Dubai substance

[Alenka]

In general I’d say that there are three perspectives you need to consider. The company is likely tax resident in UAE (incorporation), Georgia (control and management) and possibly has a permanent establishment in Russia if you have people on the ground.

I doubt that there are people experienced enough with all three jurisdictions in this forum that would be able to give a qualified answer, and even if there are, why would they provide it for free? This is quite a complicated topic and you can either wing it and accept the consequences or get professional advice which probably won’t be cheap.

Another option is to simply use a company in Georgia and have your employees there. You’d likely pay some tax but the setup becomes far easier.

Georgia is a much s**t with taxation:
15% corporate tax(it's okay)
BUT 18% Reversal VAT. If my company gets 10% of each order we will pay more than we earn

 

[FixieHartmann]

Georgia is a much s**t with taxation:
15% corporate tax(it's okay)
BUT 18% Reversal VAT. If my company gets 10% of each order we will pay more than we earn

Then move your personal residence to UAE, incorporate in UAE and “employ” the people in Russia as freelancers. Should be pretty much tax free?

 

[Alenka]

Then move your personal residence to UAE, incorporate in UAE and “employ” the people in Russia as freelancers. Should be pretty much tax free?

True, but I don't have 183 days this year And I have belorussian passport that consider me tax resident of Belarus if I don't obtain any other tax residency even if I spend in Belarus 0 days a year.

I can employee people in Russia as freelancers, but then still my company will be considered as Georgian cause I live here.

From the next year I will do with UAE and live there for 183 days, but I need to make something useful for the next 5 months.

 

[Sols]

And if I decide to work without office in Russia?

Where is your team?

Our competitors use Irish and UK LP, US LLC, and Cyprus companies without making their substance but nominal directors. I don't know why they run LP or US LLC, maybe they use dummies. Or to find who runs LP and avoid taxes uneasily?

Those are pass-through entities where the members (there are no "shareholders") are taxed on personal income. If the members are other companies, it becomes income for the companies. Those companies must then

Some use Cyprus companies with nominal and have Russian offices. I could work without an office. But I'm confused and can't figure out how they do it.

There are three options: they pay tax (optimised through correct, legal structures), they don't pay tax (legally, through proper residence arrangements), or they are getting by with a mix of luck and lack of enforcement.

 

[Sols]

Honestly this sounds so weird and draconian to me that I don't even know where to begin. I have consulted with top local lawyers (one of them was the head of the tax authorities legal department) and accountants before opening the UAE company and none of them even mentioned such a possibility. The offshore company is declared once per year by my personal accountant and I receive divdends from it and pay my taxes on them (so it's not like the local authorities don't know it exists). Very simple and easy.

I hope you didn't pay too much for that advice because that's not an accurate representation.

And how is it legally justified to pay corporate tax in 2 jurisdictions with the 2nd one being a random country the company doesn't have anything to do with despite the owner? I seriously doubt this is the case and if it is, then thats one seriouslly messed up system. It essentially obliterates 2 principles that capitalism and civilized countries have obided by for years and years:

1. Separation of legal entities (you are not your company, the company is not you)
2. Avoiding unjust double taxation.

I can literally set up a company over the border in the neighbouring country and for EVERYTHING EXCEPT MY DIVIDEND TAX I am under the rule of law of that second country.

Then, as @JustAnotherNomad said, effective corporate tax rate across the world would drop to 0% as everyone would incorporate overseas.

Your local gas station? That's now a Belize IBC.
The restaurant you had lunch at? That's technically a Cayman Islands exempt company.
The hairdresser? Thank you for choosing Hong Kong Haircuts Ltd.
Your ISP? They certainly offer great local coverage despite being a Marshall Islands company.

But let's not stop there. Why would anyone choose to be employed and pay income tax when they, in this magical world this top local lawyer concocted for us, could just become independent contractors instead? Local employment would drop to zero as everyone instead started trading as offshore companies and pay only dividends tax.

Next we have VAT/sales tax. It would require a little bit more problem solving but I think we can even get away from them by having the trades be between two non-EU entities. When you (OJ333 International Ltd, a Seychelles company) go to the local grocery story (Ultra Market Grocery Ltd, a Mauritius company), the transaction is clearly between two foreign companies so no VAT is applicable. Right?

 

[Alenka]

Where is your team?


Those are pass-through entities where the members (there are no "shareholders") are taxed on personal income. If the members are other companies, it becomes income for the companies. Those companies must then


There are three options: they pay tax (optimised through correct, legal structures), they don't pay tax (legally, through proper residence arrangements), or they are getting by with a mix of luck and lack of enforcement.

Team in Russia, but they can work in office or without contract, at home. Or even in office for some other structure, and I can send there money. So it will be another company.


If I live in Cyprus for 60 days, and team will work from Russia in office, will it be enough to obtain company tax residency on Cyprus?

If it were so easy just to ask tax expert. The main is to ask the right question. And now I can only ask "Look, my competitors have Cyprus companies and they pay low taxes somehow, tell me how".

 

[Sols]

Team in Russia, but they can work in office or without contract, at home. Or even in office for some other structure, and I can send there money. So it will be another company.

Then that's probably fine. You can have a company in Russia which does nothing but hire these people and receive enough funding from the parent company to survive. Speak with a Russian tax adviser to make sure that this is fine; sometimes there are other, minor considerations (for example, you might need to appoint a local director/manager).

If I live in Cyprus for 60 days, and team will work from Russia in office, will it be enough to obtain company tax residency on Cyprus?

You can be tax resident in multiple jurisdictions, by personal choice or by decision by the local tax authority/courts.

The 60-day scheme in Cyprus works if you are not also tax resident anywhere else.

For example, if you live 60 days in Cyprus and the other 305 days in Georgia, you are tax resident in Georgia and the tax residence in Cyprus would be invalid under Cypriot law.

If it were so easy just to ask tax expert. The main is to ask the right question. And now I can only ask "Look, my competitors have Cyprus companies and they pay low taxes somehow, tell me how".

Have to start somewhere. Don't focus on what others have done so much. Focus on what you want to achieve. Then present that goal to highly skilled advisers.

 

[OJ333]

Guys, I probably did not communicate properly the issue. The examples you are giving have a lot to do with territorial factors.
Hairdressers, pizza shops etc - they work locally, their business is conducted locally, they at least have to rent the real estate and work only with local customers. Last of all, no bank at least here in BG will open a UAE company bank account.

Now, when your company is abroad, your customers abroad, part of your employees abroad - thats a different story. The entity is not liable under local laws. Dont you think thats why the IRS has definitions of "effectively connected income"? They have to describe when an entity has a tax nexus in the states and its definitely NOT when the owner is a native citizen. If there is no effectively connected income, then owner only pays dividend tax on their profits.

The advice doesnt come from one person only. Even though this lawyer is literally highest up the chain you can go (ex head of the national tax revenue legal department with a lot of connections and 10+ years experience there). Accountants, even the tax agencies themselves - they all support my thesis. I have been declaring dividends from a foreign company and filing that I own UAE company with a certain amount of shareholder capital and paying dividend tax only for years.

In the world you describe a french who wants to sell sandwiches in Germany and employs germans who work in a german shop, but spends the majority of the year in France will be double taxes in both countries. This is just plain wrong. I have had UAE AND USA companies that do internet business, consulted with more lawyers and accountants I can count and never have anything like that come up.

Perhaps its a Bulgarian thing. But I highly doubt it we are the only country that doesn't require a Canadian dog store with canadian employees, customers and offices that is run by an owner living here to pay taxes in both places

 

[Sols]

Guys, I probably did not communicate properly the issue. The examples you are giving have a lot to do with territorial factors.

If you manage and control a company from a territory that has effective control and management regulations, it becomes tax resident there.

Hairdressers, pizza shops etc - they work locally, their business is conducted locally, they at least have to rent the real estate and work only with local customers. Last of all, no bank at least here in BG will open a UAE company bank account.

That is effectively no different from having an office (including a home office) or other Permanent Establishment in a country, thereby making you tax resident there.

In the world you describe a french who wants to sell sandwiches in Germany and employs germans who work in a german shop, but spends the majority of the year in France will be double taxes in both countries. This is just plain wrong.

Double Taxation Avoidance Agreements help solve frontier workers like in this example.

Perhaps its a Bulgarian thing. But I highly doubt it we are the only country that doesn't require a Canadian dog store with canadian employees, customers and offices that is run by an owner living here to pay taxes in both places

It is a Bulgarian thing. Bulgaria seems to be lacking the control and management regulations found in most other countries. Companies seem to only be tax resident in Bulgaria if they are incorporated or registered in Bulgaria.

 

[uplana]

or they are getting by with a mix of luck and lack of enforcement.

the latter may be the right one

An evidence of nothing is black and white.

 

[OJ333]

If you manage and control a company from a territory that has effective control and management regulations, it becomes tax resident there.


That is effectively no different from having an office (including a home office) or other Permanent Establishment in a country, thereby making you tax resident there.


Double Taxation Avoidance Agreements help solve frontier workers like in this example.


It is a Bulgarian thing. Bulgaria seems to be lacking the control and management regulations found in most other countries. Companies seem to only be tax resident in Bulgaria if they are incorporated or registered in Bulgaria.

An example was given with Australia. But check this from the page - "However, the government has proposed amendments to the existing legislation to clarify the position so that a foreign incorporated company only will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where both the company’s core commercial activities are undertaken in Australia and its central management and control is in Australia. The measure will have effect from the first income year after the enabling legislation is enacted; however, taxpayers will have the option of applying the new law from 15 March 2017"

So even they realize that this regulation is absurd. The key here is "core economic activity". What is that? Where are the customers? Where are the employees? Any offices? Warehouses? Factories? Etc etc.
I am wondering if Alenka does a deep dive in Georgia's tax laws and practices if he will be able to find something like this test.

 

[OJ333]

@OJ333 just have a look at Australia - Corporate - Corporate residence to see why the advise you got is highly questionable.

Australia is just an example, most of the developed high tax countries have similar provisions. If you are a resident of country A and are a shareholder and director of a company in country B then the company will become tax resident in A because control and management is there. In addition, the company will also likely be tax resident in country B, so now you have to file a tax declaration in both countries, take DTTs in account and possibly pay taxes in both countries.

As @JustAnotherNomad said, if that weren’t the case, everyone in a high tax country would have an offshore company in a tax haven to use as piggy bank.

Here is a continuation of the "australian" issue that we have used as an example - Home is where the 'central management and control' is: Upcoming changes to the corporate residency test | Cornwalls
Furthermore - Deloitte | tax@hand - "On 6 October 2020, as part of the Federal Budget 2020-21, the government stated that it will make technical amendments to the central management and control (CMAC) test to clarify that a non-Australian incorporated company will be treated as an Australian tax resident if it has a "sufficient economic connection to Australia."

So it definitely isn't a "clear and defined" rule, which was my point with the thread's author - may be the case with his country is how much monetary and brain capital can he summon to prove his point.

 

[Sols]

An example was given with Australia. But check this from the page - "However, the government has proposed amendments to the existing legislation to clarify the position so that a foreign incorporated company only will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’. This test will be satisfied where both the company’s core commercial activities are undertaken in Australia and its central management and control is in Australia. The measure will have effect from the first income year after the enabling legislation is enacted; however, taxpayers will have the option of applying the new law from 15 March 2017"

So even they realize that this regulation is absurd. The key here is "core economic activity". What is that? Where are the customers? Where are the employees? Any offices? Warehouses? Factories? Etc etc.
I am wondering if Alenka does a deep dive in Georgia's tax laws and practices if he will be able to find something like this test.

The OECD has various models which are implemented by many jurisdictions to agree on definitions on these things. In the OECD's terminology the definition of a Permanent Establishment is in Article 5 of this model: https://www.oecd.org/tax/treaties/1914467.pdf Not all laws use that exact wording, but it gives you a sense of what a PE is. If you have a PE, you have economic substance.

To some extent, these rules are intentionally vague so as to not restrict the government's authorities by creating easily exploited loopholes, and cater to future developments. You will never find an exact checklist that for sure, 100% defines what "core economic activity" means because things change.

What is Australia's incentive? The want to increase tax revenues and close loopholes.

What has Australia's track record been? AUSTRAC and ATO are considered among the most respected financial intelligence units and tax authorities, often touted as among the most effective in the world.

Is Australia hard at work making it easier for residents to dodge tax? No. But they might be trying to clarify the rules and update the laws, to make things easier for businesses to be compliant.

I see your optimism but it isn't the reality outside of jurisdictions like Bulgaria with somewhat outdated laws.

Georgia's rules are quite clear: resident companies and PEs of non-resident companies are taxed on their worldwide income. This means in Alenka's case there is a risk that his business is considered solely, partly, wholly, or jointly/dualy tax resident in Georgia.

Is Georgia likely to go after Alenka? Not today, no. Does the risk exist? Yes, and it only grows with time.

 

[OJ333]

The OECD has various models which are implemented by many jurisdictions to agree on definitions on these things. In the OECD's terminology the definition of a Permanent Establishment is in Article 5 of this model: https://www.oecd.org/tax/treaties/1914467.pdf Not all laws use that exact wording, but it gives you a sense of what a PE is. If you have a PE, you have economic substance.

To some extent, these rules are intentionally vague so as to not restrict the government's authorities by creating easily exploited loopholes, and cater to future developments. You will never find an exact checklist that for sure, 100% defines what "core economic activity" means because things change.

What is Australia's incentive? The want to increase tax revenues and close loopholes.

What has Australia's track record been? AUSTRAC and ATO are considered among the most respected financial intelligence units and tax authorities, often touted as among the most effective in the world.

Is Australia hard at work making it easier for residents to dodge tax? No. But they might be trying to clarify the rules and update the laws, to make things easier for businesses to be compliant.

I see your optimism but it isn't the reality outside of jurisdictions like Bulgaria with somewhat outdated laws.

Georgia's rules are quite clear: resident companies and PEs of non-resident companies are taxed on their worldwide income. This means in Alenka's case there is a risk that his business is considered solely, partly, wholly, or jointly/dualy tax resident in Georgia.

Is Georgia likely to go after Alenka? Not today, no. Does the risk exist? Yes, and it only grows with time.

Yes, of course. The risk always exists. But you should always try to manage it and think about the pros and cons. Stupid example - I will save 100K on taxes and the maximum amount I will owe IF the court doesn't accept my lawyers' interpretation of the law is 150K. Hence I will risk it (please don't get focused on that it's just an illustration).

What I am confused by though is that Bulgaria, with all the problems and corruption it has, has been a member of the EU for 15 years now, has a relatively stable economy and rule of law. So without any offence (though I think hardly anyone on this forum is a nationalist) I don't think Georgia ranks as a "more advanced country with a stronger government and better rule of law". But then again, I don't live there. All I am saying is that if there is financial incentive Alenka COULD potentially try to get into the "I will persuade the tax agency and then the court this and that game and if they don't accept it I will have a warchest to pay for the mistake" mindset.

 

[JustAnotherNomad]

It is a Bulgarian thing. Bulgaria seems to be lacking the control and management regulations found in most other countries. Companies seem to only be tax resident in Bulgaria if they are incorporated or registered in Bulgaria.

Bulgaria seems to have a broader definition of permanent establishment to make up for that.
If you run your business from Bulgaria, I don't see any difference since everything you do (even outside of Bulgaria, unless there's a PE elsewhere) will probably count as connected to that PE, so it's all corporate income that's taxable in Bulgaria anyway.

 

[JustAnotherNomad]

Yes, of course. The risk always exists. But you should always try to manage it and think about the pros and cons. Stupid example - I will save 100K on taxes and the maximum amount I will owe IF the court doesn't accept my lawyers' interpretation of the law is 150K. Hence I will risk it (please don't get focused on that it's just an illustration).

That depends. You may get lucky and nobody will notice, but then you definitely shouldn't spend those savings.
On the other hand, if you did not declare everything properly, you may still be on the hook for evasion. I would keep very good records of everything you discuss with your lawyer, as proof that you had no intention of being noncompliant.

 

[JustAnotherNomad]

Hello everyone, interested in if this scheme will work properly:

To make company in UAE with nominee directors and shareholders, live myself in Georgia and have an office in Russia. So that "management" will be in UAE, workers in Russia, and I will just get dividens from that company with 0% dividend tax in Georgia.

If someone really starts investigating, they will see that your UAE directors are just nominees, that won't hold up. The next step will be that they will decide you are managing the company from Georgia, so it's tax resident in Georgia, or at least it has a PE there.
You will probably also have to follow Russian labor laws, which may require you to register your "UAE" company in Russia. Which in turn may trigger the Russian tax authorities' attention.
With workers in Russia, there could also be a PE in Russia, especially if they work from an office, but that may not even be required. A certain number of workers will probably be enough. You may be able to mitigate that risk by hiring them as freelancers, but even then, some countries could rule that they are essentially employees and you are trying to avoid Russian labor regulations.
It's a complex question and you should ideally work with someone who can advise on both Georgian and Russian tax and labor law.

 

[OJ333]

Bulgaria seems to have a broader definition of permanent establishment to make up for that.
If you run your business from Bulgaria, I don't see any difference since everything you do (even outside of Bulgaria, unless there's a PE elsewhere) will probably count as connected to that PE, so it's all corporate income that's taxable in Bulgaria anyway.

You create the company that doesn't have anything to do with the country and they literally don't care how much or if corporate income tax is paid. As it should be. It's the business of the government of the jurisdiction of the incorporation. You pay your 5% dividend tax up to the 0.01$ and it's all clean and legal. Is there corporation tax paid? Are you filing income reports? Do you have proper articles of incorporation? It's the domicile country issue, not theirs.

Now I know what you are all thinking - but no, you can't open a pizza place that serves pizza to bulgarian customers in a bulgarian town using bulgarian waiters and cooks and bulgarian tomatoes and claim it's Belize's property. That won't work.

But writing code or selling products that are warehoused in China to USA consumers with your UAE / Swedish / Hong Kong / You-name-it company that has Filipinos as freelance employees? Not our governments business.

Back to the Georgia question - I am not encouraging the author to break any law, that would be fullish. I am telling him to get creative, get good lawyers, may be connections in the tax departments and a warchest of savings should his system not hold up.

 

[JustAnotherNomad]

@OJ333 You are just wrong. The risk of getting caught is obviously much lower compared to a local pizza restaurant, but that doesn't change anything else fundamentally.
It's also not about Bulgaria.

If you live in country A and you manage your company from country A and it's only formally incorporated in country B, then that company has to pay corporate income tax in country A, not country B. The end.

 

[OJ333]

@OJ333 You are just wrong. The risk of getting caught is obviously much lower compared to a local pizza restaurant, but that doesn't change anything else fundamentally.
It's also not about Bulgaria.

If you live in country A and you manage your company from country A and it's only formally incorporated in country B, then that company has to pay corporate income tax in country A, not country B. The end.

That may be true for your country, I am not denying it Not sure what exactly I am wrong about though?