How will be taxed Pass-through entities in 2023 in the UAE?

[Alenka]

There are a lot of UK LLPs and US LLCs pass-through entities holders in the UAE, with new tax law all UAE entities except Freezone ones must pay 9% of profit in taxes. Pass-through entities considered as tax residents of the UAE so that from 2023 they must pay 9%, it makes them useless. I don’t know if UAE has law about «doing business activities without proper registration» but in case it does then running business through pass-through entities will become illegal, if you don’t make a legal entity in the UAE.

My thoughts:
1. To connect pass through entity to Freezone entity, so that taxes will remain 0%. The only issue as always - banks. Usually, they don’t like to see UAE parent company in structure.
2. To move to Bahrain, they still remain 0% taxes (not my case, but may be someone will benefit)

Have you thought about it? How you plan to structure your business? May be I understand the new tax law wrong.

 

[KalasZX]

I would think the obvious strategy is to create a new Freezone company, Dubai bank account, Dubai merchant account, etc. and do business that way moving forward, but @Fred is the resident expert on UAE technicalities so I would defer to his expertise and go with whatever structure he recommends.

Assuming I'm understanding your question properly, I can't wrap my head around moving to Dubai and maintaining a UK or US pass-through and banking setup. I could understand not wanting to mess with a bulletproof Cook Islands structure, but maintaining high-tax and high-compliance obligations? Isn't making that go away the main reason people move to Dubai? It's not like it makes any difference to your client if you bill from the UK or UAE.

 

[Marzio]

It's not like it makes any difference to your client if you bill from the UK or UAE

It makes a big difference if you sell to other business and not to the end user.

In some high tax countries UAE bills are not deductible while US or UK bills are.

 

[Alenka]

I would think the obvious strategy is to create a new Freezone company, Dubai bank account, Dubai merchant account, etc. and do business that way moving forward, but @Fred is the resident expert on UAE technicalities so I would defer to his expertise and go with whatever structure he recommends.

Assuming I'm understanding your question properly, I can't wrap my head around moving to Dubai and maintaining a UK or US pass-through and banking setup. I could understand not wanting to mess with a bulletproof Cook Islands structure, but maintaining high-tax and high-compliance obligations? Isn't making that go away the main reason people move to Dubai? It's not like it makes any difference to your client if you bill from the UK or UAE.

UAE merchant accounts and payment processors (stripe, checkout.com) gives very poor acceptance rate for B2C, the issue for B2B described above. So it has some sense to maintain US processing for US and Canada and UK processing for Europe because of acceptance rate. Just imagine, you lose 3% of profit just because cards get declined.

 

[JackAlabama]

I would think the obvious strategy is to create a new Freezone company, Dubai bank account, Dubai merchant account, etc. and do business that way moving forward, but @Fred is the resident expert on UAE technicalities so I would defer to his expertise and go with whatever structure he recommends.

Assuming I'm understanding your question properly, I can't wrap my head around moving to Dubai and maintaining a UK or US pass-through and banking setup. I could understand not wanting to mess with a bulletproof Cook Islands structure, but maintaining high-tax and high-compliance obligations? Isn't making that go away the main reason people move to Dubai? It's not like it makes any difference to your client if you bill from the UK or UAE.

it does make a lot of difference just in perception alone.
US/UK are well known when you sell and bill within the west. Access to a wide variety of fintechs is also enough reason alone to maintain such entities.

 

[OffshorePhantom]

1. To connect pass through entity to Freezone entity, so that taxes will remain 0%. The only issue as always - banks. Usually, they don’t like to see UAE parent company in structure.

The problem with this solution is that the US LLC is still an independent company managed by UAE and since it is a foreign company in theory it will be subject of the 9% CIT even if the FZ company completely owns it. The issue is on UAE side and not on US side. Hope they found a solution for this issue in the final draft otherwise lots of good business setup will become useless in UAE.

 

[JackAlabama]

The problem with this solution is that the US LLC is still an independent company managed by UAE and since it is a foreign company in theory it will be subject of the 9% CIT even if the FZ company completely owns it. The issue is on UAE side and not on US side. Hope they found a solution for this issue in the final draft otherwise lots of good business setup will become useless in UAE.

Well if that would be such a thing you (in case you own it personally) would just need to avoid becoming tax resident in UAE (and stay more days outside than inside UAE).

 

[OffshorePhantom]

Well if that would be such a thing you (in case you own it personally) would just need to avoid becoming tax resident in UAE (and stay more days outside than inside UAE).

Ok but then what is the purpose of being a UAE resident if you cannot be a tax resident? In that case you will be tax resident in some other places like your home country which will be even worse.

 

[JackAlabama]

Ok but then what is the purpose of being a UAE resident if you cannot be a tax resident? In that case you will be tax resident in some other places like your home country which will be even worse.

Depends on situation. Many people do not need to be tax resident anywhere.

 

[Au999]

Just have the US LLC for billing/payment processing - all work and services carried out by FZCO. Lots do this especially in conservative markets where clients would freak out paying a Dubai company. Billing company charges a percentage of everything it bills and you then pay tax on that small percentage.

 

[jazzybell]

Just have the US LLC for billing/payment processing - all work and services carried out by FZCO. Lots do this especially in conservative markets where clients would freak out paying a Dubai company. Billing company charges a percentage of everything it bills and you then pay tax on that small percentage.

Did you have experience with such a setup? I would like to know more details about this setup.
I'm also in a service business and would like to have US LLC as a billing company for my clients (also the reason is conservative clients which prefer not to pay to FZCO), charging a small percent 1-5% and then passing a job to be done by FZCO (2 separate entities FZCO and US LLC).

My CPA told me it's a high-risk structure if you pass 95-99% profits to FZCO which is well known offshore. As a result, IRS will knock on your door.

 

[JackAlabama]

Did you have experience with such a setup? I would like to know more details about this setup.
I'm also in a service business and would like to have US LLC as a billing company for my clients (also the reason is conservative clients which prefer not to pay to FZCO), charging a small percent 1-5% and then passing a job to be done by FZCO (2 separate entities FZCO and US LLC).

My CPA told me it's a high-risk structure if you pass 95-99% profits to FZCO which is well known offshore. As a result, IRS will knock on your door.

Why would the IRS care if these funds are remittances to you / entities you own?

 

[Au999]

Did you have experience with such a setup? I would like to know more details about this setup.
I'm also in a service business and would like to have US LLC as a billing company for my clients (also the reason is conservative clients which prefer not to pay to FZCO), charging a small percent 1-5% and then passing a job to be done by FZCO (2 separate entities FZCO and US LLC).

My CPA told me it's a high-risk structure if you pass 95-99% profits to FZCO which is well known offshore. As a result, IRS will knock on your door.

If the LLC is a Foreign owned entity with no business on US soil, the IRS have no claim to any tax. Obviously if you're a US citizen or you employ anyone in the US it's a different story

 

[JackAlabama]

If the LLC is a Foreign owned entity with no business on US soil, the IRS have no claim to any tax. Obviously if you're a US citizen or you employ anyone in the US it's a different story

Yep, that is the current state of affairs of US-tax disregarded entities.

 

[KalasZX]

My CPA told me it's a high-risk structure if you pass 95-99% profits to FZCO which is well known offshore. As a result, IRS will knock on your door.

I'm assuming you are a US citizen since you care about what the IRS thinks. The US is actually a great offshore option in many respects if you're not a US citizen.

You are not passing profits to Dubai, you are sending the gross to Dubai. That is a significant distinction. Likewise, every expense that is not related to processing payments should be paid by your Dubai company.

Keep in mind it is your CPA's job to be both paranoid and get you into as much paperwork as possible. Remember too that this setup goes against his financial interest - your Dubai company will not require the services of an American CPA. You will have to spend a decent amount of time in Dubai. As my tax attorney explained it to me there is nothing illegal about setting up your business this way so long as you are doing the actual work in the country that is receiving the money. It becomes difficult to make that claim if you're only in Dubai 2 or 3 days a year. The other downside is that you won't be able to bring the money into the US without treating it as income and paying all taxes on it. That means double Medicare and SS tax since your Dubai company obviously isn't paying it. State and city taxes too.

Just because you are doing everything above board doesn't mean the IRS won't randomly decide you've committed 20 different tax crimes and prosecute you with infinite resources to see what they can get out of you. They do it all the time.

Another 87,000 IRS agents means they'll have more people to deploy in the field to catch you using the ATM to withdraw money from your Dubai company. They spend more money trying to catch people that move offshore than they could ever hope to collect. The ridiculous forms you'll have to fill out when you hit $10k offshore are designed more to trick you into filling them out incorrectly and incur huge fines than they are to catch terrorists or whatever the official justification was for it. Don't believe me? Try reaching out to the IRS to asking for help to make sure you fill it out correctly. They will outright refuse.

Honestly, if you really need a US billing company and are concerned the IRS will claim you are a tax cheat and owe taxes on your Dubai money just hire an American company to do the billing and eat that 5%. I'd be happy to collect 5% of whatever you make in exchange for very little work, I'm sure others are too. Get permanent residency in Dubai and keep it current so the UAE doesn't consider your information available for international exchange, Don't fill out the FBAR or any other form that puts a target on you. Keep your head down and don't try to bring the money back into the US. That's how they catch people. One day they'll be waiting for you at an ATM you never used before and arrest you as soon as you withdraw the money. It's happened so many times it's practically cliche. Once you start spending money in the US that hasn't been taxed at US rates you are asking to get caught.

For US citizens offshore entities are part of your plan to escape the US, not a way to spend money in the US without paying US taxes. Until you expatriate, that is.

 

[jazzybell]

Why would the IRS care if these funds are remittances to you / entities you own?

I'm pretty sure IRS is continuously searching how to tax you at least corporate tax 21%
especially in case, you do business with other US companies mostly and it looks like you try to avoid paying CT

I'm assuming you are a US citizen since you care about what the IRS thinks.

Thank you for your detailed explanation, it's really helpful!

Actually, I'm not a US citizen or resident.
I just care about my company's reputation, it's really important for us not to get in trouble personally and not to burn the company's reputation.

 

[KalasZX]

Let me get this straight. You want to set up a US company that will do business with other US companies and not pay US taxes? Good luck with that. The US is a great place to run an offshore operation for non-US residents, but the moment your Delaware corporation does business in the US you're treated just like everybody else. The billing company loophole is very specific, doesn't work if you're billing US companies and very hard to pull off without employing anyone in America at any time. You'll probably need a visa too.

Doing the billing in the US, UK, Singapore or anywhere else that is not Dubai is done for the sake of technicalities, like allowing your customers to claim tax deductions on their purchases they wouldn't be able to claim if business is done directly with a Dubai company, or to avoid a small amount of credit card transactions being declined initially (shouldn't an issue with B2B). It takes less than 10 minutes of effort to find out that your US billing company is owned and controlled by your Dubai company. Whatever reputation you had will be shot to hell if you presented yourself as an American company.

If you want the credibility and reputation that comes with being a first world entity you have to pay first world taxes and deal with first world paperwork. Even credible places like Hong Kong and Singapore that offer the possibility of paying zero tax for offshore companies require significant documentation every year to get you there, part of which is filing taxes as if you were paying them. I've talked about some of the fun that is the HK IRD in another thread.

If you start getting pushback for owning an entity in a zero-tax jurisdiction offer to let your customers pay your US subsidiary instead, but due to the taxes you will have to pay the quoted price is going to be subjected to a 50% premium for the privilege. The three people I encountered that didn't want to wire money to Hong Kong at first became fine with it very quickly when presented with that alternative.

 

[icecold]

In some high tax countries UAE bills are not deductible while US or UK bills are.

is that true, you can't deduct a UAE bill you get from a legitimated business transaction?

 

[Au999]

Having a US billing company is totally legitimate and in some industries an absolute necessity. As an example some of the companies I work with ONLY pay ACH and only to a US bank.

If they see some Dubai FZCo and a Dubai bank they'll run a mile. US LLC and US bank account they're happy. They don't dig. It's not just Dubai, they get weird if it's a UK company and suddenly they have to do international wires, which 9 times out of 10 they do wrong. Or they pay by PayPal and you lose 10% on foreign exchange and fees.

Also just because you do work, say some marketing, for a US company it does not automatically make you taxable in the US. If you're foreign owned and operated with zero employees or infrastructure in the US and have filled in the appropriate forms, nobody at the IRS cares about you.

 

[jazzybell]

Once you start spending money in the US that hasn't been taxed at US rates you are asking to get caught.

Could you clarify, are you talking about US citizens or residents who is trying to avoid paying taxes in the US? Or about non-citizens as well?

like allowing your customers to claim tax deductions on their purchases they wouldn't be able to claim if business is done directly with a Dubai company, or to avoid a small amount of credit card transactions being declined initially (shouldn't an issue with B2B). I

Do you mean if you do B2B business and US LLC client send you a payment e.g. for marketing service to FZCO it's not deductible expense for US LLC?

Dubai FZCo and a Dubai bank they'll run a mile. US LLC and US bank account they're happy. They don't dig. It's not just Dubai, they get weird if it's a UK company and suddenly they have to do international wires, which 9 times out of 10 they do wrong. Or they pay by PayPal and you lose 10% on foreign exchange and fees.

Literally my case, this is why I need US LLC because clients always have such issues.