Owner - nominee director - employee

[TRGali]

Hi,

Let's set the scenario of an individual ("Owner") who owns a UAE company. The UAE company makes let's say 1 M€ a year and has a UAE full time resident director receiving a salary of 30 k€ (director has skills for the activity + does not have other directorship). Then Owner also is an employee of the UAE company and makes a salary of 500 k€ (employee is directly responsible for the profit making).

In case of a challenge of PE of the UAE company by the country where the owner is tax resident, in your experience, will EU country manage to claim PE of the UAE company with such setup? In terms of "control and management", etc.

 

[Sols]

Depending on where you live and how competent, aggressive, and/or creative your local tax authority is, the whole company might be considered tax resident where you live. Of your 1 million EUR in profits, they could try to tax the full amount as local corporate tax income.

The director is clearly a sham director. They can disregard that nominee as providing fictitious substance.

If you took out 50% of the company's profits as salary, some tax authorities would view it as 1 million EUR taxable as corporate income and 500,000 EUR taxable as personal income (or capital gains).

But if you live in for example Malta or Cyprus, chances are no one cares.

So it varies a lot based on jurisdictions involved.

 

[TRGali]

Thanks Sols.

What's the problem in the scenario that makes it obvious of having a "sham director", 30k just not enough? What if "Owner" is no longer employed and acts in the business through a power of attorney from the director, would it change much?

I mean, that director is really suitable / skilled at the business activity and is not a director of x other entities, he can genuinely manage the risk of the company and control the choice of trading model to be used and adjust the risk parameters. In practise, it's actually a 30 min work every morning, btw would it be better that he has 1h a day contract or worse ? 50% of the profit for the trader (who also is the "Owner") is actually "normal" practise for a good trader in the trading industry.

As Jafo often says, the laws of the mafia are not made for us to win with. I am still trying to build up some layer of defence, in case some mafia decides to put a target in my back.

Owner residency in that scenario is indeed of one these islands Sols, but others more aggressive, may one day also decide they want their piece of the loot.

 

[Sols]

What's the problem in the scenario that makes it obvious of having a "sham director", 30k just not enough?

It's not just about the money, it's about this:

Then Owner also is an employee of the UAE company and makes a salary of 500 k€ (employee is directly responsible for the profit making).

You're saying the owner is actively involved in the business. That causes PE, tax residence, or for some other creative reason taxable income where the owner is based.

I'm not saying you're definitely going to get caught. Just pointing out that your structure would not hold if someone skilled and aggressive enough catches you. At 500,000 – 1 million EUR/year, it starts drawing attention.

What if "Owner" is no longer employed and acts in the business through a power of attorney from the director, would it change much?

A=B

C=B

Therefore A=C

No difference.

As Jafo often says, the laws of the mafia are not made for us to win with. I am still trying to build up some layer of defence, in case some mafia decides to put a target in my back.

Then go live some place where the taxes are more amenable to your needs.

Owner residency in that scenario is indeed of one these islands Sols, but others more aggressive, may one day also decide they want their piece of the loot.

As long as you're in CY/MT, you'll be fine at least for the foreseeable future. If you relocate to mainland Europe, there's a significant risk of getting caught.

Imagine you're sitting down in across the table from — let's say — the German tax authority. They ask how you made your money. You say it's salary for your job. 500,000 EUR/year salary? Show us your employment agreement. Oh, you're a consultant? Let's see your consultancy agreement. Why are you being paid so much? How much money does the company make? What does the company do? Who owns the company? So they send a TIEA request to UAE and get a reply back showing you own the company (directly or via a nominee). Mr. Gall, it seems you have a company in Dubai that should be paying tax in Germany. Time to pay up.

 

[TRGali]

Thanks again sols that this knowledge you share across the forum. I deduct from your arguments that it would be a better defence company setup not to display any involvement of the owner in the company (only passive income). Not that it would change it all I understand, but perhaps would increase the level of difficulty/motivation needed for an attacker.

 

[Sols]

I deduct from your arguments that it would be a better defence company setup not to display any involvement of the owner in the company (only passive income).

Totally I understand that's the picture you want to paint, but you have to think like a tax authority. They aren't dumb. If they catch you and if they go after you, they assume you're up to no good.

If they start looking through the company's records (including emails, chat logs) and determine that your engagements exceeds what's normal for a passive shareholder, you're on the hook for corporate income tax. Have seen that happen several times. Have also seen it not happen many, many more times.

You can find yourself in a position where the burden of proof is reversed: you have to prove your innocence, not they your guilt.