Headquarter services tax-exempt in the UAE?

[JustAnotherNomad]

I found @Don's comment here very interesting:

Post in thread 'Iran for doing business tax free'

Nov 5, 2024

Is this 20-year tax exemption the same as the 50-year tax exemption promised by UAE freezones?

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.

• Don

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?

 

[DSoz]

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

 

[JustAnotherNomad]

Here's the official definition:

Headquarter services to Related Parties includes the administering, overseeing and managing of
Business Activities of Related Parties, including the provision of senior and general management,
captive insurance services, administrative services, procurement services, business planning and
development, risk management, coordination of group activities, and in general incurring
expenditures on behalf of Related Parties and providing other support services to Related Parties.

Source: https://mof.gov.ae/wp-content/uploa...ifying-Activities-and-Excluded-Activities.pdf

 

[Marzio]

But what if the UAE company subcontracts the actual SEO marketing work to firms in India and Pakistan?

Those are not related parties.

 

[ilke]

Those are not related parties.

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 individuals outside the country doing it).

 

[Marzio]

UAE company only acting as the 'connector' and management service.

UAE company should act as connector only between related parties.

So all the UAE company is does is coordinate the work between the sales offices and the partner firms?

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

 

[daniels27]

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)?

 

[Marzio]

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.

 

[JustAnotherNomad]

Those are not related parties.

Correct, it would be providing procurement services (procuring SEO agencies from India and Pakistan) to the subsidiaries (related parties).

 

[JustAnotherNomad]

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.

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 the subsidiaries to source them.
Also the demand may vary across markets.
So the UAE headquarters can vet/source the SEO marketers from India and Pakistan and negotiate deals (buying in bulk on behalf of the group) - and then the subsidiaries can buy directly from the headquarters. The headquarters don't work with clients at all.

Shouldn't that work?

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.

Sure, it wouldn't be operative in the sense that it would be working with clients. Only procuring 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, but the way I know them, they will just refer to the official law and not issue any binding ruling.

 

[Marzio]

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.

 

[daniels27]

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.

In other words, you cannot use it for profit shifting that way?

 

[JustAnotherNomad]

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.

Sure, and that should be fine, "incurring expenditures on behalf of Related Parties" is explicitly mentioned as part of headquarter services.

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.

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 service provider of free zone, they will all tell you it's totally fine (since they want to sell you a setup), and if you ask the FTA, probably they will just point you to the stuff I already quoted.

 

[Marzio]

incurring expenditures on behalf of Related Parties" is explicitly mentioned

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.

Then how would UAEco make money to fund this?

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

That's not its job.

Its job is to get the most favourable conditions to subsidiaries.

 

[JustAnotherNomad]

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.

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 or terrible. So there's a significant value add.

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

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

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

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

Its employees all work for free because the weather is nice?

 

[Marzio]

Especially with India and Pakistan, quality can be great or terrible. So there's a significant value add.

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.

It saves them a lot of time, it frees up resources.

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.

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

True but the question is why headquarter should 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 is more long term.

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

Its employees all work for free because the weather is nice?

Employees are paid from subsidiaries profits.

If there are no profits there's no reason to have employees.

 

[JustAnotherNomad]

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.

But they are - adding bargaining power and saving time.

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.

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

True but the question is why headquarter should 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?

Well, to at least cover costs?
But that is beside the point - transfer pricing rules are only a concern in the countries where the subsidiaries are located.
The question here was about the 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 for the headquarter to save the group taxes. That's a service as well.

Headquarter's winning game is more long term.

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

But how do they get paid?

Employees are paid from subsidiaries profits.

How? They are employed by UAEco. The money has to flow into UAEco in some way.

 

[Marzio]

How? They are employed by UAEco. The 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.

 

[JustAnotherNomad]

I already told you how, when UAEco receives dividends from subsidiaries and to receive dividends from subsidiaries, subsidiaries have to make profits.

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.

 

[daniels27]

I think that there is no definition of procurement services in the Corporate Tax law. I guess it is a bit like this guide explains it and it remains unclear:
https://www.pgplaw.com/upload/ibloc...asfurt4et2g2lku/Procuring-vs-Distribution.pdf