Spain + US based partners, setting up in the UAE. Risky?

[jamescameron]

I'm based in Spain where I'm a fiscal resident. I also have residency in Dubai, since I've lived there for 5 years prior to moving to Spain, and I have an Emirates ID as well as an LLC registered (that doesn't operate so far).

My partner is based in the US, where's a fiscal residence.

We have a business that's been operating for 3 years as a C-Corp based in Delaware with revenue >$1M. Our main markets are the US and Europe, where we have most of our clients (we have a couple in Dubai).

We're both looking for a better way to get paid, since we now pay up to 50% personal income tax. If we re-incorporated in Dubai and we'd distribute dividends, we'll get taxed just 25-27% instead of our current 50%.

However, how would Spain and US look at this setup? Can we claim that we incorporated in Dubai because we're based in different countries and needed an impartial jurisdiction, or is it going to lead to a tax audit?

We don't want to do anything illegal here, but we're looking at optimizing as much as we can.

Thanks

 

[CyprusLawyer101]

What is your product?

 

[jamescameron]

It's a digital service where we consult customers + offer them access to our tech platform. It's a SaaS + Consulting firm.

 

[CyprusLawyer101]

There are many variables to be taken into consideration here, including a difference in tax treatment between your partner and yourself both from a personal tax perspective as well as for structuring the operation while navigating the different anti avoidance rules of both your countries of residence. You should engage a professional advisor for this.

 

[Nickster]

I am a successful Solo-preneur living in Dubai and I work through my Freezone company, that only deals with entities outside of Dubai and all of my business is online (Saas, ecom etc.). So, as far as I am aware this should be totally exempt under the new corporate tax regime being introduced (to be confirmed).

I actually did the opposite to you. I lived in Spain for most of my life and moved to Dubai in 2020. So I have done a ton of research in this field (Although I have no knowledge about how things work for a US resident)

The major issue you'll have is proving economic substance (i.e. that your company is actually operational in Dubai).

I was thinking that it could be interesting to team up with other similar digital entrepreneurs from abroad that would like to benefit from having a Dubai entity, but in need of real economic substance.

But it would need to be in something totally legitimate and fully transparent (not interested in anything dodgy or opaque).

I was thinking something like an arrangement covering costs and a fair equity stake (or I could even possibly provide some investment capital if the opportunity is interesting), that both incentivises me but also make the arrangement make real sense for the partner too.

I thought I'd float the idea out there to see if this could be an interesting proposition for you/anyone.

It's only the spark of an idea right now, so If anyone believes there are flaws in such an idea I am very open to feedback.

 

[jamescameron]

That's interesting Nick, let's chat about that via DM. I'm totally with you that if anything happens, it needs to be 100% transparent and legal. Let's see if there's a way.

 

[European]

I am a successful Solo-preneur living in Dubai and I work through my Freezone company, that only deals with entities outside of Dubai and all of my business is online (Saas, ecom etc.). So, as far as I am aware this should be totally exempt under the new corporate tax regime being introduced (to be confirmed).

I actually did the opposite to you. I lived in Spain for most of my life and moved to Dubai in 2020. So I have done a ton of research in this field (Although I have no knowledge about how things work for a US resident)

The major issue you'll have is proving economic substance (i.e. that your company is actually operational in Dubai).

I was thinking that it could be interesting to team up with other similar digital entrepreneurs from abroad that would like to benefit from having a Dubai entity, but in need of real economic substance.

But it would need to be in something totally legitimate and fully transparent (not interested in anything dodgy or opaque).

I was thinking something like an arrangement covering costs and a fair equity stake (or I could even possibly provide some investment capital if the opportunity is interesting), that both incentivises me but also make the arrangement make real sense for the partner too.

I thought I'd float the idea out there to see if this could be an interesting proposition for you/anyone.

It's only the spark of an idea right now, so If anyone believes there are flaws in such an idea I am very open to feedback.

I'd be potentially interested too. Are you talking about having for instance two (or more) partners with a company in a FZ in UAE with office space and perhaps employees?
Imagine, as an example, one of the partners owns 60% of the company and is a resident in Dubai. The other partner owns 40% and is a (fiscal) resident in the EU. If the partner with 60% (officially) manages the company, they won't be able to argue that the place of effective management is not UAE. However, a EU tax office might still interpret that the company has a Permanent Establishment (branch) in the EU country. Particularly if the company provides consulting services, they would want to see evidence that the 40% partner is truly a passive shareholder and is not doing any work for the company. Of course this will depend on how aggressive the EU tax office is and if it ever cares to look into it but I've heard stories where they have successfully argued so and levied local (EU) corporate tax on that 40%.

 

[Nickster]

I'd be potentially interested too. Are you talking about having for instance two (or more) partners with a company in a FZ in UAE with office space and perhaps employees?
Imagine, as an example, one of the partners owns 60% of the company and is a resident in Dubai. The other partner owns 40% and is a (fiscal) resident in the EU. If the partner with 60% (officially) manages the company, they won't be able to argue that the place of effective management is not UAE. However, a EU tax office might still interpret that the company has a Permanent Establishment (branch) in the EU country. Particularly if the company provides consulting services, they would want to see evidence that the 40% partner is truly a passive shareholder and is not doing any work for the company. Of course this will depend on how aggressive the EU tax office is and if it ever cares to look into it but I've heard stories where they have successfully argued so and levied local (EU) corporate tax on that 40%.

I would assume that the EU shareholder may not be an employee of the company and only receive dividends passively. If a salary/wages are needed then perhaps they can use a consultancy company in the EU country and the company can invoice.

I'm sure there would be different options available.

 

[European]

I would assume that the EU shareholder may not be an employee of the company and only receive dividends passively. If a salary/wages are needed then perhaps they can use a consultancy company in the EU country and the company can invoice.

I'm sure there would be different options available.

Yes, I was talking about the EU partner only taking money out as dividends. If that's the case, the tax authority might still want to check that they are truly a passive shareholder, not doing any active work for the company.

Taking money out as salary shouldn't be a problem; you pay income tax on it and that is it, but that wouldn't be more advantageous that operating directly on your own in the EU (eg sole proprietorship)

 

[Nickster]

that they are truly a passive shareholder, not doing any active work for the company.

That would be quite unlikely for a digital only product/service. But I guess it would depend on how careful/reckless the person is.

 

[European]

That would be quite unlikely for a digital only product/service. But I guess it would depend on how careful/reckless the person is.

What do you mean?

 

[Nickster]

What do you mean?

How would they check?

 

[European]

How would they check?

Oh, I had the same question but I was told by several people that in many cases the tax authority will place the burden of proof on you. Apparently, they will say we assume you are an active shareholder, prove us wrong. To me it does not make a lot of sense as they should be the ones to provide evidence; plus even if you are a completely legitimate passive shareholder, how exactly do you prove it?

 

[Nickster]

Exactly.

I'm not wanting to give anyone specific tax advice. That would be for them to decide upon and get appropriate qualified advice.

 

[bandanna]

Oh, I had the same question but I was told by several people that in many cases the tax authority will place the burden of proof on you. Apparently, they will say we assume you are an active shareholder, prove us wrong. To me it does not make a lot of sense as they should be the ones to provide evidence; plus even if you are a completely legitimate passive shareholder, how exactly do you prove it?

Heard about multiple cases like that in Spain. I had a company in Estonia while residing in Spain years ago, and "hacienda" wasn't happy neither. The tax authorities there can make many assumptions. Here's a little story, a designer (friend of mine) was making 6 digits profit and as part of his work he needed to travel to customers. They came after him once asking to proof a ticket below 20 eur that he expensed and submitted 4 years before that time. Somehow he managed to prove it was a trip to a customer in tossa de mar, not a vacation, and they accepted but came back asking other questions. Other fun fact, Hacienda usually would go after the smaller fish (mostly "autonomos" / self-employed) rather than bigger corporates.

If anybody finds a way to live in Spain while paying less taxes - sign me up please.

 

[SoNewToAllShit]

Can see why you guys think it is risky if you consult a good tax advisor in your country of residency.

 

[European]

I am a successful Solo-preneur living in Dubai and I work through my Freezone company, that only deals with entities outside of Dubai and all of my business is online (Saas, ecom etc.). So, as far as I am aware this should be totally exempt under the new corporate tax regime being introduced (to be confirmed).

I actually did the opposite to you. I lived in Spain for most of my life and moved to Dubai in 2020. So I have done a ton of research in this field (Although I have no knowledge about how things work for a US resident)

The major issue you'll have is proving economic substance (i.e. that your company is actually operational in Dubai).

I was thinking that it could be interesting to team up with other similar digital entrepreneurs from abroad that would like to benefit from having a Dubai entity, but in need of real economic substance.

But it would need to be in something totally legitimate and fully transparent (not interested in anything dodgy or opaque).

I was thinking something like an arrangement covering costs and a fair equity stake (or I could even possibly provide some investment capital if the opportunity is interesting), that both incentivises me but also make the arrangement make real sense for the partner too.

I thought I'd float the idea out there to see if this could be an interesting proposition for you/anyone.

It's only the spark of an idea right now, so If anyone believes there are flaws in such an idea I am very open to feedback.

@Nickster I'd be interested in discussing this

 

[JustAnotherNomad]

However, how would Spain and US look at this setup?

They would most likely tax the company like a local US/Spanish company, unless you can prove you are only passive investors and not managing the company from the US/Spain. This is what @Nickster meant. There are many companies offering "substance" (local office, employees), so that you can tell your local tax authorities "I'm not involved, I have my guys down there doing everything by themselves".
But you have to pay realistic salaries - and even then, you might still have to pay tax per CFC rules.
So you really need good lawyers in the US/Spain to make sure that it will work. It would probably be much better and less risky to just move to the UAE.

if you are a completely legitimate passive shareholder, how exactly do you prove it?

You show that the director of your company that makes $1M in revenue gets paid a $200k salary and that he works from an office that costs $10k in rent per month.
He also has three people working under him who make $5k a month each.
You also show that the company exists for operational reasons (because you have customers and suppliers in the region), not to save taxes. And even then you can't be sure they will accept it...

But then your costs may be so high that you basically pay the same - just in salaries, not in taxes. And then they might still tax you under CFC rules.