UAE to introduce 9% corporate tax on business profits from June 1, 2023 (FZCO REMAINS 0%)

[rowena]

@rowena I had Mashreq account 4-5 years ago then they decided to close many FZC accounts in 2019. However I heard that they re-opened for FZC again from 2021. But my friend said that they screw customers with bad services and often ask for supporting documents, do you get any problem with Mashreq?

I had zero problems but my business is low risk and I'm a real UAE resident.

 

[Martin Everson]

Are UAE free zone companies exempt from corporate tax?

The FZ companies will need robust accounting records for allocating expenses and determine net income from each of the above transaction streams.

www.khaleejtimes.com

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Will free zone companies be required to meet any conditions to be eligible for 0 per cent Corporate Tax?

The Free Zone companies will be required to maintain adequate substance and comply with all regulatory requirements.

Maintaining adequate substance could require meeting the tests of Economic Substance Regulations (ESR) i.e. the presence of adequate manpower, assets and income-generating activities in the UAE. Further, the entity must be directed and managed in the UAE.



Can I or my family members draw salary from the company that I own? Alternatively, can I or my family member charge rent for the premises owned by me but leased to the company?

The policy document recognises that the absence of a personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode CT base by making excessive payments to themselves or persons connected with them.

Accordingly, payments or benefits provided by a business to its “Connected Persons” (defined below) will be deductible as expense only if the business can demonstrate that the payment or benefit:

corresponds with the market value of the service provided; and is incurred wholly and exclusively for the purposes of the taxpayer’s business

The business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons. All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle. The salaries/rent will be tax free in the hands of the recipients.


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[RealDude]

In Germany, for example, director salaries are regulated upwards/downwards depending on the industry.

Branchenkennzahlen zum Geschäftsführergehalt

Branchenkennzahlen zum Geschäftsführergehalt erleichtern die Einschätzung, ob ein Geschäftsführergehalt angemessen ist. Wir stellen vor.

www.juhn.com

 

[JackAlabama]

Are UAE free zone companies exempt from corporate tax?

The FZ companies will need robust accounting records for allocating expenses and determine net income from each of the above transaction streams.

www.khaleejtimes.com

----- start quote

Will free zone companies be required to meet any conditions to be eligible for 0 per cent Corporate Tax?

The Free Zone companies will be required to maintain adequate substance and comply with all regulatory requirements.

Maintaining adequate substance could require meeting the tests of Economic Substance Regulations (ESR) i.e. the presence of adequate manpower, assets and income-generating activities in the UAE. Further, the entity must be directed and managed in the UAE.



Can I or my family members draw salary from the company that I own? Alternatively, can I or my family member charge rent for the premises owned by me but leased to the company?

The policy document recognises that the absence of a personal income taxation in the UAE can generate incentives for individual owners of taxable businesses to erode CT base by making excessive payments to themselves or persons connected with them.

Accordingly, payments or benefits provided by a business to its “Connected Persons” (defined below) will be deductible as expense only if the business can demonstrate that the payment or benefit:

corresponds with the market value of the service provided; and is incurred wholly and exclusively for the purposes of the taxpayer’s business

The business will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons. All Related Party transactions and transactions with Connected Persons will need to comply with transfer pricing rules and the arm’s length principle. The salaries/rent will be tax free in the hands of the recipients.


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Equally important:

"
Will the services supplied by Free Zone companies be subject to CT?


Income from transactions with businesses located outside UAE will benefit from 0 per cent CT.


Income from services supplied to the customers in the mainland UAE or in Free Zones is likely to be covered under 9 per cent CT.


I own a company in mainland UAE. Will the export of goods and/or services from mainland to overseas customers be subject to CT?


The policy document does not provide details about the tax treatment of the export of goods or services from mainland UAE.


Considering the scheme of CT, income from the export of goods/services from mainland UAE is likely to be covered under 9 per cent CT.
"

 

[hireblade89]

I think that in order to avoid any issues now and in the future with possible changes in the local company tax legislation it is best to open a FZ company only for the VISA and then operate through a US LLC and then distribute profits as personal income directly from the LLC to your personal account.

In this way, you completely avoid CT and all the possible interpretations that derive from this new legislation like profit erosion, salary cap etc.

 

[JackAlabama]

I think that in order to avoid any issues now and in the future with possible changes in the local company tax legislation it is best to open a FZ company only for the VISA and then operate through a US LLC and then distribute profits as personal income directly from the LLC to your personal account.

In this way, you completely avoid CT and all the possible interpretations that derive from this new legislation like profit erosion, salary cap etc.

That sounds like a working strategy.

I do not see much interpretations (from that article at least). Clients fromoutside UAE only mean 0% tax.

 

[RealDude]

Income from transactions with businesses located outside UAE will benefit from 0 per cent CT.

This means B2B as well as B2C?

 

[azb1]

If they introduce tax to freezone, Dubai will lose its charm. It is not beneficial to them to impose tax on freezone. THey lose more than they gain by introducing tax to freezone.

 

[khinkali]

I think that in order to avoid any issues now and in the future with possible changes in the local company tax legislation it is best to open a FZ company only for the VISA and then operate through a US LLC and then distribute profits as personal income directly from the LLC to your personal account.

In this way, you completely avoid CT and all the possible interpretations that derive from this new legislation like profit erosion, salary cap etc.

As far as I know, if you conduct business as an individual and need a license then this would be mainland activity so it will become subject to CT above AED 375,000.

So if you live in the UAE and manage the US LLC, work for it or exercise authority to conclude contracts then that business has a Permanent Establishment in the UAE. The registration would be offshore, but as far as I can see the PE is in mainland UAE so why wouldn't it be subject to mainland CT?

If you live in UAE, don't work or become tax resident in some other high tax country then you can conduct business through the tax exempt FZ company and pay yourself a tax free salary. Until OECD countries lower the global minimum tax in a few years and steal your yacht.

 

[hireblade89]

As far as I know, if you conduct business as an individual and need a license then this would be mainland activity so it will become subject to CT above AED 375,000.

So if you live in the UAE and manage the US LLC, work for it or exercise authority to conclude contracts then that business has a Permanent Establishment in the UAE. The registration would be offshore, but as far as I can see the PE is in mainland UAE so why wouldn't it be subject to mainland CT?

If you live in UAE, don't work or become tax resident in some other high tax country then you can conduct business through the tax exempt FZ company and pay yourself a tax free salary. Until OECD countries lower the global minimum tax in a few years and steal your yacht.

Sorry but if your US LLC has only foreign income, and does not conduct business with mainland UAE how can this be subject to CT (it is the same thing as a FZ but with the benefit of also being offshore)? Also the US LLC as a disregarded entity is a transparent entity and from a taxation standpoint, the taxation is on the member of the LLC which if it is a person is personal income taxation.

 

[rowena]

Sorry but if your US LLC has only foreign income, and does not conduct business with mainland UAE how can this be subject to CT (it is the same thing as a FZ but with the benefit of also being offshore)? Also the US LLC as a disregarded entity is a transparent entity and from a taxation standpoint, the taxation is on the member of the LLC which if it is a person is personal income taxation.

I think it is a grey area and needs to clarify. The same applies to UK LLP with UAE resident partners.

 

[khinkali]

Sorry but if your US LLC has only foreign income, and does not conduct business with mainland UAE how can this be subject to CT

"Foreign income" means different things to different people but in most circumstances if I do some business then the income is local to where I do the business, regardless of where my company is registered or where the customers are.

If a business has its workers in the UAE, or the people who exercise management functions are in the UAE or the people who conclude contracts are in the UAE then that business has a Permanent Establishment in the UAE. This permanent establishment is a UAE business; is it exempt from mainland CT?

If you have shares in an offshore business then OK, there's no CFC rule as far as I know. If you are not running the business from UAE (management, entering into contracts, working, etc.) then you can receive "foreign income" from it untaxed because you're not doing the business in the UAE.

Or you can use a FZ which covers you to run the business with tax exemption in UAE.

Also the US LLC as a disregarded entity is a transparent entity and from a taxation standpoint, the taxation is on the member of the LLC which if it is a person is personal income taxation.

If the natural person living in the UAE is conducting business from UAE mainland, then (s)he can be subject to CT above AED 375,000. The US LLC's tax transparency avoids US taxation in many cases but it doesn't protect you from personal income tax where you live, or from running a Permanent Establishment outside the US.

@hireblade89 I'm trying to see your angle but I already lived in Thailand. Permanent Establishment has a similar meaning there. Now I'm in Georgia, again similar (and people do get in trouble here for interpreting "foreign source" income incorrectly). Also being a natural person doesn't exclude you from business taxes, else we can all just not register a company and trade tax-free.

You talk about enforcement and I agree with you. It seems unlikely that the UAE tax authorities are going to chase you for for running a small business in the USA while living in UAE. Same in Thailand, immigration and Revenue Department officials released a bunch of freelancers in Chiang Mai and said they didn't need to pay the tax. But this is just being nice, if they felt differently another day then the law would not protect them.

There are plenty of places to go for lack of enforcement (does anyone pay in Greece? ). The advantage of FZ is that it is written and intended to apply to running a business from UAE, which gives a sense of security rather than running an illegal tax evasion scheme and relying purely on lack of enforcement.

 

[aage]

There are plenty of places to go for lack of enforcement (does anyone pay in Greece? ).

I believe NO!

 

[hireblade89]

Greece, a western country does not enforce tax controls? I didn't know that.

What scares me is that I see UAE changing rules very fast and what you rely now on can change in the following years, that's why I was considering other solutions because UAE in the future may regulate even more the local companies including FZ and this can be only the tip of the iceberg.

For example, when the CT was introduced I heard some guys saying "no worries just transfer all the company profit as salary and deduct it as business expense" while now, according to the article, it seems this is not possible.

 

[calnana]

For example, when the CT was introduced I heard some guys saying "no worries just transfer all the company profit as salary and deduct it as business expense" while now, according to the article, it seems this is not possible.

Tbh only delusional ppl were suggesting this. This happens for a lot things, telling people not to get a tax residency certificate is another one…

 

[Au999]

I think Dubai knows full well people don't move there for the sunny climate. If there was a heavily policed 9% tax in Dubai versus 10-12% tax some other place Dubai would become a ghost town

 

[azb1]

I think Dubai knows full well people don't move there for the sunny climate. If there was a heavily policed 9% tax in Dubai versus 10-12% tax some other place Dubai would become a ghost town

Can not agree more,
Nobody will like to live under Sharia law with no freedom of speech, no democracy . Nobody will buy law qaulity
real estate without tax benefit.

 

[Fred]

What scares me is that I see UAE changing rules very fast and what you rely now on can change in the following years, that's why I was considering other solutions because UAE in the future may regulate even more the local companies including FZ and this can be only the tip of the iceberg.

Enlighten us - which other solutions are out there?

When we talk about 0% Tax, no audit or accounting requirements, no public company records, Residence Visa and having reliable retail banking available - what's out there?

You have St. Kitts Nevis with 150k USD for the passport but then again no reliable retail banking available - further we have Bahamas available for 750k USD but then again only for Residence as Bahamas Companies having public Company Register and that's it basically - Cayman Islands with very hard immigration process and of course the center of the world - Vanuatu is available as well all this old school Offshore Structures like a Samoa or Marshall Island Company with a Puerto Rico Bank Account are dead anyway.

UAE is playing it smart and I'm sure at some point in the future you have it all somehow in the UAE as well - tax, accounting etc. but at this point it's worldwide order and you have no longer any tax free, bureaucracy free jurisdiction available and then everything comes down how things are enforced in practice - ride the wave till the end and as sooner the better - for the rich always loophole will exist however the definition of "rich" with the current world trend will be 10mm+$ easily in the future.

 

[Bill D]

"Are free zone companies eligible for 0 per cent corporate tax?


Income earned from the following transactions is likely to benefit from 0 per cent CT:


*Transactions with businesses located outside UAE"

Does that mean if you are day trading throught your FZ on stocks platform like interactive broker or performing whatever day trader activity which do not involve local companies shares trading (emaar etc) then this tax does not apply to you ?
What about the professional trading perform under your own name ?(traditional finance+crypto) (for Dubai residents)

 

[azb1]

When we talk about 0% Tax, no audit or accounting requirements, no public company records, Residence Visa and having reliable retail banking available - what's out there?

That's a bottom line, There is no competition for Dubai in this area. Dubai is not or near Banana Republic.