Zero tax option for software development with access to EMI

[Roo]

Hi, can someone recommend a good zero-tax option for a software development/consultancy company? I need something that can have access to a reliable bank/EMI without crazy fees.

As far as I've read online most zero tax jurisdictions have issues with bank accounts/EMIs. Also is there any incorporation service provider that you would recommend for such jurisdictions?
If for Singapore/Hong Kong some service providers look quite reliable and focused on incorporations in that region for other jurisdictions I found that they are usually companies that offer incorporations in every part of the world, not sure how reliable those are or how much experience they actually have with every jurisdiction.

Has anyone worked with Korporatio? I saw they say to offer a very digital approach to incorporation.

 

[sinos]

UAE/Dubai, period.

 

[Cloudbanck]

UAE/Dubai, period.

UAE is not that cheap, and you cant get accounts with international EMIs, and there is a 9% corp tax (above 375k AED).

How about a US LLC instead, and then live in a territorial or zero tax country. Much cheaper, better banking access, and 0% tax.

 

[EliasIT]

There are a few different options. One, as already suggested by @Cloudbanck, is to take the straightforward path, set up a company in the USA, and move to a country where the tax regime suits you.

Another suggestion is to create a thread in the Mentor Group Gold and see what you can find there. There are quite a few suggestions on how things can be done a little differently.

 

[jafo]

Hi, can someone recommend a good zero-tax option for a software development/consultancy company? I need something that can have access to a reliable bank/EMI without crazy fees.

As far as I've read online most zero tax jurisdictions have issues with bank accounts/EMIs. Also is there any incorporation service provider that you would recommend for such jurisdictions?
If for Singapore/Hong Kong some service providers look quite reliable and focused on incorporations in that region for other jurisdictions I found that they are usually companies that offer incorporations in every part of the world, not sure how reliable those are or how much experience they actually have with every jurisdiction.

Has anyone worked with Korporatio? I saw they say to offer a very digital approach to incorporation.

Zug, CH!
Just go there. Walk around. It's super quiet and peaceful!
When all is said and done, I pay about 8% in taxes (deducting every business expense, of course), which is still a LOT of money.
You will have to go there and walk around and find your own service providers and consultants. Most people there are very intellectual, serious, and professional. You can really grow your business from there.
I practice what I preach.

PS. The EXIF data will reveal Zug, CH.

 

[uplana]

Some of these company formation firms advertise such services in their stores; I've definitely seen one on Metallstrasse in Zug.

You will have to go there and walk around and find your own service providers and consultants. Most people there are very intellectual, serious, and professional.

 

[Roo]

Thanks for the info guys, I was looking for something that can preferably be set up remotely with zero tax, I am already using a low tax jurisdiction but I was thinking that I could save more on the annual costs of corporate service providers and tax.

I was looking into the caribbean like BVI, SVG as they have low annual costs and not much reporting but I am afraid I'll waste the incorporation money if I can't get some decent EMI/bank or end up spending a lot on bank fees and end up gaining nothing.
Any opinion on those jurisdictions? I see no one recommends them.

 

[jafo]

I've definitely seen one on Metallstrasse in Zug.

Swissmoney's address is there.

 

[wellington]

Thanks for the info guys, I was looking for something that can preferably be set up remotely with zero tax, I am already using a low tax jurisdiction but I was thinking that I could save more on the annual costs of corporate service providers and tax.

I was looking into the caribbean like BVI, SVG as they have low annual costs and not much reporting but I am afraid I'll waste the incorporation money if I can't get some decent EMI/bank or end up spending a lot on bank fees and end up gaining nothing.
Any opinion on those jurisdictions? I see no one recommends them.

BVI has reporting and accounting now

You could do BVI with a territorial tax country or remittance territorial tax country (Thailand fits that)

 

[Marzio]

I see no one recommends them

The reason is that you will hardly find banking for those jurisdictions.

US LLC + territorial taxation is your best bet.

 

[sinos]

UAE is not that cheap, and you cant get accounts with international EMIs, and there is a 9% corp tax (above 375k AED).

How about a US LLC instead, and then live in a territorial or zero tax country. Much cheaper, better banking access, and 0% tax.

US LLC with new Beneficiary Information and physical address requirements will make it effective ETOB. Place of effective management will come into picture for most territorial taxation countries. UAE has a lower cost of living comparatively.

 

[Cloudbanck]

US LLC with new Beneficiary Information and physical address requirements will make it effective ETOB.

Beneficial information has no impact on ETOB (assuming the owner is non-resident). And I have not seen physical address being required.
What I have seen is that some US EMIs require the US LLC to have US customers/suppliers/activities. But you can have US customers and suppliers without having ETOB. See American accountant James Baker explaining this from the 3:35 mark here:

Then, more recently some US EMIs, including Mercury, have - for some clients - started requesting W-9 and that the US LLC is a US person. In this situation to keep the EMI account one can switch from a single member LLC to a multi member LLC. The multi member LLC is a US person and files W-9, but there is still no US tax for non-resident members just like for a single member LLC. Again see James Baker on this:

Also, you dont have to have a US EMI, there are other options like European/Global EMIs that accept US LLCs.

Place of effective management will come into picture for most territorial taxation countries. UAE has a lower cost of living comparatively.

Place of effective management typically comes in to the picture in theory, but rarely in practice. Rules around this in Latam are typically unclear, and in practice a one man US LLC that is owned by a gringo living in a territorial tax Latam country is just not taxed. If the application of the law changes on this (or the law itself), which is unlikely, there will probably be some warning signs ahead. But if one wants to play it really safe, one can have a manager in some cheap third country.

 

[Roo]

Thanks @Cloudbanck , it looks like the US LLC is the preferred option here. Would you know how the income is treated in this case? I've read that the LLC is a pass through so the income actually belongs to the person/persons behind the LLC not to the company itself (like in case of a PTE LTD in Singapore for instance) so all of this should be declared in the country of residence as income rather than only what is taken out of the company via dividends/salary/etc.

Is my understanding correct?

 

[Cloudbanck]

From the US perspective it is pass through (transparent), and it is only the individual owner that is taxed.
Treatment by the country of residence depends entirely by country. Many high tax western countries treat a US LLC as if it was a local company, opaque or transparent.

A transfer from a US LLC to the owner is called a distribution in the US. It depends on the country of residence if a distribution is treated as a salary, dividend or something else from the perspective of the country of residence, and if the owner can choose what it should be.

Fortunately many countries of residence just dont tax foreigners with US LLCs at all.

 

[Marzio]

Would you know how the income is treated in this case?

It depends upon the receiving country.

For example UK treats US LLC as an opacque entity so US LLC income is considered like dividends.

INTM180030 - Foreign entity classification for UK tax purposes: List of classifications of foreign entities for UK tax purposes - HMRC internal manual - GOV.UK

www.gov.uk

 

[sinos]

@Cloudbanck please update your information regarding beneficial ownership, physical address is required as per Beneficial Ownership Information Reporting | FinCEN.gov

It is the reason why all of the US based EMI's including Relayfi, Mercury are asking for physical street address, virtual address is not accepted. If you have a physical address for your US LLC, then you will trigger ETOB.

Place of effective management typically comes in to the picture in theory, but rarely in practice. Rules around this in Latam are typically unclear, and in practice a one man US LLC that is owned by a gringo living in a territorial tax Latam country is just not taxed. If the application of the law changes on this (or the law itself), which is unlikely, there will probably be some warning signs ahead. But if one wants to play it really safe, one can have a manager in some cheap third country.

You should be aware of Branch taxation and also if you are willing to play with IRS then go ahead. I hope you have also heard about reportable transactions and form 5472. Using any non-US EMI to transfer assets, in that case, the transaction has to be reported. See below from IRS:

Reportable transaction.
A reportable transaction is:

• Any type of transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year;
• Any transaction listed in Part V; or
• Any transaction or group of transactions listed in Part VI.

The ‘reportable transactions’ include any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or right to use any property or money between the LLC and its foreign owner or other foreign related parties.

So, things have changed from January 2024. Blindly suggesting US LLC and then hope that IRS will look the other side, is a wishful thinking.

@Cloudbanck considering hiring a cheap third world manager and forming multi member LLC and all other methods suggested with added costs, I stand by my suggestion of operating a UAE FZ co for software and pay 0% tax as its a qualifying activity. UAE will come out of FATF grey list next month and even if it doesn't, there are a lot of EMIs working for UAE.

 

[Roo]

@Marzio I checked and unfortunately the EU country I reside in treats LLCs as transparent so unless I change my residence I would need to declare and pay tax here on all profits of the LLC due to its pass-through nature.

@sinos can you please recommend a service provider for UAE to discuss costs and details of incorporation? Will this company no fall under the 9% tax that has been recently added at least in Dubai? Income will probably be over the taxable threshold.

 

[Cloudbanck]

@Cloudbanck please update your information regarding beneficial ownership, physical address is required as per Beneficial Ownership Information Reporting | FinCEN.gov

The beneficial ownership reporting requires the residential address of the owner which in our case here is abroad, and also the address in the US of the LLC which I guess is the issue here. In the link you shared it does not say that it is a physical address, and it specifically mentions businesses "whose principal place of business is outside the United States" which would point to these not having ETOB.

"F. 2. What information will a reporting company have to report about itself?

A reporting company will have to report:

1. Its legal name;
2. Any trade names, “doing business as” (d/b/a), or “trading as” (t/a) names;
3. The current street address of its principal place of business if that address is in the United States (for example, a U.S. reporting company’s headquarters), or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States (for example, a foreign reporting company’s U.S. headquarters);"

If we go back to James Baker (who is quickly becoming my favourite US CPA), at the 4 min mark below, he is saying that you can't put your registered agent address, but you can put any address where you can receive mail (and one usually gets such an address when one sets up a US LLC and it doesnt cause ETOB):

Also the beneficial ownership reporting is by Fincen, not the IRS, and it's purpose isnt to establish ETOB or not. ETOB rules havent changed.

It is the reason why all of the US based EMI's including Relayfi, Mercury are asking for physical street address, virtual address is not accepted. If you have a physical address for your US LLC, then you will trigger ETOB.

I have not yet heard or seen US based EMIs requesting this, but cant exclude that it is happening.

You should be aware of Branch taxation and also if you are willing to play with IRS then go ahead.

Branch taxation deals with if a foreign company has a US branch (and the US branch has ETOB), and how that is taxed (as a US subsidiary of the foreign corporation). So that is not quite what we are discussing here. More details: Navigating the Branch Profits Tax

I hope you have also heard about reportable transactions and form 5472. Using any non-US EMI to transfer assets, in that case, the transaction has to be reported. See below from IRS:


The ‘reportable transactions’ include any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or right to use any property or money between the LLC and its foreign owner or other foreign related parties.

Yes, of course, since 2017, I believe, single member US LLCs have to include reportable transactions in form 5472 that is sent in every year. Reporting requirements are surprisingly light to be honest.

 

[sinos]

Software development can be crafted as Qualifying Intellectual Property and as per UAE govt. notification vide https://mof.gov.ae/wp-content/uploa...ncome-for-the-Qualifying-Free-Zone-Person.pdf

will incur 0% tax. Also, there is a scope for Qualifying costs. All research and development costs incurred in the UAE, potentially including those from parties outside free zones and foreign based unconnected persons, might be allowable.

In short, its a "Patent Box" regime with 0% tax.

 

[Cloudbanck]

@Cloudbanck considering hiring a cheap third world manager and forming multi member LLC and all other methods suggested with added costs, I stand by my suggestion of operating a UAE FZ co for software and pay 0% tax as its a qualifying activity. UAE will come out of FATF grey list next month and even if it doesn't, there are a lot of EMIs working for UAE.

Where do you find information saying software is a qualifying activity? Would be great if that was the case, as otherwise the list of qualifying activities for UAE freezone companies seems quite limited. On the UAE Ministry of Finance's website (Ministry of Finance Announces New Decisions Relating to Corporate Tax for Free Zones – Ministry of Finance – United Arab Emirates) I see:

"In summary, the ‘Qualifying Activities’ include manufacturing of goods or materials; processing of goods or materials; holding of shares and other securities; ownership, management, and operation of ships; reinsurance services; fund management services that are subject to the regulatory oversight of the competent authority in the UAE; and wealth and investment management services that are subject to the regulatory oversight of the competent authority in the UAE. They also include headquarter services to related parties; treasury and financing services to related parties; financing and leasing of aircraft, including engines and rotable components; logistics services; distribution in or from a designated zone that meets the relevant conditions; and any activities that are ancillary to the above-mentioned activities."

And then some additions have been made to the above including:

"Definition of Qualifying Income expanded to include 'Income derived from the ownership or exploitation of Qualifying Intellectual Property’. The inclusion of this definition seems to be targeted for companies who generate income from intellectual property but not trademark royalty, and actually carry out research and development themselves or via 3rd parties."

Source:

Updated UAE Corporate Tax Rules for Free Zones

The previously issued Cabinet Decision No 55 of 2023 and Ministerial Decision No. 139 of 2023 regarding UAE Free Zones (FZ) have been repealed and are now replaced by: Cabinet Decision No. 100 of 2023 on Determining Qualifying Income (QI) for the Qualifying Free Zone Person (QFZP); and...

www.pwc.com

Is this what you mean? Software as intellectual property? Guess that could work, but then one cant just sell one's programming skills as a service.

@Marzio I checked and unfortunately the EU country I reside in treats LLCs as transparent so unless I change my residence I would need to declare and pay tax here on all profits of the LLC due to its pass-through nature.

@sinos can you please recommend a service provider for UAE to discuss costs and details of incorporation? Will this company no fall under the 9% tax that has been recently added at least in Dubai? Income will probably be over the taxable threshold.

If you live in a high tax EU country, you will according to the law have to pay tax on any foreign company you control, regardless of if it is a UAE freezone company or a US LLC. And if you don't control it, you'd still have to pay tax on funds that are transferred to you as dividends/salary/whatever.

So I guess addressing one's place of residence is key here.