Spanish resident. Company in Dubai subject to CFC?

[jamescameron]

I’m a resident of Spain (EU citizen) and I run a small solo-consulting Spanish firm that makes €100-150k a year.

This year though revenue might triple as I might be winning a larger contract in Dubai.

If I setup an entity in the UAE (e.g. free zone), move my business there and leave my earnings , can Spain claim that I should pay corporate tax as if it was a Spanish company?

My accountant seems relaxed about it, as long as I don’t go above the €100k / year revenue mark. He believes that I would be too small for authorities to care. However, he advise to invoice some €2000 / month from my Spanish company to my “potential” Dubai one. So to keep the authorities happy.

I don’t really need to pay myself more than €2000 / month as I can live off my savings

P.s. unfortunately I cannot spend 183 days away from Spain for family reasons. Also my wife (Non-EU) is under my visa sponsorship.

What setup would you think to be the best?

P.s. unfortunately I cannot spend 183 days away from Spain for family reasons. Also my wife (Non-EU) is under my visa sponsorship.

 

[Sols]

If you're resident in Spain, anything you do that doesn't involve paying full tax on your taxable income is illegal. It's really that simple.

As for your accountant's relaxed advice, keep in mind that with the tourism industry hurt badly from COVID-19 and government coffers suffering. As a result, the threshold for what's considered too small to care about might decrease. Especially if you make it easy for them.

You could try a setup which establishes tax residence in that jurisdiction (Cyprus, Malta, Isle of Man are popular choices for this). You have a local director who signs all agreements and who is the sole signatory on the company's bank account. You're paid a salary or dividend (for example the 2,000 EUR/month) which you the dutifully pay tax on in Spain, and the rest stays in the company. If the Spanish authorities get aggressive towards you, though, this structure risks falling apart. The account will be reported under CRS back to Spain, so you'd have to hope they are content with you being a passive shareholder.

But you still need to pay full tax in Spain once you wish to withdraw the company's cash reserves, if you still live in Spain at that time. It's a risky way of deferring your tax bill until you're in a more favorable situation to cash out.

Not paying tax is one crime. Using money you haven't paid tax on is — in the worst case — how you go from a tax evader to a money launderer.

 

[lavel]

If you're resident in Spain, anything you do that doesn't involve paying full tax on your taxable income is illegal. It's really that simple.

like in any other European country, there are only a very few countries left in this world where this tax rule does not apply!

 

[JackAlabama]

I’m a resident of Spain (EU citizen) and I run a small solo-consulting Spanish firm that makes €100-150k a year.

This year though revenue might triple as I might be winning a larger contract in Dubai.

If I setup an entity in the UAE (e.g. free zone), move my business there and leave my earnings , can Spain claim that I should pay corporate tax as if it was a Spanish company?

My accountant seems relaxed about it, as long as I don’t go above the €100k / year revenue mark. He believes that I would be too small for authorities to care. However, he advise to invoice some €2000 / month from my Spanish company to my “potential” Dubai one. So to keep the authorities happy.

I don’t really need to pay myself more than €2000 / month as I can live off my savings

P.s. unfortunately I cannot spend 183 days away from Spain for family reasons. Also my wife (Non-EU) is under my visa sponsorship.

What setup would you think to be the best?

P.s. unfortunately I cannot spend 183 days away from Spain for family reasons. Also my wife (Non-EU) is under my visa sponsorship.

It is not allowed as others have stated already, but you will face another hurdle.

In short there is also this cultural aspect, which in short format is:
"Spanish in general love taxes and big government. The more totaliarian the better."

And as you make a quite a lot of money with 100k-150k / year compared to the common man in Spain which perceives IT developers making 80k / year highly paid.

So you will have the culture / moral argument against you as well in top of doing something not allowed.

Having the moral argument against you allows for the hammer hitting you with max force.

 

[jamescameron]

If you're resident in Spain, anything you do that doesn't involve paying full tax on your taxable income is illegal. It's really that simple.

As for your accountant's relaxed advice, keep in mind that with the tourism industry hurt badly from COVID-19 and government coffers suffering. As a result, the threshold for what's considered too small to care about might decrease. Especially if you make it easy for them.

You could try a setup which establishes tax residence in that jurisdiction (Cyprus, Malta, Isle of Man are popular choices for this). You have a local director who signs all agreements and who is the sole signatory on the company's bank account. You're paid a salary or dividend (for example the 2,000 EUR/month) which you the dutifully pay tax on in Spain, and the rest stays in the company. If the Spanish authorities get aggressive towards you, though, this structure risks falling apart. The account will be reported under CRS back to Spain, so you'd have to hope they are content with you being a passive shareholder.

But you still need to pay full tax in Spain once you wish to withdraw the company's cash reserves, if you still live in Spain at that time. It's a risky way of deferring your tax bill until you're in a more favorable situation to cash out.

Not paying tax is one crime. Using money you haven't paid tax on is — in the worst case — how you go from a tax evader to a money launderer.

Thanks for your reply Sols and advice.

The Spanish legislation considers a CFC if a foreign company is owned or controlled by at least 50% by a Spanish shareholder.

Also, CFC regulation applies when a foreign company does not have what the Spanish legislation considers an adequate structure (human resources and material operations) unless it can be justified that there is a specific reason for the existence of the foreign company.

Now, I have the option of having a venture partner who is actually going to work together with me on the venture, who could be owning 51% of the company.

I feel to have quite a few reasons to set up in the UAE - my partner lives in the US, so we need a neutral country to set up and carry our venture. Most importantly, I will do business with UAE (and KSA) based customers, hence, a strong reason why we are choosing to setup in the UAE.

The law also talks about "Passive Income" but I'm not clear whether my case applies to it. I will actually carry the work.

Do you think that my interpretation is overly optimistic?

Not my intention to do anything illegal, just trying to find that grey area (if it exists at all) that can be my sweet spot.

 

[Sols]

The Spanish legislation considers a CFC if a foreign company is owned or controlled by at least 50% by a Spanish shareholder.

CFC is just one thing. You have to consider tax residence and permanent establishment as well.

The company can become tax resident in Spain by you having effective control over the company. Do you call the shots? Then the company is Spanish. Is there anyone working in UAE for the company? No, then it's even clearer that it's a Spanish company.

Even if you have a partner in US who can own 50.01% or 99% of the company, if the Spanish tax authorities catch wind of your setup, your presence in Spain could be construed as a permanent establishment and income derived therefrom (i.e. your portion of the profits) taxable in Spain. They will then look at the real numbers (total company profit), not shareholding percentages. And if the tax authority is unsure what part is yours, they'll very often start with the presumption that it's all attributable to you and then you have to prove them otherwise.

Being under investigation by an aggressive tax authority is a terrible situation to be in. With increased transparency and exchange of information, and desperation for tax money to recover loss of income COVID-19, I would think both twice and three times before doing something like this.

Do you think that my interpretation is overly optimistic?

Yes.

Think about it this way, if what you propose were possible, why would there be any tax payers at all in Spain? Wouldn't everyone be operating under a setup like this?

 

[jamescameron]

CFC is just one thing. You have to consider tax residence and permanent establishment as well.

The company can become tax resident in Spain by you having effective control over the company. Do you call the shots? Then the company is Spanish. Is there anyone working in UAE for the company? No, then it's even clearer that it's a Spanish company.

Even if you have a partner in US who can own 50.01% or 99% of the company, if the Spanish tax authorities catch wind of your setup, your presence in Spain could be construed as a permanent establishment and income derived therefrom (i.e. your portion of the profits) taxable in Spain. They will then look at the real numbers (total company profit), not shareholding percentages. And if the tax authority is unsure what part is yours, they'll very often start with the presumption that it's all attributable to you and then you have to prove them otherwise.

Being under investigation by an aggressive tax authority is a terrible situation to be in. With increased transparency and exchange of information, and desperation for tax money to recover loss of income COVID-19, I would think both twice and three times before doing something like this.


Yes.

Think about it this way, if what you propose were possible, why would there be any tax payers at all in Spain? Wouldn't everyone be operating under a setup like this?

That makes sense, thanks Sols.

And again, thanks a lot for walking me through things and I'm sorry to exploit your kindness.

You talk about "my portion of the profit". Would the tax authorities consider "profit" even I leave the money on my company account in the UAE, and eventually re-invest that rather than distributing that to me?

Perhaps, if that company setup is carried in Ireland (rather than in the UAE), I could take advantage of the Freedom of Establishment to avoid a Permanent Establishment in Spain. Ireland seems to be a good option.

Said that, if I want to go for full peace of mind, something tells me that I should lead with a regular Spanish SL for the time being, and try to optimize taxes on that.

 

[jamescameron]

our average joe's salaries are more like 15k-20k/year

In my opinion I would open the dubai company and keep the money there and dont sending anything to spain

That was my original idea, but I understand from what others say that the Spanish authorities won't like it.

 

[Sols]

You talk about "my portion of the profit". Would the tax authorities consider "profit" even I leave the money on my company account in the UAE, and eventually re-invest that rather than distributing that to me?

They likely would, yes, since AFAIK Spain taxes companies on profits earned regardless of whether they are retained or distributed.

Perhaps, if that company setup is carried in Ireland (rather than in the UAE), I could take advantage of the Freedom of Establishment to avoid a Permanent Establishment in Spain. Ireland seems to be a good option.

You are free to incorporate wherever, but the tax residence rules are the same. If you incorporate in Ireland, you might find yourself having to pay 12.50% in Ireland and then difference in Spain, and have to invoke a double taxation treaty to not pay both full Irish and full Spanish tax.

Said that, if I want to go for full peace of mind, something tells me that I should lead with a regular Spanish SL for the time being, and try to optimize taxes on that.

It's certainly not as fun and exciting as an overseas company, but in your case this does sound like the best option. Look into the autonomo regime. It's quite popular with independent professionals.

 

[jamescameron]

As a spaniard myself I can agree they dont like it but they also dont like the other idea as well....they want you to do through an spanish company or they will be as intrusive as a colonoscopy....they are like the mob and dont like spanish residents owning companies/bank accounts in places where they cannot reach...

Actually the best you can try to do is to remain under the radar

I understand. But regretfully, I have just filled my 720 model, so I helped the authorities go through a full colonoscopy when needed.

They disseminate terror online about filing the model late, or not filing it at all, with their fines threat.

Well, at least we live in a beautiful country I guess.

 

[jamescameron]

It's certainly not as fun and exciting as an overseas company, but in your case this does sound like the best option. Look into the autonomo regime. It's quite popular with independent professionals.

That's what I am at the moment, an Autonomo.

But as my earnings grow, I was advised that I should move to an SL setup, whether in or off-shore. Both from a tax and responsibility perspective.

 

[JohnLocke]

open an offshore company + Puerto Rico bank account and if you wanna declare some income pay yourself as a freelance

which bank in Puerto Rico do you suggest to look into?

 

[Nasters]

open an offshore company + Puerto Rico bank account and if you wanna declare some income pay yourself as a freelance

Banco Popular of Puerto Rico, and the offshore company in which country ?