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EmiratesSetup
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EmiratesSetup

UAE clarification of Freezone Qualifying Income

#662
uranium said:
I think salary should match standards of similar positions
Like 50k AED for salary and 750k AED counts as profits
Don't forget to deduct business expenses
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Yes, but salaries for CEOs/Executive Directors are very high in the UAE. And of course the larger the company, the easier it is to motivate a high salary. But even for a one person company a CEO annual salary of say 500k AED or more should be totally reasonable. I mean 500k AED is still below the average Google employee salary in the US.
 
#663
Cloudbanck said:
Yes, but salaries for CEOs/Executive Directors are very high in the UAE. And of course the larger the company, the easier it is to motivate a high salary. But even for a one person company a CEO annual salary of say 500k AED or more should be totally reasonable. I mean 500k AED is still below the average Google employee salary in the US.
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500k AED per year which is around 136k USD sounds reasonable.
Not per month.
 
#669
Don said:
I will try to be more clear. The Estonian tax office confirmed that even if a US LLC, which is disregarded for tax purposes in the US, has all the activities in Estonia, it will not be considered an Estonian tax resident, but it will need to register a PE (meaning all locally sourced profits will be taxed in Estonia, but only when they are taken out of PE).
The same US LLC can also earn profits outside the local PE. It works out like territorial taxation.
Based on the residency of the director alone, there is no need to register a PE. So you can have US LLC disregarded for tax purposes in the US with an Estonian director and UAE member.
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Consider the next setup:

- US LLC develops and sells mobile apps on app stores and via Stripe. All development and product managment is outsourced to independent agents outside USA (outsoursing companies, freelancers), for example, to some company in Poland.
- A single member of US LLC is UAE resident. He is a passive owner not involved in management and control and not running business.
- A manager of US LLC is a resident in Estonia. He is a real director (not nominee) who actually manages the company. No other activities are performed in Estonia.

If this setup triggers PE in Estonia, what would be the profit attributed to this PE? How is it calculated?
 
#670
rdevalex said:
Consider the next setup:

- US LLC develops and sells mobile apps on app stores and via Stripe. All development and product managment is outsourced to independent agents outside USA (outsoursing companies, freelancers), for example, to some company in Poland.
- A single member of US LLC is UAE resident. He is a passive owner not involved in management and control and not running business.
- A manager of US LLC is a resident in Estonia. He is a real director (not nominee) who actually manages the company. No other activities are performed in Estonia.

If this setup triggers PE in Estonia, what would be the profit attributed to this PE? How is it calculated?
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Foreign companies and other juridical persons may also be treated as resident persons for CT purposes where they are effectively managed and controlled in the UAE. So, appointing a manager outside the UAE could help avoid triggering UAE tax residency for the US LLC, but it would not make the US LLC tax resident in Estonia.

Under Article 7 of the OECD MTC, the profits to be attributed to a PE are those that the PE would have derived if it were a separate and independent enterprise performing the activities that cause it to be a PE, and after it has been established that a PE exists due to activities specified in Article 5(4) that are not preparatory or auxiliary in nature, the attribution of profits to the PE should be determined under an analysis of the amounts of revenue and expense that the PE would have recognized if it were a separate and independent enterprise.

The UAE Revenue threshold for natural persons subject to CIT is AED 1 million. So, assuming the US LLC doesn't create a PE in UAE (there is no complete clarity on how UAE will treat single-member tax transparent US LLC, but so far we know they don't have anti-hybrid rules), e.g., the same person can do business by being a partner in an unincorporated partnership based on Estonian law (treated as tax transparent in both UAE and Estonia), managed by the US LLC PE in EE on e.g., 99%/1% income split with yourself as natural person, without registering for CIT in UAE. That's a maximum of USD ~272k/year of income without much bureaucracy and cheap substance, and if needed, you can show that the company is paying taxes abroad since it is registered for tax. Since the unincorporated partnership is not a legal entity it means in practice that everything is still managed by the US LLC (banking, invoicing, etc.).

The devil is in the details of documents you can produce. As a significant benefit, it would still leave some wiggle room to structure some income to zero-tax jurisdictions.

I would structure the US LLC as an operating company with very few assets and keep the assets separated under a holding, keeping it cheap and effective but with just enough substance for banking. The LLC has limited liability, so if things go wrong, you can simply restructure and drop the old entity. US LLC is also one of the worst choices for a holding due to the exorbitant inheritance taxes.
Using a holding also gives additional tax planning opportunities for zero tax income beyond the USD 272k. For a holding, choosing a proper jurisdiction is essential because, for example, such a US LLC wouldn't be able to invoice Polish companies without Poland applying 20% WHT if it doesn't have a tax residence certificate or a tax number (here, the PE would help to fix the issue). Different jurisdictions for holding can have significant differences in costs, bureaucracy and ease of getting things done.

It is possible to use a similar approach with some other jurisdictions, achieving more or less the same result, but for transacting in USD, it is better to use US banks, for which US LLC is naturally a better choice.
 
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#671
Does paying an excessive salary to the owner fall under GAAR (General Anti-Avoidance Rule) if my FZE business meets the De Minimis requirement threshold and is therefore considered a qualifying free zone person because its revenue is under 5M AED? It shouldn't, right? Because the tax liability would be 0% anyway?
 
#672
visive said:
Does paying an excessive salary to the owner fall under GAAR (General Anti-Avoidance Rule) if my FZE business meets the De Minimis requirement threshold and is therefore considered a qualifying free zone person because its revenue is under 5M AED? It shouldn't, right? Because the tax liability would be 0% anyway?
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It does if you are avoiding tax. The difference of market rate salaries and what you actually pay could be taxed with CIT, since related party transactions should be conducted at arms length.
 
#673
Don said:
It does if you are avoiding tax. The difference of market rate salaries and what you actually pay could be taxed with CIT, since related party transactions should be conducted at arms length.
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Even if I opt for dividends or capital withdrawal instead of a salary? It seems impractical for a business with zero expenses to just keep the money in the company without a specific reason.
 
#674
visive said:
Even if I opt for dividends or capital withdrawal instead of a salary? It seems impractical for a business with zero expenses to just keep the money in the company without a specific reason.
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If a company is exempt from CIT, it shouldn't matter because you are not doing this to avoid tax.
 
#675
visive said:
Even if I opt for dividends or capital withdrawal instead of a salary? It seems impractical for a business with zero expenses to just keep the money in the company without a specific reason.
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Pay your self average salary for same position. Just Google average salary for ceo of web dev company for example.
Dividends you are free to pay as much as you want. Just sign dividend distribution document everytime but you still have to pay 9% anyways later.
 
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