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

[troubled soul]

https://www.khaleejtimes.com/business/income-that-would-be-exempt-from-proposed-corporate-tax-regime

Income that would be exempt from proposed corporate tax regime​

Dividends and Capital Gains
Foreign branch profit

 

[khinkali]

@azb1 if I understand correctly then the participation exemption doesn't lead to 0% dividend tax for mainland corporations.

From the article:

Dividends paid by foreign companies, and capital gains from the sale of shares from foreign companies would also be exempt from CT provided UAE corporate shareholder owns at least 5 per cent shares of the subsidiary, and the foreign subsidiary is subject to at least 9 per cent CT or similar tax to prevent income shift to a subsidiary in a no or low-tax country.
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So the above approach should keep the OECD happy once the tax goes from 9% to 15% in future.

Weirdly it looks like a mainland company will pay 9% tax on dividends received from zero tax offshore companies, but not on dividends received from zero tax UAE free zone companies?

any domestic dividend earned from UAE companies would be exempt, including dividends paid by a Free Zone Person that benefits from the 0 per cent CT regime
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[OffshorePhantom]

What about for example a US LLC as a disregarded entity (tax transparent) fully owned by a Free Zone company. It is a setup advertised a lot but with the new corporate tax regime I think it will have some issues.

In theory on US side all the revenue of the LLC flow-through and should be taxed on its member, in this case, the Free Zone that in theory remains 0% tax (all foreign income), BUT the US LLC is a foreign company managed from UAE so in theory subject to the 9% corporate tax.

"For the application of UAE CT, legal persons incorporated in a foreign jurisdiction that are effectively managed and controlled in the UAE will be treated as if they were UAE incorporated entities." (cit. MoF Public consultation document)

It is some sort of hybrid mismatch.
I read in the clarification document that the UAE MoF has redacted that, for example, LLPs will be subject to the 9% CT.

"Limited liability partnerships, partnerships limited by shares and other types of partnerships where none of the partners have unlimited liability for the partnership's obligations or other partners' actions will be subject to UAE CT in the same manner as a UAE company."

Any thoughts about this? Lots of users in Dubai operate through US LLCs in order to use some platforms that are not available in UAE or save on Stripe commissions (which are very high in UAE) I wonder what will happen to them when this new law will be implemented.

I do not think that having 100% ownership of the LLC by a Free Zone company exempts the LLC from being taxed as a foreign company managed from the UAE, the only possibility this could happen is if the FTA considers the US LLC as tax transparent like the US and attributed all the income of the LLC to the Free Zone (even if not directly distribute to it for example).

Reference for the advertised setup:

 

[Marzio]

Operating a US LLC from DXB have numerous advantages, the biggest that comes to mind is having access to the US banking system but there are also some insidious downsides which are using payment gateways like Stripe or Paypal that often require some form of US presence otherwise there's a risk of accout closure.

@hireblade89 have you moved to Dubai or think about moving there?

A better solution (with a caveat) would be a UK LTD treaty non resident in UAE but only to the extent that you can register the UK LTD in a freezone otherwise there's no point.

If allowed to register the UK LTD in a freezone you would basically operate at 0% CIT with a UK LTD, have access to all EU EMI's and UK Stripe and PayPal.

@Fred do you know if this would be possible?

 

[OffshorePhantom]

marzio said:
Operating a US LLC from DXB have numerous advantages, the biggest that comes to mind is the US banking system but also some insidious downsides which are using payment gateways like Stripe or Paypal that often require some form of US presence otherwise there's a risk of accout closure.

@hireblade89 have you moved to Duabi or think about moving there?

A better solution (with a caveat) would be a UK LTD treaty non resident in UAE but only to the extent that you can register the UK LTD in freezone otherwise there's no point.

If allowed to register the UK LTD in a freezone you would basically operate at 0% CIT with a UK LTD, have access to all EU EMI's and UK Stripe and PayPal.

@Fred do you know if this would be possible?
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I was thinking about the possible implications because it seems that all foreign companies managed from Dubai would be subject to that tax, so if you are not able to receive money directly through the Free Zone but need another company, for example a US LLC to receive money as an intermediary, and it is subject to the 9% tax because it is managed from Dubai it is not a good setup anymore!

 

[Marzio]

That's exactly why i proposted to use a UK LTD treaty non resident.

The end result is a full UAE company with a UK facade.

 

[OffshorePhantom]

Isn't the UK LTD subject to UK 19% CIT? Or you can place it non-resident in UK and avoid paying the CIT?

About registering the UK LTD in the Free Zone I have never heard of that so I do not know if it is possible, maybe you can register a branch of the UK LTD in the Free Zone but I am not that user.

In my specific case I do not need stripe nor Paypal but only access to US banking so a US LLC would be the best.

 

[Marzio]

A UK LTD treaty non resident is a company incorporated in UK but managed from UAE.

This makes the company tax resident in two jurisdictions.

If you register the UK LTD in UAE and prove to HMRC that it's resident in UAE, according to the treaty between UK and UAE, the tax residency will be awarded to UAE and you will not owe anything to UK.

It remains to be seen if the UK LTD could be registered in a freezone

If yes you will operate a tax free UK LTD.

If not you will operate a UK LTD that pays 9% CIT

 

[OffshorePhantom]

marzio said:
A UK LTD treaty non resident is a company incorporated in UK but managed from UAE.

This makes the company tax resident in two jurisdictions.

If you register the UK LTD in UAE and prove to HMRC that it's resident in UAE, according to the treaty between UK and UAE, the tax residency will be awarded to UAE and you will not owe anything to UK.

It remains to be seen if the UK LTD could be registered in a freezone

If yes you will operate a tax free UK LTD.

If not you will operate a UK LTD that pays 9% CIT
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Ok, and why for example you cannot do the same with a US LLC which as a disregarded entity is already considered as a pass-through company from IRS side and does not any US taxes (meeting certain conditions), without needing to prove it?

 

[Marzio]

Because there's no treaty between UAE - US

 

[OffshorePhantom]

marzio said:
Because there's no treaty between UK - US
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Yes but even without a treaty between UAE-US, IRS does not tax the company if no service is performed in the US and certain conditions are met since it is considered tax transparent and not liable of any taxes on US side if no FDAP income for example.

In any case, the problem here is more generic and I do not think the setup described in the YouTube video I sent works. In addition, I do not think you can directly register a foreign company in a free zone or at least it is a very uncommon and undocumented thing.

I am very curious what will happen when the corporate tax will come with all those setups with foreign companies which are very common.

 

[Marzio]

hireblade89 said:
even without a treaty between UAE-US, IRS does not tax the company
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The poin there is not US, it is UAE.

Without a treaty in place that US LLC company will always be a foreign company managed from UAE.

With the UK LTD treaty non resident instead you are managing a UAE registered company.

hireblade89 said:
I do not think you can directly register a foreign company in a free zone
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I don't see why not, you can open a branch in a freezone. Once you get your UAE tax id for the branch you request to HMRC a tax residency transfer and you will have your very own UK LTD treaty non resident.

Last edited: Aug 4, 2022

 

[OffshorePhantom]

I think that if you are able to registrate the foreign company in a free zone there is no difference between a US LLC and a UK LTD since both will be UAE registered companies for UAE CIT purposes.

I read in IFZA website that you can register a branch of a foreign company, but not directly the entire company.
https://ifza.com/en/set-up-your-business/

 

[Marzio]

hireblade89 said:
I think that if you are able to registrate the foreign company in a free zone there is no difference between a US LLC and a UK LTD since both will be UAE registered companies for UAE CIT purposes.
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Maybe you can but even if you could you would have to operate the US LLC through the branch so you would loose all the benefits of using the LLC (access to US banks and payment processors) because if you try to operate directly the US LLC from UAE you would incur in the same problems you were talking before.

With the UK LTD treaty non resident instead this isn't the case because it's a UAE resident company.

hireblade89 said:
you can register a branch of a foreign company, but not directly the entire company.
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Registering the branch is all you have to do from UAE side of things, the rest is done on the UK side. It's the UK that awards the treaty non resident status.

 

[Fred]

hireblade89 said:
I think that if you are able to registrate the foreign company in a free zone there is no difference between a US LLC and a UK LTD since both will be UAE registered companies for UAE CIT purposes.

I read in IFZA website that you can register a branch of a foreign company, but not directly the entire company.
https://ifza.com/en/set-up-your-business/
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This.

And the Branch is a FZCO as well - so it's pointless just costs more then just setting up an independent subsidiary if you require a Dubai Branch - the UK docs need to be attested and certified by MOFA and translated to arabic etc.

Guys don't get me wrong and frame my response here however you want like some guys say "follow blind Fred" - in fact (!) black on white we have the announcement 31.01.2022 and a consultation sheet seen so far - nothing else.

You can take this conversation here the next hours, days or months but it's pointless and even worse it's hard to follow for peaople new to the topic then getting misleading information.

Same like with VAT it takes YEARS to have - in a country which was since the beginning of it's existing 0% tax - CT implemented.

Come on as if we would have starting 01.06.2023 a German "Finanzamt" in the UAE - let's keep things realistic and at that point it doesn't make sense to plan a structure ahead as too less is clear and time will tell - fair enough when this is too less clarity for the one or other to settle down in Dubai currently but be sure - it won't become easier - all over the world.

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[Marzio]

Fred said:
just costs more then just setting up an independent subsidiary if you require a Dubai Branch - the UK docs need to be attested and certified by MOFA and translated to arabic
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So it is possibile, even if it costs more.

I get your point about registering directly a UAE company but in some industries, having a LTD as a front facing company would provide the extra reassurance needed to close the deal. In the end it is good to have options (even when it come to bank accounts)

 

[Fred]

marzio said:
So it is possibile, even if it costs more.

I get your point about registering directly a UAE company but in some industries, having a LTD as a front facing company would provide the extra reassurance needed to close the deal. In the end it is good to have options (even when it come to bank accounts)
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It's not possible in the earlier context having a UK company run out of the Freezone to avoid CT or whatever.

Yes having a UK company owned by FZCO can make sense but this wasn't clear mentioned from your side - that would be the way to go and not the UK company settle down in a Freezone.

In your context it would be the FZCO owning the UK Ltd.

Anyway all good - happy weekend!

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[Marzio]

Fred said:
It's not possible in the earlier context having a UK company run out of the Freezone to avoid CT
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Ok so it's not possible then LOL 😀

Fred said:
Anyway all good - happy weekend!
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You don't pay taxes and your weekend starts on thursday. How lucky are those Dubai guys?

 

[Martin Everson]

Foreign companies managed in UAE to be subject to CT regime​

https://www.gulftoday.ae/business/2...ies-managed-in-uae-to-be-subject-to-ct-regime

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Please note my posts should not be taken as financial or tax advice. Please seek professional advice in that respect.

 

[Fred]

Martin Everson said:

Foreign companies managed in UAE to be subject to CT regime​

https://www.gulftoday.ae/business/2...ies-managed-in-uae-to-be-subject-to-ct-regime
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"This was revealed by Arslan Mushtaq, Partner Tax at athGADLANG, during an exclusive interview with Gulf Today."

".....Mushtaq added."

".....Mushtaq concluded."

".....Akbar added."

Seems like Arslan Mushtaq knows more then everyone else and even more then the Website from the Ministry of Finance reflects at the moment.

Long story short his point is basically that it's starting 01.06.2023 more then ever pointless - even for a UAE Resident - to have a Seychelles, Belize or BVI Offshore Company instead of a FZCO at 0% CT.

It's the dead of RAKICC and the other Old School Offshore Type of Companies even for the usage of a Holding Company as if it's used as a non-resident Offshore Company you won't get any Bank Account done and as soon as you are Resident the CT applies and no excemptions are in place unklike the Freezone Companies.

Last but not least it's over for the guys with some fake / remote worker Residence Visa and US LLC as already mentioned earlier here in the forum it was obviously that this won't be a sustainable longterm solution.

Congratulations so far to all our existing clients so far - you made everything right and things remain like they are.

“The freezones have robustly supported the UAE economy by attracting Foreign Direct Investment and offering ease of doing business. The CT regime has outlined the businesses operating in the freezones will be subject to the CT regime and meet the compliance obligation like registering and filing the CT return. However, the CT regime will honor the 0% tax incentive if freezone businesses maintain adequate substance and comply with all regulatory requirements. The freezone business can benefit from a 0% CT rate on income earned from transactions with businesses located outside of the UAE, income from trading with businesses located in the same or any other freezone, and income from certain regulated financial services from foreign markets.”

So your bottom line is filling a CT return which we will provide free of charge for our existiing clients - it's even becoming more attractive then ever using a FZCO as a Holding Company as well.

Well done UAE!

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