UAE clarification of Freezone Qualifying Income

[jafo]

Before you ask, no, you cannot split your business up into multiple companies that each have <$800k in revenue, as that would also violate the GAAR. This is even explicitly mentioned in the corporate tax FAQ.

I like you! You got me! Thanks for kicking me in the scrotum (and you are right...that would have been my next question). Case closed! I'm heading to Fred

 

[Sols]

Is there ANY way to have local banking, immigration, and zero personal tax without the 9% corporate tax?

Yes, by having a company that isn't taxed/taxable in the UAE. For example, if you own a foreign company that pays you dividend, and your role is genuinely that of a passive shareholder.

 

[troubled soul]

Yes, by having a company that isn't taxed/taxable in the UAE. For example, if you own a foreign company that pays you dividend, and your role is genuinely that of a passive shareholder.

Like
USA LLC own 49% under my my personal name and 51% by UAE holding company........by this structure ...Can I avoid 9% corporate tax on USA LLC ?
Do 49% ownership make me passive investor ?

 

[Sols]

No, the percentage doesn't matter. Being a passive shareholder means you're not involved in running the business. If you do, you risk triggering tax residence or creating a PE which would be taxable in UAE.

 

[troubled soul]

No, the percentage doesn't matter. Being a passive shareholder means you're not involved in running the business. If you do, you risk triggering tax residence or creating a PE which would be taxable in UAE.

Thanks for reply.....Can you suggest any setup to avoid CFC and avoid paying tax for single person USA LLC for Dubai resident ?

 

[JustAnotherNomad]

Thanks for reply.....Can you suggest any setup to avoid CFC and avoid paying tax for single person USA LLC for Dubai resident ?

The UAE does not have CFC rules.

You can use a director in another country, so you can claim you are only a passive investor. But that could trigger tax in the country where the director is located.

 

[troubled soul]

The UAE does not have CFC rules.

You can use a director in another country, so you can claim you are only a passive investor. But that could trigger tax in the country where the director is located.

so what would suggest to make single person USA LLC tax free for Dubai resident ? any structure or setup

 

[Marzio]

He already told you! You need to hire a director in a tax free jurisdiction.

 

[Don]

so what would suggest to make single person USA LLC tax free for Dubai resident ? any structure or setup

You can use Estonian director for this possibly even with zero substance. The benefit is that it's not blacklisted jurisdiction so easier on banking compliance.

Based on the treaty the US LLC will not become a tax resident in Estonia, as tax residence is based on domicile/place of incorporation, noting that there is no management and control test for the purpose of determining corporate residency in Estonian legislation.

Its only theoretically possible (based on the place of management) that the company would need to register a PE or a branch, so Estonian-sourced profits attributed to PE can be taxed in Estonia. Even if you do all business from Estonia with US LLC, there will be no tax payable in Estonia until profits are distributed/taken out from the branch/PE.
Estonian Director can show the tax office a POA to a representative outside Estonia who is making key management decisions, has access to bank accounts, etc.
Because it's not treated as a resident company local cfc rules don't apply either, and no need to submit public accounts for a registered PE.
Companies can have multiple PEs where profits are arising. Maybe some of the company's business is done in the Bahamas, Bermuda, Vanuatu, BVI or other nice places even from temporary offices rented through Airbnb.
As a bonus, by investing a little in substance, it is possible to get reliable EU banking and apply for a local residence permit. Substance locally can be a great way to access EU banking at reasonable fees. Everything can be managed online, including branch registration (if desired).
For US banking, EIN and a visit to e.g., NY is required.

feel free to pm

 

[JustAnotherNomad]

You can use Estonian director for this possibly even with zero substance. The benefit is that it's not blacklisted jurisdiction so easier on banking compliance.

It would also be possible to use an Estonian company, but then only salaries would not be taxed in Estonia, and just like in the UAE, you can't pay out an outrageously high salary.

Based on the treaty the US LLC will not become a tax resident in Estonia, as tax residence is based on domicile/place of incorporation, noting that there is no management and control test for the purpose of determining corporate residency in Estonian legislation.

Does the treaty really apply if the LLC is not tax resident and does not have a PE in the US? I would doubt that.

Its only theoretically possible (based on the place of management) that the company would need to register a PE or a branch, so Estonian-sourced profits attributed to PE can be taxed in Estonia. Even if you do all business from Estonia with US LLC, there will be no tax payable in Estonia until profits are distributed/taken out from the branch/PE.

But then you'd have 20% (22% from next year) tax in Estonia.

Estonian Director can show the tax office a POA to a representative outside Estonia who is making key management decisions, has access to bank accounts, etc.

But if you tell the Estonian tax office that the company is really managed from the UAE, wouldn't you again risk the company being taxed in the UAE?

For US banking, EIN and a visit to e.g., NY is required.

There are EMIs that accept US LLC's, but an EIN would always be required.

 

[Marzio]

Does the treaty really apply if the LLC is not tax resident

Treaty will not apply because LLC is not considered tax resident if the single member is not liable to US tax.

 

[Don]

Does the treaty really apply if the LLC is not tax resident and does not have a PE in the US? I would doubt that.

Treaty will not apply because LLC is not considered tax resident if the single member is not liable to US tax.

Yes, only PE is a potential risk. I have confirmed this with the tax office.
You don't necessarily need to register a PE if there are no activities and the only director is in Estonia.

 

[Marzio]

I have confirmed this with the tax office.

Tax office said that US LLC is tax resident in US when single member is not liable to tax in US?

 

[JustAnotherNomad]

Tax office said that US LLC is tax resident in US when single member is not liable to tax in US?

The tax office probably said that no tax in EE applies if the director is only located in EE, but no activities take place there, i.e. it's just a nominee who doesn't really work for the LLC.
Which I guess is possible, but then where do the activities take place? If EE think the activities take place in the UAE, then you risk taxation in the UAE again (even if it's unlikely that the UAE tax authority would be able to catch this).

 

[Don]

Tax office said that US LLC is tax resident in US when single member is not liable to tax in US?

I will try to be more clear. The Estonian tax office confirmed that even if a US LLC, which is disregarded for tax purposes in the US, has all the activities in Estonia, it will not be considered an Estonian tax resident, but it will need to register a PE (meaning all locally sourced profits will be taxed in Estonia, but only when they are taken out of PE).
The same US LLC can also earn profits outside the local PE. It works out like territorial taxation.
Based on the residency of the director alone, there is no need to register a PE. So you can have US LLC disregarded for tax purposes in the US with an Estonian director and UAE member.
When it comes to potential audits the director should be able to point fingers somewhere regarding where profits are arising, but when you don't register the PE it will likely stay under the radar. If banking is in US, then as far as I know US will not provide its ‘reciprocal’ FATCA partners any information about the following types of accounts held at US financial institutions:

• Depository (i.e., cash) accounts held by entities. This includes entities that are resident in the FATCA partner country, or,
• Non-cash accounts (e.g., brokerage accounts), whether held by individuals or entities, even those that are resident in the FATCA partner country, unless the accounts earn so-called US-source income.

 

[JustAnotherNomad]

Yeah, but then it's as I said:
US will say: Not taxable in the US as there is no activity in the US (clear case).
EE will say: Taxable only in EE if there is activity in EE - so where is this activity? UAE? Then no tax in EE.
UAE will say: Taxable only in UAE if there is activity in the UAE - so where is this activity? EE? Then no tax in the UAE.

So then you could get lucky because the UAE will think it's taxed in EE and EE will think it's taxed in the UAE. But if you're unlucky, then you will end up with taxes either in EE or in the UAE, because either tax authority may demand that you declare where the activity really takes place and expect it to be taxed there. They may not talk to each other, so it may just end up not being taxed anywhere, but I wouldn't consider that a compliant/legal setup.

If you only want to get 200k or so out without paying taxes, then it would be better to just use an EE company with a resident director. The company would clearly be tax resident in EE and it would be extremely unlikely that the UAE would be able to attribute a taxable UAE PE to the company. You only need a good employment contract in EE. This should also help with banking.

 

[Don]

Yeah, but then it's as I said:
US will say: Not taxable in the US as there is no activity in the US (clear case).
EE will say: Taxable only in EE if there is activity in EE - so where is this activity? UAE? Then no tax in EE.
UAE will say: Taxable only in UAE if there is activity in the UAE - so where is this activity? EE? Then no tax in the UAE.

So then you could get lucky because the UAE will think it's taxed in EE and EE will think it's taxed in the UAE. But if you're unlucky, then you will end up with taxes either in EE or in the UAE, because either tax authority may demand that you declare where the activity really takes place and expect it to be taxed there. They may not talk to each other, so it may just end up not being taxed anywhere, but I wouldn't consider that a compliant/legal setup.

End of the day... taxation typically follows the principle of "taxation where value is created". In the case of audits, companies need to explain this. Cross-border audit is quite expensive so tax authorities need to have resources and see a high ROI to proceed with this.
Note that even in the Bahamas permanent establishments carrying on taxable activities from within the Bahamas with an annual turnover in excess of 100k must register locally.

 

[JustAnotherNomad]

I think it's not necessarily a bad idea, but there clearly is some risk involved. The EE tax authority could demand to see proof that the company was indeed taxed in the UAE (just as a formality to be able to close the case - but as you say, they may not check this if no PE has to be registered and there are no FATCA reports), and then you're screwed. I think the chance of success is quite high, but some risk remains, EE is not a banana republic.
Wouldn't it be better then to use a director from a country that really doesn't care? E.g. a director from Bahrain or some other tax-free country where offshore companies don't have to be registered.

 

[troubled soul]

The tax office probably said that no tax in EE applies if the director is only located in EE, but no activities take place there, i.e. it's just a nominee who doesn't really work for the LLC.
Which I guess is possible, but then where do the activities take place? If EE think the activities take place in the UAE, then you risk taxation in the UAE again (even if it's unlikely that the UAE tax authority would be able to catch this).

How Dubai Government will know that I own single person USA LLC ?​

How Dubai Government will know that I own single person USA LLC ?

I am trying to find a way to set up a tax-free US LLC for a Dubai resident. I know that some US states offer high levels of privacy, meaning that there is no public record of LLC ownership in those states. If I register a single-member US LLC as a non-resident and only conduct business with US...

www.offshorecorptalk.com

 

[Don]

I think it's not necessarily a bad idea, but there clearly is some risk involved. The EE tax authority could demand to see proof that the company was indeed taxed in the UAE (just as a formality to be able to close the case - but as you say, they may not check this if no PE has to be registered and there are no FATCA reports), and then you're screwed. I think the chance of success is quite high, but some risk remains, EE is not a banana republic.
Wouldn't it be better then to use a director from a country that really doesn't care? E.g. a director from Bahrain or some other tax-free country where offshore companies don't have to be registered.

Bahrain looks good indeed, but its more difficult for banking. Zero-substance banking is getting more difficult each day. This is what made UAE great.
Wherever you have a director, in theory as a passive owner you might still need to prove to UAE that you are not actively involved in the business (e.g., how the value is generated).

I think it's not necessarily a bad idea, but there clearly is some risk involved. The EE tax authority could demand to see proof that the company was indeed taxed in the UAE (just as a formality to be able to close the case - but as you say, they may not check this if no PE has to be registered and there are no FATCA reports), and then you're screwed. I think the chance of success is quite high, but some risk remains, EE is not a banana republic.
Wouldn't it be better then to use a director from a country that really doesn't care? E.g. a director from Bahrain or some other tax-free country where offshore companies don't have to be registered.

You can have this setup alongside UAE freelancer setup (which you might need anyway for residence). Invoicing the llc for some services not exceeding 375k AED year to remain tax free.

You can always have more directors (e.g. one in Georgia, Kosovo, Pakistan). Where is company resident?