Physical substance of visa motivated freezone companies in UAE

[Thomas67]

Hi,

For a trader/investor (mainly US stocks, cryptos, forex), is it interesting/risky to set up a freezone company in Sharjah/Ajman for visa purposes (only), and to operate as a physical person (no tax and no client)? (while living in Dubai)

The company would have no revenue and no professional bank account, in absence of accounting/audit requirements from the freezone (which might change, see below).

As a second question, given the coming corporate tax applied to fzcos from 2024 (tax relief for small businesses until end 2026 under qualifying conditions), I expect that each fzco will be obliged to report its level of activity (accounting, tax statement,...), i.e. in this case a revenue equal to zero. My question is, can such a company be seen/flagged as lacking physical/business substance and what could in your view be the risks (if any).

 

[Jbb1]

You can use a freelance visa if you only want a visa.

 

[Gediminas]

Hi,

For a trader/investor (mainly US stocks, cryptos, forex), is it interesting/risky to set up a freezone company in Sharjah/Ajman for visa purposes (only), and to operate as a physical person (no tax and no client)? (while living in Dubai)

The company would have no revenue and no professional bank account, in absence of accounting/audit requirements from the freezone (which might change, see below).

As a second question, given the coming corporate tax applied to fzcos from 2024 (tax relief for small businesses until end 2026 under qualifying conditions), I expect that each fzco will be obliged to report its level of activity (accounting, tax statement,...), i.e. in this case a revenue equal to zero. My question is, can such a company be seen/flagged as lacking physical/business substance and what could in your view be the risks (if any).

Hey,

As long as the company is not engaged in business (i.e. does not have income), accounting, tax, and audit questions are not relevant.

You will need to register the company for Corporate Income tax purposes in any case, you will need to have “zero” FS, but these are technical nature, not expensive matters.

Another question is about trading shares in your personal name. As a general rule, income from private passive investments should not be taxable. On the other hand, in some instances, it might be considered as business activities on the individual level (which are taxable with 9% tax).

The line between personal investments and business activities is not fully clear, but it depends on volume, your background (are you a professional trader or not), other sources of income (is this your only income), the time you spend managing these investments, and many more.

Interestingly law authorities already mentioned that all activities with crypto by default fall as business activities.

 

[sporeaway]

Interestingly law authorities already mentioned that all activities with crypto by default fall as business activities.

Can you cite a source for this?

This would be hitting many UAE based traders pretty hard.

By law any trading with personal funds should be taxed under personal income tax, regarded as professional or not. At least this is how most countries handle it, where capital gains tax applies for passive investments, and personal income tax for professional trading. I imagine it to be quite hard to argue for corporate tax when it's really just active wealth management.. afaik there is a paragraph of new UAE tax law stating that corporate tax can apply on income received in personal name - but this is business income for people that do coaching or similar things, not profit arising from wealth management. Just my opinion. Would love to see sources for any other claims.

Thanks.

 

[zaybxc]

Another question is about trading shares in your personal name. As a general rule, income from private passive investments should not be taxable. On the other hand, in some instances, it might be considered as business activities on the individual level (which are taxable with 9% tax).

The line between personal investments and business activities is not fully clear, but it depends on volume, your background (are you a professional trader or not), other sources of income (is this your only income), the time you spend managing these investments, and many more.

This looks like the badges of trade, can you provide a source?

Interestingly law authorities already mentioned that all activities with crypto by default fall as business activities.

Can you provide a source for this too?

On the Corporate Tax FAQs ( https://mof.gov.ae/corporate-tax-faq/ ) at point 30 it is written that Personal Investment income is not taxed.

 

[Gediminas]

Can you cite a source for this?

This would be hitting many UAE based traders pretty hard.

By law any trading with personal funds should be taxed under personal income tax, regarded as professional or not. At least this is how most countries handle it, where capital gains tax applies for passive investments, and personal income tax for professional trading. I imagine it to be quite hard to argue for corporate tax when it's really just active wealth management.. afaik there is a paragraph of new UAE tax law stating that corporate tax can apply on income received in personal name - but this is business income for people that do coaching or similar things, not profit arising from wealth management. Just my opinion. Would love to see sources for any other claims.

Thanks.

<..>
Definition of commercial business is provided by Federal Decree Law 50 of 2022 (Commercial code). Article 5 specifies activities which are considered commercial business, by virtue of their nature, and one of them is virtual asset works (Art. 5 Part 17).
<..>

Article 5
The following works shall be considered commercial business, by virtue of their nature:
Purchase of tangible and intangible chattel for purpose of sale with profit whether sold as is, or after transformation or
manufacture.
Purchase or hire of tangible and intangible chattel for purpose of lease.
Sale or hire of purchased or hired chattel as aforementioned.
Operations of banks, exchanges, stock market, operations of mutual funds, trust funds and financial institutions and all
other operations of financial brokerage.
All commercial papers’ operations, whatever the capacity of the interested parties therein, and whatever the nature of
the operations for which the same is created.
All works of marine and air navigation, including:
a. Building, selling, purchasing, leasing, chartering, repairing or maintaining ships and aircrafts, and marine
and air consignments, including the marine and air transport.
b. Selling or purchasing equipment, tools or materials of ships or aircrafts or their catering.
c. Loading and discharge works.
d. Marine and aircraft loans.
Works of incorporation of commercial companies.
Current account.
Different kinds of insurance.
Sale at public auction except those conducted by the judiciary.
Works of hotels, restaurants, cinemas, theaters, playgrounds and theme parks.
Works of production, sale, transport and distribution of water, electricity and gas.
Issue of newspapers and magazines, if the purpose of the issue is realizing profit through publication of
advertisements, news and articles.
Post and communications’ works.
Works of radio and TV broadcast and studios of recording and photography.
Works of public warehouses and mortgages created on the properties lodged therein.
Virtual asset works.

https://www.moec.gov.ae/documents/20121/0/DecreeLaw_50_2022_pdf.pdf/d34d9209-b407-6e73-9acb-3b01522e94e6?t=1673496808487

 

[Mekan Gurbanov]

This looks like the badges of trade, can you provide a source?



Can you provide a source for this too?

On the Corporate Tax FAQs ( https://mof.gov.ae/corporate-tax-faq/ ) at point 30 it is written that Personal Investment income is not taxed.

Can you cite a source for this?

This would be hitting many UAE based traders pretty hard.

By law any trading with personal funds should be taxed under personal income tax, regarded as professional or not. At least this is how most countries handle it, where capital gains tax applies for passive investments, and personal income tax for professional trading. I imagine it to be quite hard to argue for corporate tax when it's really just active wealth management.. afaik there is a paragraph of new UAE tax law stating that corporate tax can apply on income received in personal name - but this is business income for people that do coaching or similar things, not profit arising from wealth management. Just my opinion. Would love to see sources for any other claims.

Thanks.

Personal Investment Income - investment activity that a natural person conducts for their personal account that is neither conducted through a Licence or requiring a Licence from a Licensing Authority in the State, nor considered as a commercial business in accordance with the Federal Decree-Law No. 50 of 2022.

Cabinet Decision No. (49) of 2023 On Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person that are Subject to Corporate Tax clearly outlines the sources that shall not be considered as Business or Business Activities.

 

[Thomas67]

You can use a freelance visa if you only want a visa.

Indeed, having it in mind too. Though, it would lead to the set up of a single shareholder FZE in my view. Hence the raised questions might be the same.

 

[Mekan Gurbanov]

Indeed, having it in mind too. Though, it would lead to the set up of a single shareholder FZE in my view. Hence the raised questions might be the same.

As one of the UAE's leading corporate services provider and business consultant we are ready to offer our professional services to support your initiative and provide complete guidance throughout the whole process.

 

[Thomas67]

Hey,

As long as the company is not engaged in business (i.e. does not have income), accounting, tax, and audit questions are not relevant.

You will need to register the company for Corporate Income tax purposes in any case, you will need to have “zero” FS, but these are technical nature, not expensive matters.

Another question is about trading shares in your personal name. As a general rule, income from private passive investments should not be taxable. On the other hand, in some instances, it might be considered as business activities on the individual level (which are taxable with 9% tax).

The line between personal investments and business activities is not fully clear, but it depends on volume, your background (are you a professional trader or not), other sources of income (is this your only income), the time you spend managing these investments, and many more.

Interestingly law authorities already mentioned that all activities with crypto by default fall as business activities.

Hello,

Thank you for the elaborated answer.

I agree with sentences 1-2, though the risks related to a lack of substance is not addressed. Unless there is no issue, as in many countries, to have a dormant company without business activity.

Sentence 3 is interesting and is indeed rather in line with what can be found in the Q&A, whereas sentence 4 is indeed quite close to the badges of trade concept, as applied in Cyprus if I remember well.

Personal Investment Income - investment activity that a natural person conducts for their personal account that is neither conducted through a Licence or requiring a Licence from a Licensing Authority in the State, nor considered as a commercial business in accordance with the Federal Decree-Law No. 50 of 2022.

Cabinet Decision No. (49) of 2023 On Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person that are Subject to Corporate Tax clearly outlines the sources that shall not be considered as Business or Business Activities.

Thank you for your reply. Would you have a link describing activities that should require a license from a licensing authority?

Can you cite a source for this?

This would be hitting many UAE based traders pretty hard.

By law any trading with personal funds should be taxed under personal income tax, regarded as professional or not. At least this is how most countries handle it, where capital gains tax applies for passive investments, and personal income tax for professional trading. I imagine it to be quite hard to argue for corporate tax when it's really just active wealth management.. afaik there is a paragraph of new UAE tax law stating that corporate tax can apply on income received in personal name - but this is business income for people that do coaching or similar things, not profit arising from wealth management. Just my opinion. Would love to see sources for any other claims.

Thanks.

As far as I understand, only passive investments would be tax exempted, with quite an important impact on professional traders indeed in this case.

There could be more options than just UAE jurisdiction. Feel free to email me and we can speak about it in depth. Big4 experience is worth the time...

What about the concept of permanent establishment now that UAE is setting up a corporate taxation even for businesses run by natural persons?

 

[zaybxc]

@Gediminas @Mekan Gurbanov thanks for your replies.

Based on Decree-Law No. 50 of 2022 trading crypto is considered a commercial business and as such is subject to corporate tax (also if done on a personal level with own money).

So, for example, also people who are employed on a 9 to 5 office job and trade crypto in their spare time on Bitoasis have to set up a business and pay taxes if the profit is above 375k AED, isn't it?

 

[Mekan Gurbanov]

Hello,

Thank you for the elaborated answer.

I agree with sentences 1-2, though the risks related to a lack of substance is not addressed. Unless there is no issue, as in many countries, to have a dormant company without business activity.

Sentence 3 is interesting and is indeed rather in line with what can be found in the Q&A, whereas sentence 4 is indeed quite close to the badges of trade concept, as applied in Cyprus if I remember well.


Thank you for your reply. Would you have a link describing activities that should require a license from a licensing authority?


As far as I understand, only passive investments would be tax exempted, with quite an important impact on professional traders indeed in this case.


What about the concept of permanent establishment now that UAE is setting up a corporate taxation even for businesses run by natural persons?

Yes, sure. Here you go: https://www.moec.gov.ae/documents/2...9-b407-6e73-9acb-3b01522e94e6?t=1673496808487.
(Page 5, Chapter 1 - Commercial Business)

@Gediminas @Mekan Gurbanov thanks for your replies.

Based on Decree-Law No. 50 of 2022 trading crypto is considered a commercial business and as such is subject to corporate tax (also if done on a personal level with own money).

So, for example, also people who are employed on a 9 to 5 office job and trade crypto in their spare time on Bitoasis have to set up a business and pay taxes if the profit is above 375k AED, isn't it?

No, 375k rule applies only to legal entities. Business activity conducted by a resident or non-resident natural person is subject to Corporate Tax only if the annual turnover exceeds AED 1,000,000. (Source: Cabinet Decision No. (49) of 2023)

 

[Tom85]

No, 375k rule applies only to legal entities. Business activity conducted by a resident or non-resident natural person is subject to Corporate Tax only if the annual turnover exceeds AED 1,000,000. (Source: Cabinet Decision No. (49) of 2023)

Hi! Do you know what is counted towards turnover in case of crypto trading? For example, when you exchange one crypto BTC to another USDT will turnover increase by the amount (measured in AED) that was exchanged? Or only exchange of a crypto to fiat will count into turnover?

I can see the definition of turnover in Cabinet Decision No. 49 of 2023: "The gross amount of income derived during a Gregorian calendar year". But it's quite vague.

 

[Thomas67]

Hi! Do you know what is counted towards turnover in case of crypto trading? For example, when you exchange one crypto BTC to another USDT will turnover increase by the amount (measured in AED) that was exchanged? Or only exchange of a crypto to fiat will count into turnover?

I can see the definition of turnover in Cabinet Decision No. 49 of 2023: "The gross amount of income derived during a Gregorian calendar year". But it's quite vague.

I have the same question regarding the Turnover. As well as if the tax administration considers that the net profit from crypto to stable coins transactions is taxable or not (in many countries these transaction wouldn't be seen as taxable events, but I've no confirmation for UAE).

Has someone a view, document or link about these two points?

Hey,

As long as the company is not engaged in business (i.e. does not have income), accounting, tax, and audit questions are not relevant.

You will need to register the company for Corporate Income tax purposes in any case, you will need to have “zero” FS, but these are technical nature, not expensive matters.

Another question is about trading shares in your personal name. As a general rule, income from private passive investments should not be taxable. On the other hand, in some instances, it might be considered as business activities on the individual level (which are taxable with 9% tax).

The line between personal investments and business activities is not fully clear, but it depends on volume, your background (are you a professional trader or not), other sources of income (is this your only income), the time you spend managing these investments, and many more.

Interestingly law authorities already mentioned that all activities with crypto by default fall as business activities.

@Gediminas In the case of active trading (stocks, forex, crypto), the activity is likely to be categorized as commercial business, due to its speculative and profit seeking nature. Though, is there a source stating that such a commercial business necessarily requires a license/incorporation to be law compliant?

(the Commercial Transactions law doesn't state anything regarding licenses at first sight)

Has anyone a view on it?

 

[Thomas67]

@Tom Taylor regarding the definition of Turnover and according to the Small Business relief tax guide (a clear example/illustration is given): "revenue (same as turnover) is determined in accordance with the applicable accounting standards accepted in the UAE", i.e. IFRS or IFRS for SMEs. So apparently: sales proceeds (e.g. sum of the sell amounts in the case of long trades) without considering the acquisition cost and operating expenses (the latter intervene in the profit calculation). In my view the revenue can hence be quickly quite high in the case of active trading (certainly for Forex with leverage).

The other questions are still open; would be great if a mentor could help clarifying.

 

[MarkusCostigan]

So as a natural person, is trading/crypto trading now taxed in Dubai ?

 

[Thomas67]

So as a natural person, is trading/crypto trading now taxed in Dubai ?

If revenue (not profit) is above 1m AED (3m AED if small business relief applies), part of profit exceeding 375k AED is taxed at 9%.

 

[Tom85]

So apparently: sales proceeds (e.g. sum of the sell amounts in the case of long trades) without considering the acquisition cost and operating expenses

Thanks for the info. Yeah, most of active traders will exceed 1 million AED turnover very easily.

Most of tax accountants from UAE believe trading on personal account isn't taxed, see here.
I don't understand how an individual would audit all their trades and pay taxes without help of tax accountants, who say we don't need to pay taxes.

So there is a hope they're right. We need to get an official statement from the government I guess.

 

[Thomas67]

Thanks for the info. Yeah, most of active traders will exceed 1 million AED turnover very easily.

Most of tax accountants from UAE believe trading on personal account isn't taxed, see here.
I don't understand how an individual would audit all their trades and pay taxes without help of tax accountants, who say we don't need to pay taxes.

So there is a hope they're right. We need to get an official statement from the government I guess.

My view is the opposite. I also believe most tax accountants can't differentiate long term investment from day/swing trading, and will only consider that the activity is done using personal savings.

- The Commercial Transaction Law is quite clear to me about this: "Speculation works practiced by a person, whether or not a trader, for purpose of realizing profit" is a commercial business.
- Corporate tax guide (last part; see also @Mekan Gurbanov 's post above, partially answering the question): "Personal Investment income is not subject to Corporate Tax when derived by natural persons from investment activity conducted in their personal capacity that is neither conducted through a Licence or requiring a Licence from a Licensing Authority, nor considered as a commercial business in accordance with the Commercial Transactions Law"

On top of this, I believe UAE is a country where it's probably better to have a good surprise than the converse in terms of financial penalties/possible sanctions.

In terms of compliance, audit I'm (at this stage) not sure it's needed, but accounting yes. Then there is the pending question of license requirement for traders (personal savings, main activity and high level of sales proceeds) and for prop firm traders (a service is provided to a prop firm).

Still looking for a source regarding @Gediminas 's statement "The line between personal investments and business activities is not fully clear, but it depends on volume, your background (are you a professional trader or not), other sources of income (is this your only income), the time you spend managing these investments, and many more".

Based on this, a professional trader (main activity, high volume, expertise,...) is expected to run a business activity.

 

[MarkusCostigan]

If revenue (not profit) is above 1m AED (3m AED if small business relief applies), part of profit exceeding 375k AED is taxed at 9%.

As a natural person using personal funds, can't be true. Let's wait more clarifications.