UAE clarification of Freezone Qualifying Income

[canomad]

Yeah, I think the problem is that ECI/ETBUS ("engaged in a trade or business in the US") is a very vague concept.
Basically anything happening physically in the US is a potential risk. And then even if they only attribute ECI to the days spent in the US - what is the value of those meetings? An aggressive IRS agent could probably say that, without the meeting, you wouldn't have received that $365k contract. So the ECI is not simply 1/365 (1 day out of 365 per year), but it should be something higher, maybe 20% of the contract sum? That's the risk.
If there is ECI, then there will be US tax in any case - the BPT would be on top of that.

Then there's the UAE side on top of it all:
If the US LLC is owned by the UAE company, then it would probably count as income of the UAE company in the UAE, as if the income was earned by the UAE company directly. So if you have a freezone company, it would probably count as income of that freezone company.
However, if you own the US LCC in your own name, then in theory, the UAE could say that your US LLC has a mainland PE in the UAE and that it's basically a mainland company that is completely separate from your freezone company (and if you didn't register for corporate tax, then you risk fines on top of UAE corporate tax). That seems rather far-fetched at the moment, but the new corporate tax rules in the UAE are as clear as mud at the moment.

I think it would probably be best to await further clarifications from the UAE tax authority. Until then, I see two potential solutions to avoiding the tax risk in the UAE:

1. Own the US LLC under your personal name, but register a freezone branch of the US LLC, instead of a UAE company, so it's clear how the US LLC should be handled in the UAE.
This might be a better solution anyway as your company would (hopefully) mostly fall under US law and not UAE law (liability etc.).

2. Add a nominee manager to your US LLC. That person should be in a tax-free country or a territorial tax country with very weak enforcement of PE rules. Then, if the UAE tax authorities really should come asking, you could explain that you are not managing the US LLC from the UAE, but that you're just a passive investor. (Can't really imagine they will come asking anytime soon, but if they do, I really can't imagine they'll start questioning your substance outside the UAE...) This approach would also completely avoid the headache with salary, corporate tax etc. - you're just a passive investor, no work is happening in the UAE, no PE, nothing... But that would also mean you'd need some other way to get your visa (like a Golden Visa or a separate freelancer license, or something like that).

It's all quite a mess at the moment, unfortunately.

I have already registered my freezone company and traveling in the next few weeks for visa. I hope I can update the freezone to be a branch of the US LLC and not have to set this up from scratch. That would be crazy.
The other thing is , will the US be sending reports or my 5472 to the UAE? Like how would this all play out in the UAE ( I know it's a mess there right now ) .

If I register for corp tax in UAE , pay my 9% with my freezone company. Does it matter that it's a branch of us LLC or registered in my name ?

 

[fshore]

The risk that my tax lawyer was seeing was that your clients would notify the IRS about your revenue from US clients (form 1099).

This form is only for services, not purchase of goods. So it wouldn't affect all industries.

 

[canomad]

This form is only for services, not purchase of goods. So it wouldn't affect all industries.

Thanks, yes I am services only

 

[fshore]

However, if you have US business clients, they only see a US company. And they may send a form 1099 (if I remember correctly), because that's what they would have to do for a US supplier.

When the file the 1099 they will use your foreign details, as you can't give them a W9 as a foreigner with a disregarded LLC, you must give them a W8BEN(E). So the IRS will not actually be informed of the LLC, only the single member. That's why it's called a disregarded entity, it's disregarded for taxes.

 

[canomad]

When the file the 1099 they will use your foreign details, as you can't give them a W9 as a foreigner with a disregarded LLC, you must give them a W8BEN(E). So the IRS will not actually be informed of the LLC, only the single member. That's why it's called a disregarded entity, it's disregarded for taxes.

Hey, so with this form filled properly they won't withhold 30% tax when selecting the disregarded LLC on the form? Any references for how to fill?

 

[JustAnotherNomad]

Yeah, I already asked about that as well:

A W-8BENE is not applicable to a U.S. domestic entity (unless solely owned by a foreign person and is a disregarded entity – then a Form W-8BEN would be the correct form). A domestic entity, LLC, issues a Form W-9 to establish that it is not foreign.

However.

The problem is, and we encounter this frequently, is that the customer dictates which form they will send to your LLC or foreign corporation, and it is almost fruitless to change their minds. And you will have the benefit of no Treaty as you are in Dubai.

As I said, many (most? almost all?) people are fine. I cannot tell you how risky this is in practice. I still think it's good to be aware of this, however.
The tax lawyer has nothing to gain from scaring people away either - it's just his honest opinion (and he works in a high position in an extremely reputable law firm).

 

[fshore]

Yeah, I already asked about that as well:

A W-8BENE is not applicable to a U.S. domestic entity (unless solely owned by a foreign person and is a disregarded entity – then a Form W-8BEN would be the correct form). A domestic entity, LLC, issues a Form W-9 to establish that it is not foreign.

However.

The problem is, and we encounter this frequently, is that the customer dictates which form they will send to your LLC or foreign corporation, and it is almost fruitless to change their minds. And you will have the benefit of no Treaty as you are in Dubai.

As I said, many (most? almost all?) people are fine. I cannot tell you how risky this is in practice. I still think it's good to be aware of this, however.
The tax lawyer has nothing to gain from scaring people away either - it's just his honest opinion (and he works in a high position in an extremely reputable law firm).

The tax lawyer if they're also a cpa can gain from having you hiring them to file a US tax return even if you wouldn't have to.

I don't see how you can file a w9 if you're a foreigner. I understand that the customer might not want to accept a w8ben, but that doesn't mean that you can or should file a w9.

 

[JustAnotherNomad]

The tax lawyer if they're also a cpa can gain from having you hiring them to file a US tax return even if you wouldn't have to.

They also made it clear I wouldn't have to file a US tax return (only form 5472 if I remember correctly). They were quoting ridiculous rates for that, but they didn't try to sell anything I didn't need.

I don't see how you can file a w9 if you're a foreigner. I understand that the customer might not want to accept a w8ben, but that doesn't mean that you can or should file a w9.

Yeah, that sentence wasn't worded well. Not sure why there were even mentioning the W9, probably I incorrectly asked about W8-BENE. Maybe I should have omitted the first sentence.
I think what they meant is just what you wrote, that the W9 is for domestic entities, but in my case, W-8BEN would be the form to file. But as you said, the client may not accept a W8-BEN and send a 1099 anyway. So some risk would remain.
To be honest, I'm not super worried about this. I just thought it might be relevant for others.

 

[Cloudbanck]

They also made it clear I wouldn't have to file a US tax return (only form 5472 if I remember correctly). They were quoting ridiculous rates for that, but they didn't try to sell anything I didn't need.



Yeah, that sentence wasn't worded well. Not sure why there were even mentioning the W9, probably I incorrectly asked about W8-BENE. Maybe I should have omitted the first sentence.
I think what they meant is just what you wrote, that the W9 is for domestic entities, but in my case, W-8BEN would be the form to file. But as you said, the client may not accept a W8-BEN and send a 1099 anyway. So some risk would remain.
To be honest, I'm not super worried about this. I just thought it might be relevant for others.

I once had a US client asking me first for a W-8BENE. I told them no, no that's for a foreign business, this is a US business. Then they said, oh that's great, that's much simpler, then you just need to send us a W-9.
So, I had to tell them, look on the W-9 form it says:

"If the owner of the disregarded entity is a foreign person, the owner must complete an appropriate Form W-8 instead of a Form W-9."

And the appropriate W-8 for a disregarded US LLC owned by a foreign person is W-8BEN. (Without the -E)

They answered that they had checked with their tax advisor and I was indeed correct. But then they started querying about whether they should deduct withholding tax, so I had to explain why that wasn't the case. All good at the end.

 

[bnpsu]

Yeah, I think the problem is that ECI/ETBUS ("engaged in a trade or business in the US") is a very vague concept.
Basically anything happening physically in the US is a potential risk. And then even if they only attribute ECI to the days spent in the US - what is the value of those meetings? An aggressive IRS agent could probably say that, without the meeting, you wouldn't have received that $365k contract. So the ECI is not simply 1/365 (1 day out of 365 per year), but it should be something higher, maybe 20% of the contract sum? That's the risk.
If there is ECI, then there will be US tax in any case - the BPT would be on top of that.

Then there's the UAE side on top of it all:
If the US LLC is owned by the UAE company, then it would probably count as income of the UAE company in the UAE, as if the income was earned by the UAE company directly. So if you have a freezone company, it would probably count as income of that freezone company.
However, if you own the US LCC in your own name, then in theory, the UAE could say that your US LLC has a mainland PE in the UAE and that it's basically a mainland company that is completely separate from your freezone company (and if you didn't register for corporate tax, then you risk fines on top of UAE corporate tax). That seems rather far-fetched at the moment, but the new corporate tax rules in the UAE are as clear as mud at the moment.

I think it would probably be best to await further clarifications from the UAE tax authority. Until then, I see two potential solutions to avoiding the tax risk in the UAE:

1. Own the US LLC under your personal name, but register a freezone branch of the US LLC, instead of a UAE company, so it's clear how the US LLC should be handled in the UAE.
This might be a better solution anyway as your company would (hopefully) mostly fall under US law and not UAE law (liability etc.).

2. Add a nominee manager to your US LLC. That person should be in a tax-free country or a territorial tax country with very weak enforcement of PE rules. Then, if the UAE tax authorities really should come asking, you could explain that you are not managing the US LLC from the UAE, but that you're just a passive investor. (Can't really imagine they will come asking anytime soon, but if they do, I really can't imagine they'll start questioning your substance outside the UAE...) This approach would also completely avoid the headache with salary, corporate tax etc. - you're just a passive investor, no work is happening in the UAE, no PE, nothing... But that would also mean you'd need some other way to get your visa (like a Golden Visa or a separate freelancer license, or something like that).

It's all quite a mess at the moment, unfortunately.

What would be the role of the nominee manager, do they have to sign contracts and be signatory of banks etc? Are most of them on paper? Or actually doing the work?

 

[canomad]

The tax lawyer if they're also a cpa can gain from having you hiring them to file a US tax return even if you wouldn't have to.

I don't see how you can file a w9 if you're a foreigner. I understand that the customer might not want to accept a w8ben, but that doesn't mean that you can or should file a w9.

What do you think of this.. my client needs me to have professional and workers comp insurance. Any issues with having Insurance being considered ECI?

 

[andrew28fl]

I have been filing my own 5472s and 1120s. There's tons of info on YouTube. Here is a good guide:

 

[canomad]

I have been filing my own 5472s and 1120s. There's tons of info on YouTube. Here is a good guide:

Are you in services B2B by chance ?
Have you followed the past few posts? Any IRS issues that you encountered?

 

[andrew28fl]

Are you in services B2B by chance ?
Have you followed the past few posts? Any IRS issues that you encountered?

I provide services to US clients. My understanding is that if you don't have physical locations, employees, and don't need to regularly visit the US to perform business duties, you will be fine. I would even avoid US freelancers or regular US visits for pleasure just to be safe. I have not had any issues with the IRS, so far.

I have been advised to keep my servers/domain registrations outside of the US too, but I haven't yet done so. I have a business and personal account in the US (CitiBank). In theory this setup works. Depending on the scale of your business, you would want to be super careful with keeping anything in the US.

Are you in services B2B by chance ?
Have you followed the past few posts? Any IRS issues that you encountered?

I am a mix of B2B and B2C.

 

[Au999]

Then there's the UAE side on top of it all:
If the US LLC is owned by the UAE company, then it would probably count as income of the UAE company in the UAE, as if the income was earned by the UAE company directly. So if you have a freezone company, it would probably count as income of that freezone company.
However, if you own the US LCC in your own name, then in theory, the UAE could say that your US LLC has a mainland PE in the UAE and that it's basically a mainland company that is completely separate from your freezone company (and if you didn't register for corporate tax, then you risk fines on top of UAE corporate tax). That seems rather far-fetched at the moment, but the new corporate tax rules in the UAE are as clear as mud at the moment.

I think it would probably be best to await further clarifications from the UAE tax authority. Until then, I see two potential solutions to avoiding the tax risk in the UAE:

1. Own the US LLC under your personal name, but register a freezone branch of the US LLC, instead of a UAE company, so it's clear how the US LLC should be handled in the UAE.
This might be a better solution anyway as your company would (hopefully) mostly fall under US law and not UAE law (liability etc.).

2. Add a nominee manager to your US LLC. That person should be in a tax-free country or a territorial tax country with very weak enforcement of PE rules. Then, if the UAE tax authorities really should come asking, you could explain that you are not managing the US LLC from the UAE, but that you're just a passive investor. (Can't really imagine they will come asking anytime soon, but if they do, I really can't imagine they'll start questioning your substance outside the UAE...) This approach would also completely avoid the headache with salary, corporate tax etc. - you're just a passive investor, no work is happening in the UAE, no PE, nothing... But that would also mean you'd need some other way to get your visa (like a Golden Visa or a separate freelancer license, or something like that).

It's all quite a mess at the moment, unfortunately.

You're bang on about the UAE mainland risk of US LLC if owned by UAE resident - as opposed to FZCO.

In the grand scheme of things I'd far rather risk having to show IRS there is no US activity (in my case super easy to show given digital services are taxed where the service is performed rather than where customers based) than have to argue anything in a Dubai court

And provided you explicitly have no US activity and have never been there the IRS has no leg to stand on given these rules at least are crystal clear.

 

[JustAnotherNomad]

Yeah, I think the question is what happens once you spend at least a few days per year in the US and you get a 1099 because the client doesn't understand the reporting rules.
What are your thoughts on having a UAE freezone branch of the US LLC instead of having the FZCO own the US LLC?

 

[fshore]

I think the question is what happens once you spend at least a few days per year in the US and you get a 1099

They file the 1099 based on the information you give them in a W9 or W8BEN(E). They can't file a 1099 without a W9/W8BEN.

 

[Marzio]

They file the 1099 based on the information you give them in a W9

I've surely lost part of the discussion here but why should a foreign owned US LLC file a W9 form if the beneficial owner is a foreign company?

Isn't form W9 for U.S. entities?

 

[JustAnotherNomad]

They file the 1099 based on the information you give them in a W9 or W8BEN(E). They can't file a 1099 without a W9/W8BEN.

So then you think it's fine if you just send them a W8BEN? I have no idea how big the risk of the IRS claiming there is ECI really is.

Isn't form W9 for U.S. entities?

Yes, W8BEN is what's relevant, we've established that.

 

[canomad]

You're bang on about the UAE mainland risk of US LLC if owned by UAE resident - as opposed to FZCO.

In the grand scheme of things I'd far rather risk having to show IRS there is no US activity (in my case super easy to show given digital services are taxed where the service is performed rather than where customers based) than have to argue anything in a Dubai court

And provided you explicitly have no US activity and have never been there the IRS has no leg to stand on given these rules at least are crystal clear.

So, what is the deal here, do I change ownership of My US LLC to my FZE instead of my personal name ? I am registered in Wyoming so I think I can just send a form and change ownership. This then puts me at a low risk of branch tax as per previous conversations . What is the UAE risk , does the FTA audit this stuff ?

I provide services to US clients. My understanding is that if you don't have physical locations, employees, and don't need to regularly visit the US to perform business duties, you will be fine. I would even avoid US freelancers or regular US visits for pleasure just to be safe. I have not had any issues with the IRS, so far.

I have been advised to keep my servers/domain registrations outside of the US too, but I haven't yet done so. I have a business and personal account in the US (CitiBank). In theory this setup works. Depending on the scale of your business, you would want to be super careful with keeping anything in the US.


I am a mix of B2B and B2C.

Hey , is the owner of your US LLC your UAE FZE or did you register your personal name against it. Also, do you have US business insurance? My customers require it along with workers comp , even tho I'm never on site for their customers.

Yeah, I think the question is what happens once you spend at least a few days per year in the US and you get a 1099 because the client doesn't understand the reporting rules.
What are your thoughts on having a UAE freezone branch of the US LLC instead of having the FZCO own the US LLC?

Hey, can I bug you with one more thing. I also have a Canadian operation (my citizenship) with people and Canadian customers etc. I know my tax obligations here. I will also be running zero net profit when I leave . (Have discussed this with my Canadian accountants).
For the UAE, they will consider this in anyway or do I need to disclose this ? 0 net profit and zero revenue share since no profit. Owner here is def in my name and not FZE.
Now, for transfer pricing , technically management and control is not in Canada.
And there is a Canada UAE treaty.