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Headquarter services tax-exempt in the UAE?

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JustAnotherNomad

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I found @Don's comment here very interesting:

[IMG alt="Don"]http://localhost/data/avatars/s/20/20196.jpg?1727588547[/IMG]

Post in thread 'Iran for doing business tax free'​

Nov 5, 2024
ecool said:
ecool said:
Is this 20-year tax exemption the same as the 50-year tax exemption promised by UAE freezones?
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It's not exactly the same. Nowadays, in the UAE, rather limited activities are exempt from tax (also referred to as qualifying activities), so in Iran the scope is broader.

However, you can still have your UAE entity provide headquarters services (tax-free in the UAE) to affiliated entities, e.g., in Iran.

To do business globally with an Iranian company, you might need to have intermediary entities in other jurisdictions.

Indeed it seems like "Headquarter services to Related Parties" are on the list of "qualifying" (tax-exempt) activities.
Does anyone have more insight how this is defined?

Say you are an SEO agency.
You have sales offices (local subsidiaries) in different high-tax countries that simply resell the services of the UAE company.
Could this be seen as "headquarter services to related parties"? I guess not if the actual SEO marketing is done from the UAE (SEO marketing is not a qualifying activity and the company needs to have 95%+ qualifying activities to get the tax-free status).
But what if the UAE company subcontracts the actual SEO marketing work to firms in India and Pakistan? So all the UAE company is does is coordinate the work between the sales offices and the partner firms? Could that be headquarter services?
 
This is quite interesting and might be a good way to solve the complex issue‌ of PE with other UAE companies if you have a US LLC for example
 
I believe he is suggesting‌ related parties on the other end – as in there being foreign related entities that‍ sell this service and the UAE company only acting as the 'connector' and management service.⁠ The outsourcing of SEO work is to make it less ambiguous whether the UAE company⁤ is really providing a headquarter service or actually just doing SEO with a different name⁣ (like this, it would be visible that the UAE company does not have employees or⁢ suitable equipment to conduct such a service, and easier to demonstrate there are other individuals︀ outside the country doing it).
 
UAE company should act as connector only between related parties.

Since the official definition says "Headquarter services to Related Parties⁤" partner firms are outside the scope of the headquarter.

Headquarter only deals with subsidiaries⁣ providing management, financing and so on.

The moment headquarter deals with unrelated party it becomes⁢ a taxable event in UAE
 
In other words, that financing can only be from internal cash. If they get external⁠ funding, it would become taxable?

And can the headquarters provide non-management services, like IT development⁤ or customer support (internally)?
 
Headquarter is essentially a final holding that receives dividends from subsidiaries so one of its‌ job could be to reinvest income to support financially a subsidiary in a new area.‍

They made it very clear from the official definition that headquarter can't do any kind⁠ of operative work but can only do strategic kind of work.
 
Correct, it would be providing‌ procurement services (procuring SEO agencies from India and Pakistan) to the subsidiaries (related parties).
 
We have "Treasury and financing services to Related Parties" as⁠ a separate qualifying activity, so I think this is different.

Yes, it can't be operative,⁤ so it can't work with clients.
But to take my SEO agency example - you⁣ could have subsidiaries in different markets that sell the SEO services.
The company wants to⁢ outsource this to marketers from India and Pakistan, but it wouldn't make sense for the︀ subsidiaries to source them.
Also the demand may vary across markets.
So the UAE headquarters︁ can vet/source the SEO marketers from India and Pakistan and negotiate deals (buying in bulk︂ on behalf of the group) - and then the subsidiaries can buy directly from the︃ headquarters. The headquarters don't work with clients at all.

Shouldn't that work?

Sure, it︅ wouldn't be operative in the sense that it would be working with clients. Only procuring︆ the needed services for the subsidiaries.
I think it would fit the description perfectly.

But how to get this clarified? It's possible to ask for clarification from the FTA, but︇ the way I know them, they will just refer to the official law and not︈ issue any binding ruling.
 
If subisdiaries buy directly from headquarter it means that headquarter bought from those indian SEO‌ agencies first to be able to resell to subsidiaries so headquarter acts as an intermediary.‍

I could be wrong but procurement service would be if UAEco negotiate a deal with⁠ SEO agencies and then each subsidiary will buy services from SEO agencies at headquarter's negotiated⁤ price.
 
Sure, and that should be fine, "incurring expenditures on behalf⁠ of Related Parties" is explicitly mentioned as part of headquarter services.

Then how would UAEco make money to fund this? A fixed fee for⁢ procurement services? Then why would that be allowed, but not directly working as an intermediary?︀
I still think this should be fine. But as usual, if you ask a service︁ provider of free zone, they will all tell you it's totally fine (since they want︂ to sell you a setup), and if you ask the FTA, probably they will just︃ point you to the stuff I already quoted.
 
Yes but this surely isn't intented as a way to shift profits by reselling services‍ at higher cost to subsidiaries because it wouldn't make sense for the subsidiary to pay⁠ you more than would have paid to the unrelated party.

In a genuine situation and⁤ if the quality of service is equal, the subsidiary would have bought the service directly⁣ from the indian SEO agency.

It makes sense when your only aim is to lower⁢ subsidiaries taxation but by doing so you are robbing subsidiaries from needed cashflow.

This is the︁ point, UAEco doesn't have to necessarily make money.

That's not its job.

Its job is︂ to get the most favourable conditions to subsidiaries.
 
No, the subsidiary would have⁣ to do the vetting, sourcing, negotiations etc.
They don't have to think about this -⁢ UAEco takes care of this. Especially with India and Pakistan, quality can be great or︀ terrible. So there's a significant value add.

But anyway, that would be a matter of︁ transfer pricing in the subsidiary country. The UAE won't care about this.
The question is︂ whether the services fall under this category or not only.

It saves them a lot of time,︅ it frees up resources. And the group can negotiate better deals and distribute supplies across︆ the subsidiaries.

Its employees all work for free because the weather is nice?
 
That's defintely true, i personally always had terrible‍ experiences but the point here is that headquarter's job is to save subsidiaries money, not⁠ the reverse.

You want to ave time and resources? Develop some kind of SEO⁣ software by leveraging a tool like N8N with RPA and license that SEO software to⁢ subsidiaries is a better way to shift profits.

True but the question is why headquarter should︂ resell with a markup to subsidiaries when its job is to get subsidiaries better deals,︃ better prices, better payment terms.

Oh, wait. To make profits right? 😛

Headquarter's winning game is︄ more long term.

Headquarter negotiate better deal with vetted SEO services > subsidiary pays less︅ for the services than competitors in its location > subsidiary has higher margings so it︆ can buy more ads > more clients mean more SEO services = headquarter gets paid.︇

Employees are paid from subsidiaries profits.

If there are no profits there's no reason︉ to have employees.
 
But they are - adding bargaining power and saving time.

There are always better business plans. But what about this⁢ specific one?

Well, to at least︂ cover costs?
But that is beside the point - transfer pricing rules are only a︃ concern in the countries where the subsidiaries are located.
The question here was about the︄ tax treatment in the UAE.
And it would be pointless to have this 0% "QFZP"︅ regime if the company wasn't allowed to have profits.
And it would make sense for︆ the headquarter to save the group taxes. That's a service as well. 😉

But how do they get paid?

How? They are employed by UAEco. The︊ money has to flow into UAEco in some way.
 
I already told you how, when UAEco receives dividends‍ from subsidiaries and to receive dividends from subsidiaries, subsidiaries have to make profits.

That's why⁠ you don't start with UAEco from day one.

No company has headquarter from day one,⁤ you build it overtime.

If you want to start with a headquarter from day one⁣ then you need the cash reserves to pay for ongoing costs ike employees (which will⁢ be only you i guess), office space, utility bills and so on.
 
Doesn't make sense‍ - dividends are a reward that you get for investing your money into something.
But in this case, the headquarter is providing a service, which it should be paid for.⁠
 
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