Important! RAK ICC Company Dubai and new rules economic Substance

[AK UAE]

Hello dear forum users,

FYI:

I have a RAK ICC limited company (Offshore) by shares in the UAE and also my company bank account is in Dubai, but I live privately in Asia in a country where income tax only applies if the source of income is in the country, but if the income comes from sources abroad not taxable (by law, foreigners are only required to file an income tax return if income is earned with a domestic source, such as a hotel, restaurant or other local business, with domestic customers and domestic payment but not if the source of income is from abroad).

Basically I am of course never on-site in Dubai, I have no employees there either, just the registered office via the agent.

I do online marketing with my company (no clients from the UAE, only Europe!!) and can work from anywhere in the world. But to be able to write invoices to my customers - especially from an internationally recognized location and that I do not always have to found a company in my home town if possible I change it often, I founded the offshore company in Dubai which was ideal for me Of course also because of the other known advantages of a RAK ICC so various tax advantages and that I do not have to do any more bookkeeping, etc.

The fact that I am not allowed to do business in Dubai was not relevant for me, since all my clients are in Europe.

Basically I am of course never on-site in Dubai and I have no employees there either, just only the registered office via the agent.

As you all know there is the economic substance requirements for companies Economic Substance Regulation of UAE | Lexology and also in the UAE.

Now, however, my company was renewed for another year by my agent in October 2019 and I was not informed by the agent about any news.

But based on the information I find on the internet, I would have to build up substance in Dubai now, right? So, according to the information on the Internet, questions about my company should be answered by me now. But as I wrote to you, I have not received any information from the agent yet.

So I wrote to my agent on Wednesday. He usually responds within 24 hours, but strangely enough, not this time. Of course, now I'm wondering what's going on.

The fundamental question now, of course:

- If the new rules apply to my company as well, I think very probably yes
- What happens if I cannot build up a substance in the UAE? I have to close the company?
- If I have to close the company, where should I open a company at all?

I must also mention: So far my customers are only in Belgium and Switzerland and my customers have never complained that the invoices from my RAK ICC companies are not recognized by their tax authorities. But this is probably also because Belgium and Switzerland have no foreign tax law (CFC Rules) or maybe a RAK ICC gives the tax authorities the impression of a normal company by the addition of a "Limited" and they do not think that this company could be offshore?

What do you think about it? I hope there are some experienced users here who can give you tips and advice.

I can't imagine that I am the only one who has this problem now. There are many digital nomads who can work from anywhere in the world and this is where an offshore company made sense, didn't it? But vice versa, it would mean that it is basically no longer possible NOT to have your company at your place of residence (i.e. if you don't want to build up substance at the company's location)

Thanks for your help!

BR

 

[funk]

Since you have formed a RAKICC offshore company there is no burden of economic substance requirement on you. Offshore company means that the company has no business in UAE. Also, therefore you can't avail any double taxation benefits with countries UAE has signed treaty with.

If you form an offshore company you are liable to pay taxes in resident country and not in UAE. So don't worry about any economic substance requirement but make sure you are not liable to pay taxes in your resident country. For taxation purposes offshore company has to pay taxes where management of company is taking place.

If you would have formed a freezone company in UAE then the burden of economic substance would have been on you and that would be complete taxfree and get benefits under double taxation treaty.

 

[AK UAE]

Hi Funk,

thank you very much for your message. I think you are well experienced. Since I think others are in a similar situation as I am (living in the same country as me and may be earning money online and maybe also with a company like an offshore company as I using), it would be helpful if we could go a little bit deeper. Also because you don't read anything concrete about it on the Internet.

You wrote: "If you form an offshore company you are liable to pay taxes in resident country and not in UAE."

O.k. So I live in the Phillippines. On the side of the tax office is written:

————————

„Who are Required to File Income Tax Returns?

Aliens, whether resident or not, receiving income from sources within the Philippines

———————

In fact, if I live in the Philippines as a foreigner and do not have a company in the Philippines or do not receive income from the Philippines, the tax office will never contact me here. I know it for sure because living here for many years and if you don´t have a concrete business in the Philippines with Philippines customers (like Restaurant, etc.) they normally will not contact you.

The question now I think is the exact meaning of the phrase "Aliens, whether resident or not, receiving income from sources within the Philippines“ or in other words, what exactly is defined as a "source"?

For me personally a source is not mobile, so it cannot be moved. The source remains and is always in the same place, where it was created and built. In my case, for example, my source is my website (or websites) abroad and my customers abroad who pay me. For me the source is not from where I work, because where I work from is flexible and mobile. That means, if I move somewhere else, my source stays where it is, only my workplace changes.

What do you think about it? Probably this is a grey area?

 

[funk]

Hi Funk,

thank you very much for your message. I think you are well experienced. Since I think others are in a similar situation as I am (living in the same country as me and may be earning money online and maybe also with a company like an offshore company as I using), it would be helpful if we could go a little bit deeper. Also because you don't read anything concrete about it on the Internet.

You wrote: "If you form an offshore company you are liable to pay taxes in resident country and not in UAE."

O.k. So I live in the Phillippines. On the side of the tax office is written:

————————

„Who are Required to File Income Tax Returns?

Aliens, whether resident or not, receiving income from sources within the Philippines

———————

In fact, if I live in the Philippines as a foreigner and do not have a company in the Philippines or do not receive income from the Philippines, the tax office will never contact me here. I know it for sure because living here for many years and if you don´t have a concrete business in the Philippines with Philippines customers (like Restaurant, etc.) they normally will not contact you.

The question now I think is the exact meaning of the phrase "Aliens, whether resident or not, receiving income from sources within the Philippines“ or in other words, what exactly is defined as a "source"?

For me personally a source is not mobile, so it cannot be moved. The source remains and is always in the same place, where it was created and built. In my case, for example, my source is my website (or websites) abroad and my customers abroad who pay me. For me the source is not from where I work, because where I work from is flexible and mobile. That means, if I move somewhere else, my source stays where it is, only my workplace changes.

What do you think about it? Probably this is a grey area?

https://en.wikipedia.org/wiki/International_taxation
Did a quick read on wiki (Wiki is not a trusted source)
It says that Philippines has Residence-based taxation of citizens, territorial taxation of foreigners.

If I were you I would not be bothered about anything. Not about taxes as your source of income is from abroad and because Philippines has territorial tax structure for foreigners you are not required to pay anything in Philippines as tax.

 

[ih8socialism]

I am having a RAK ICC myself, it acts as holding for my free zone company and several shares within the UAE. For the ICC there is no actually need to have economic substances within the UAE since its a fully offshore company and you are not even allowed to do business in UAE. This would literally kill the reason to incorporate offshore companies within the UAE, and Free Zones like RAK heavily relies on ICC's besides their freezones.

 

[blockchain4ever]

I think you're getting some outdated advice in this thread. As quoted from your own link:

The Economic Substance Regulations shall apply to UAE onshore, Free Zone and offshore companies that operate and generate income from the “Relevant Activities”.

Yes this kills offshore companies, and yes, that is what OECD/EU wants.

You could employ someone on the ground in Dubai though to create substance. For example hire an accountant from India for about AED 2000 a month to run your company. If you have a business account at the bank, you can setup approvals for transfers so that while your manager initiate payments, you have to approve them.

„Who are Required to File Income Tax Returns?

Aliens, whether resident or not, receiving income from sources within the Philippines

Regarding this statement, in some jurisdictions they will say that your UAE company is actually operating in the country you reside, thus income from the UAE company should be assigned to the Philippines. I'm not saying the Philippines do this, but some countries will definitively say this.

To protect against this, it is also beneficial to have some substance in UAE as that also thwarts that line of reasoning from the authorities.

 

[funk]

I think you're getting some outdated advice in this thread. As quoted from your own link:



Yes this kills offshore companies, and yes, that is what OECD/EU wants.

You could employ someone on the ground in Dubai though to create substance. For example hire an accountant from India for about AED 2000 a month to run your company. If you have a business account at the bank, you can setup approvals for transfers so that while your manager initiate payments, you have to approve them.




Regarding this statement, in some jurisdictions they will say that your UAE company is actually operating in the country you reside, thus income from the UAE company should be assigned to the Philippines. I'm not saying the Philippines do this, but some countries will definitively say this.

To protect against this, it is also beneficial to have some substance in UAE as that also thwarts that line of reasoning from the authorities.

There is nothing outdated about this advice. Offshore is legally not allowed to have business in UAE so question of economic substance does not arise.

Also link from the Ministry of Finance, UAE Govt which clearly states

"The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the “Relevant Activities” listed below to maintain an adequate “economic presence” in the UAE relative to the activities they undertake."
https://www.mof.gov.ae/en/StrategicPartnerships/Pages/ESR.aspx
If you will maintain any economic substance in UAE that is a violation of law and can't be done legally.

 

[AK UAE]

I think you're getting some outdated advice in this thread. As quoted from your own link:



Yes this kills offshore companies, and yes, that is what OECD/EU wants.

You could employ someone on the ground in Dubai though to create substance. For example hire an accountant from India for about AED 2000 a month to run your company. If you have a business account at the bank, you can setup approvals for transfers so that while your manager initiate payments, you have to approve them.




Regarding this statement, in some jurisdictions they will say that your UAE company is actually operating in the country you reside, thus income from the UAE company should be assigned to the Philippines. I'm not saying the Philippines do this, but some countries will definitively say this.

To protect against this, it is also beneficial to have some substance in UAE as that also thwarts that line of reasoning from the authorities.

But that would mean that all recommendations of websites on the internet (Websites with the topic of saving taxes - of which there are many by now) to save taxes by founding an offshore company and living in countries where a territorial tax system exists does not work. Since then the tax authorities could always "assume" that the management of the company is in the place of residence. That would probably affect many digital nomads now and the recommendation of the tax-saving websites would be completely wrong, right from the beginning?

"Flag Theory requires substantial planning to legally pay no tax. You must move your business and/or personal accounts to a jurisdiction that imposes no tax. Alternatively, you can move to a place where they have a territorial tax system, meaning that income remitted from abroad won't be taxed.

 

[blockchain4ever]

But that would mean that all recommendations of websites on the internet (Websites with the topic of saving taxes - of which there are many by now) to save taxes by founding an offshore company and living in countries where a territorial tax system exists does not work. Since then the tax authorities could always "assume" that the management of the company is in the place of residence. That would probably affect many digital nomads now and the recommendation of the tax-saving websites would be completely wrong, right from the beginning?

Yes, and these sites take no responsibility for the issues you end up with.

From Deloitte

In November 2018, the Organization for Economic Cooperation and Development (‘‘OECD’’) announced a new global standard on Base Erosion and Profit Shifting (“BEPS”) Action 5 for inclusive framework jurisdictions to prevent business activities from being relocated to NOONs to avoid the substantial activities requirement that applies to preferential regimes for geographically mobile income.

In response to the above, and to circumvent reputational concerns, governments of the following NOONs enacted legislation introducing enhanced economic substance requirements for tax purposes, bringing the rules into force as from 1 January 20191:

• Bermuda
• British Virgin Islands (BVI)
• Cayman Islands
• Isle of Man
• Jersey
• Guernsey
• Mauritius
• Bahamas
• Seychelles

The economic substance rules introduced by the above mentioned countries are broadly similar, as they are based on the guidance and requirements issued by the EU as well as by the OECD. Essentially, the legislation impose the following three requirements on a resident entity that undertakes relevant activity to demonstrate economic substance (the exact rules may vary depending on the respective jurisdiction):

1. The ‘Directed and Managed’ Test: The entity will need to be directed and managed in the jurisdiction with regards to the relevant activity (e.g. having board meetings with an adequate frequency, quorum of directors physically present at such meetings, the directors having the necessary knowledge and expertise to discharge their duties as directors, meeting minutes kept in the jurisdiction, etc.).
2. The ‘Core Income Generating Activities’ (“CIGA”) Test: The entity will need to demonstrate that the relevant CIGAs have been undertaken in the jurisdiction, having regard to the level of relevant income derived from the relevant activity. The CIGAs could be outsourced to a corporate service provider in the jurisdiction, subject to oversight by the entity (e.g. monitor and control). In such cases, the relevant resources of the service providers will be taken into account when determining whether the CIGA test is satisfied. In practice, however, it is unlikely that corporate service providers would be comfortable assuming key CIGA functions due to liability concerns (see below).
3. The ‘Adequate’ Test: The entity will need to have an adequate number of qualified employees in the jurisdiction, incur adequate expenditure in the jurisdiction proportionate to the level of activity and have adequate physical presence in the jurisdiction (e.g. office space, facilities, etc.). The Adequate Test is not designed to be prescriptive, and what is deemed to be adequate will be dependent on the particular facts and circumstances of the entity and the relevant activity in question. Further guidance may be issued in due course as to the interpretation of “adequate” in the context of the economic substance requirements.

 

[ih8socialism]

But that would mean that all recommendations of websites on the internet (Websites with the topic of saving taxes - of which there are many by now) to save taxes by founding an offshore company and living in countries where a territorial tax system exists does not work. Since then the tax authorities could always "assume" that the management of the company is in the place of residence. That would probably affect many digital nomads now and the recommendation of the tax-saving websites would be completely wrong, right from the beginning?

"Flag Theory requires substantial planning to legally pay no tax. You must move your business and/or personal accounts to a jurisdiction that imposes no tax. Alternatively, you can move to a place where they have a territorial tax system, meaning that income remitted from abroad won't be taxed.

imo, these websites deliver some good information but most of them just wanna sell you their own stuff like books and w/e

 

[AK UAE]

I thought it depends ALSO on the foreign tax law and if the country you reside has CFC rules or not?

Wikipedia writes:

„Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities. The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity.“

So actually I thought there is no problem having an offshore company abroad when your residence country having territorial tax regime PLUS not having CFS rules. But it`s not for sure, or is it just speculation, right?

 

[Crest]

Since you have formed a RAKICC offshore company there is no burden of economic substance requirement on you. Offshore company means that the company has no business in UAE. Also, therefore you can't avail any double taxation benefits with countries UAE has signed treaty with.

If you form an offshore company you are liable to pay taxes in resident country and not in UAE. So don't worry about any economic substance requirement but make sure you are not liable to pay taxes in your resident country. For taxation purposes offshore company has to pay taxes where management of company is taking place.

If you would have formed a freezone company in UAE then the burden of economic substance would have been on you and that would be complete taxfree and get benefits under double taxation treaty.

Hi, Actually this is not correct - every company registered in the UAE, including RAK ICC companies have to adhere to economic substance regulations should they fall into one of the reporting activities. The fact is is classed as 'offshore' does not matter. The RAK ICC portal has already set up the section where you submit the information on your company about Economic substance. The main points are whether the company is undertaking one of the 'regulated activities' and if it does, if the company has received income in the last reporting year.

 

[AK UAE]

Crest is right. Also, RAK ICC companies have to show economic substance, but only the one mentioned with "relevant activities" like Banking, Insurance, Investment Fund management, Lease, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businessesbanking, Insurance, Investment Fund management, Lease, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businesses.

My agent RAK ICC Agent wrote me in the meantime that in my case my company is not affected by this category, so everything is ok. Of course, this is good, but the question of how long this will go on?

I guess that till now it is more likely to be the bigger companies with big sales and profits, but not one-man shows like many digital nomads with rather manageable sales. But of course, probably the belts will be tightened in future also more and more for such companies. So probably only a matter of time when other companies which are not yet on the list of relevant activities will have to build up their economic substance...

 

[qugo]

Crest is right. Also, RAK ICC companies have to show economic substance, but only the one mentioned with "relevant activities" like Banking, Insurance, Investment Fund management, Lease, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businessesbanking, Insurance, Investment Fund management, Lease, Headquarters, Shipping, Holding, Intellectual Property, Distribution and Service Centre Businesses.

My agent RAK ICC Agent wrote me in the meantime that in my case my company is not affected by this category, so everything is ok. Of course, this is good, but the question of how long this will go on?

I guess that till now it is more likely to be the bigger companies with big sales and profits, but not one-man shows like many digital nomads with rather manageable sales. But of course, probably the belts will be tightened in future also more and more for such companies. So probably only a matter of time when other companies which are not yet on the list of relevant activities will have to build up their economic substance...

I wouldn’t worry much if I were you, since your company does not undertake any activity which is in the scope of economic substance. Substance rules are based on limited activities, which do not include marketing (that’s what you do as I understood).
Even though RAK ICC indeed collects declarations from the companies regarding getting income from “in scope activities”, it does not require any reporting from companies with other business activities.

 

[AK UAE]

I wouldn’t worry much if I were you, since your company does not undertake any activity which is in the scope of economic substance. Substance rules are based on limited activities, which do not include marketing (that’s what you do as I understood).
Even though RAK ICC indeed collects declarations from the companies regarding getting income from “in scope activities”, it does not require any reporting from companies with other business activities.

Hi qugo, thank you so much! So yes, you're right, but the question is how long "marketing" will not be one of the relevant activities. That's just what worries me, that you don't know if the rules will be stricter in the future and you don't know how long you can use the RAK ICC company (without substance). Well, I am probably not the only one who is worried and I know that no one can see the future-)

 

[Crest]

A

I wouldn’t worry much if I were you, since your company does not undertake any activity which is in the scope of economic substance. Substance rules are based on limited activities, which do not include marketing (that’s what you do as I understood).
Even though RAK ICC indeed collects declarations from the companies regarding getting income from “in scope activities”, it does not require any reporting from companies with other business activities.

Actually every company has to make a notification to the free zone to declare what type activity they are doing and if they have received any income. That is applicable to all companies regardless of if they are doing one of the relevant activities. The Free Zone will then check the information to see if that company requires further Economic Substance requirements.

 

[AK UAE]

Hi Crest, yes right. my agent did this for me and my company. But as I wrote before, the question will be how long I don`t need to show economic substance or other said if maybe in the future also Marketing will be a part of "in-scope activities".

 

[rowena]

@AK UAE
I'm in a similar situation like this. I have a software development company in RAK ICC. As far as I know, it is not a related activity. Do I need to send ESR notification in this case? Do you have any idea?

 

[AK UAE]

Hi Rowena, I think the best is to contact your agent. In my case my agent did all the imortant things!

 

[rowena]

I talked with directly RAKICC and they told me all every company must complete ESR notification. I will finish ESR notification via agent next week.