesin kahvihuone (Osa 8)
Ylisukupolvinen varallisuus ja perheen oma sijoitusyhtiö
3

Greetings!

Your first post was excellent. Thanks for that! :slight_smile:

This might be a silly and childish question, but I’m interested in this and I assume it’s not possible to provide a very precise answer.

Question:

Are you able to describe or define in any way how large an investment or holding company should be to make it worthwhile to hire an accounting firm like yours? It’s probably not worth it for small-scale operations?

Thank you for your answer in advance and I apologize if my question is “pointless”. :slight_smile:

8 Likes
4

Thank you for the excellent question; it would have been good to clarify this in our original post.

Our clients include companies of all sizes, from small one-person holding companies to larger fund structures. We currently have just under 600 client companies. The simplest of these are holding companies that passively own shares in one other unlisted company (the investment target) and do nothing else. In our experience, even the smallest holding companies should consider outsourcing financial management if technical accounting matters are not your core strength :blush: With an accounting partner who understands your company’s operations, you receive, above all, proactive advice and support for planning the company’s activities, even in situations you might not have considered yourself.

Through specialization, we have made our processes efficient, and our pricing is scalable according to the complexity of the operations. Therefore, we are also able to serve simple companies sensibly and at a reasonable price.

3 Likes
5

And thank you for the excellent answer! :pray:

To be honest, I don’t know of other accounting firms that specialize specifically in this, although they do exist. :slight_smile:

In your latest article, you also mention insurance wrappers, so is setting up a capitalization agreement/insurance wrapper and managing the related matters demanding for a regular person?

Accounting firm clients are often on an “ongoing contract,” but do you have clients who purchase services/help for a specific individual task, such as setting up an insurance wrapper like this?

To be honest, I’m not particularly familiar with insurance wrapper matters, and while I know certain principles, it’s a foreign world to me personally, so my questions might be a bit silly, and I’m asking out of curiosity. :slight_smile:

Thanks again for the answer in advance!

2 Likes
6

An insurance wrapper is a service provided by an insurance company where they handle pretty much everything. Almost all that is required from the subscriber is a signature. The taxation of an insurance wrapper is also simple, as tax events only occur if money is withdrawn from the wrapper. Trades occurring within the wrapper do not trigger tax consequences.

Regarding individual services, our policy is to help our ongoing contract clients with miscellaneous matters, such as opening accounts, but we prefer not to handle these smaller cases for others. The reason for this is bureaucratic matters such as the accounting firm’s KYC obligations, etc. Larger entities, such as corporate restructurings handled through our partners, are a separate matter.

3 Likes
7

Thank you for the clear answer!

I had thought that it required quite a bit of unpleasant bureaucracy from the applicant and hadn’t realized that the insurance company handles almost everything. :slight_smile:

This is also very understandable and sensible..

As you can see, this is a foreign world to me. :slight_smile:

These were warm-up questions; I’m sure there will be more questions from the more informed folks on the Forum, especially as your future posts come out. :muscle:

2 Likes
8

Great to have you on the forum :+1:

I believe that investing through a company interests many, but the extra work, the cost of outsourced services (mainly accounting firms), the risks, and the unclear benefits likely weigh on many people’s minds. In Finland, there is a fairly strong culture of saving and investing as an individual, and investment/holding companies give many a somewhat murky/dishonest impression.

One concrete challenge with small investment companies is banking services. As I understand it, banks are not very enthusiastic about investment companies, and few offer a package suitable for an investment company; instead, they always want to sell credit cards, etc., and the price is several dozen euros a month even if the only need is for a current account. Do you at Investco or others on the forum have experience with which bank offers the lightest and most reasonably priced package?

Can you also draw a normal salary from an investment company? If we consider FIRE practitioners—i.e., accumulating enough wealth and “retiring” to live off investment returns—wouldn’t the lowest tax rate be achieved through small salary incomes? Of course, if there is a need to withdraw larger amounts, then progressive taxation kicks in.

9 Likes
9

Thanks, we’ll try to be helpful.

Well said. There is clearly a need to clarify and break down the benefits and costs in more detail. In the first text, we tried to go through the benefits. Below is a selective copy from the text summary.

Regarding taxation, as a summary, it can be stated that a limited company’s 26-26.8% income taxation is clearly lower than an individual’s capital gains taxation if capital income is over €30,000 and the tax rate is 34%.

If you make unlisted equity investments, investing through a limited company is almost without exception the absolute choice.

The other side is then the extra work and costs, which would definitely be worth writing about. Regarding risks, tax risks primarily come to mind right now, which arise from accounting and taxation being done incorrectly. What kind of risks did you have in mind? The image of murkiness probably relates to at least the tax arrangements that limited companies have been associated with in the public eye.

I agree that a service package aimed at investment/holding companies would be welcome. Banks do provide companies (including investment companies) with just an account and online banking, but prices have risen in recent years and are now often closer to €20/month than €10/month. The account opening fee may also be around €200. There is variation between different banks and, for example, with an OP account, you can probably manage with a bit under €10/month. The matter is not yet familiar to us, but we have heard Alisa Pankki offers a very affordable alternative. Everything is relative, though, and a €200 annual cost is not significant if the investment assets and tax savings are large enough.

Yes, you can absolutely draw a normal salary. You are right, in Finland, the first approx. €20,000 of earned income goes almost tax-free. So, company (investment) income can, in a way, be converted into taxable salary to a certain extent, assuming no earned income is received from elsewhere. For example, entered with my own data, the tax percentage calculator(link) gives a tax rate of 3.0% for a €20,000 annual salary. The only side cost from the salary is the employer’s health insurance contribution of 1.53%. We will write about salary taxation in another text, which relates more to the company and profit distribution. There have been recent reforms to YEL (entrepreneur’s pension insurance) practices, but for a passive investment company, the YEL insurance obligation should not arise.

8 Likes
10

My message was more of a general reflection than anything concrete :grinning: Mostly, it’s great that you’re putting out more posts, and I’m sure this thread will pick up speed over time. There are certainly many pros and cons, and it’s smarter to break them down clearly in individual posts rather than just slapping down a long list of bullet points.

The biggest risk for an ordinary investor is likely uncertainty and the fear of doing something wrong and suddenly finding themselves in the crosshairs of the tax authorities or, at worst, the police. I don’t know the specifics, but my understanding is that this risk is practically non-existent if you use a professional accounting firm and don’t intentionally stray into gray areas. This might also be partly due to the murky reputation of investment companies. For many, the first things that come to mind with holding companies are tax havens, old wealthy families, and Yle’s MOT :grinning:

@Sijoittaja-alokas mentioned wanting a post about portfolio size and the benefits of an investment company. It would be nice to read about this in a bit more depth than your previous answer. Specifically from the angle of establishing a company solely for investing—brainstorming at what point the benefits start to outweigh the costs. Ideally, illustrated with some example calculations.

If, for instance, the annual capital income was €30,000 and the tax benefit was simplified to 4% (30% vs. 26%), then the costs would need to stay under €1,200/year. Accounting fees + bank fees are probably at least in that ballpark?

7 Likes
11

Thank you for the good writing suggestion, we’ll note it down.

Your calculation clearly shows that, especially compared to the 30% capital income tax rate, the direct tax benefits of moving a stock/fund portfolio to an investment company are minor, if not non-existent. In personal taxation, one can additionally benefit from dividend tax relief and the deemed acquisition cost (hankintameno-olettama).

When capital income exceeds €30,000 per year, the benefit is already clear. Still, I would say that a direct income tax benefit from running a stock portfolio is very rarely the reason for moving investments under a limited company. Most often, the reasons are holdings in unlisted companies or ownership arrangements involving multiple owners related to either joint ventures or family companies.

If the company exists in any case and its administration is organized, a stock portfolio is often also run under the company. Even in this situation, the main reason to move a stock portfolio under the company is rarely a direct income tax benefit. A greater interest in moving the stock portfolio relates to the more efficient withdrawal of other company income (e.g., dividends from an unlisted company): by moving the stock portfolio into the company and recording the investment in the SVOP fund (invested unrestricted equity fund), the company’s net assets can be increased, allowing for the distribution of more tax-relieved dividends to the individual owner.

7 Likes
12

The article below examines a company’s profit distribution and asset management from a tax perspective as of the publication date. It’s worth a read. :slight_smile:

In the previous text, an individual had a large sum of money in their personal account. We discussed whether it is better to invest funds personally, through a capitalization agreement, or through a limited company, and how the situation differs for various investment targets.

In this article, a large sum of money has ended up in a limited company’s account, for example, as a result of the sale of a business or a significant investment. What options does the owner have for managing the assets from here on, and how can this be done sensibly from a tax perspective?

2 Likes
13

Thank you for sharing the article! We welcome any comments or questions related to the topic.

4 Likes
14

I am a (satisfied) customer of InvestCo and was already about to send a question directly to them, but I’ll ask here as it’s so closely related to the blog post.

Question: @Investco_Tuomas discusses the use of the deemed acquisition cost in a company liquidation situation in the blog post, but is it possible for an investment company to buy back its own shares, which would allow the entrepreneur to apply the deemed acquisition cost without liquidating the company?

6 Likes
15

Nice to hear that you have been satisfied with our service! It’s also great that you posted your question here, so we can share the information more widely at the same time.

Our view is that without a business rationale for the acquisition of own shares, the transaction can easily be taxed as a disguised dividend rather than a disposal. A disguised dividend is taxed as 75% earned income and 25% tax-free income, which is the same as an earned income dividend.

Section 29.2 of the Act on Tax Assessment Procedure states the following:

”Disguised dividend also refers to funds distributed by acquiring or redeeming own shares, or by reducing share capital, reserve fund, or share premium account, in order to avoid the tax due on dividends.” Laki verotusmenettelystä | 1558/1995 | Lainsäädäntö | Finlex

Here is an article on the subject: Omien osakkeiden hankinta yksityisessä osakeyhtiössä - Oulun kauppakamari

3 Likes
16

@Investco_Tuomas has written a relatively insightful piece on how wealth can be transferred to future generations as optimally as possible. :slight_smile:

This text focuses primarily on considering ways in which wealth can be transferred to future generations tax-efficiently and in an administratively sensible manner. The best solution always depends on the situation, and the methods described in the text are only illustrative examples. Secondarily, the text also addresses the balancing of wealth between spouses. For the sake of clarity, the text is written from the perspective of a parent and child, but the same models can be applied almost without exception to spouses as well.

5 Likes
17

Related to this: If I were to set up an investment company with, for example, a group of friends, and one shareholder wants to exit the company after a few years, how should it be done if the company cannot buy back said shares for fear of a disguised dividend? It seemed logical at first that the company would buy back its own shares. Of course, selling to other shareholders is always an option, but what if the others don’t have the money at that stage because everything is already invested in the company…

And as a plus, a big thumbs up for appearing on the forum :+1:

3 Likes
18

It also occurred to me, regarding the situation I described earlier, that some form of compensation should be arranged for the “active manager” of the company. The title is optional… whether it’s CEO or Chairman of the Board? Ideally, the compensation would be 100% in shares or a 50/50 split of shares and cash. Would employer contributions, etc., be mandatory in all these scenarios?

These are fairly central concerns before it’s worth moving forward with setting up a company in this kind of situation and starting to request quotes from accounting firms :wink:

ps. Was the +/- €1,200/year price for accounting services mentioned by @Notorious in the right ballpark for a relatively small investment company with multiple owners? Considering that during the setup phase there are naturally more questions and consequently more points of contact, and as the company grows, that expense item will obviously increase as well.

3 Likes
20

In our view, in the case you presented, there would clearly be a genuine business reason when one shareholder gives up their holdings and thus the ownership structure changes. A disguised dividend would be interpreted, for example, in a situation where the company buys back shares from all shareholders in proportion to their holdings, and the ownership ratios do not change. This latter operation would easily be interpreted as dividend tax avoidance, as it would so clearly be a distribution of profit in nature.

4 Likes
21

Yes, that €1200/year is a very typical charge for a small investment company, at least for us. The number of owners doesn’t have a major impact on the pricing. The scope and complexity of the investment activities largely determine the price.

3 Likes
22

From the perspective of employer contributions, it makes no difference whether the fee is paid in shares or cash. No side costs are payable on board fees. Full side costs are payable on salary if the employee is not considered an entrepreneur. An employee is considered an entrepreneur if they personally own more than 30%, or together with family members more than 50% of the shares or voting rights AND work in a leading position in the company, such as on the board. For an entrepreneur, the only side cost is the employer’s health insurance contribution of 1.16%, provided the entrepreneur has YEL insurance (Self-employed persons’ pension insurance).

5 Likes
Ylisukupolvinen varallisuus ja perheen oma sijoitusyhtiö