UAE clarification of Freezone Qualifying Income

[alessio]

I understand that you are emphasizing the positive aspects of Dubai's development and suggesting that focusing on the negative side of taxation overlooks the international relations and progress the city has made.
You are now definitely in 9 of June in your mind and try to analyze situation focusing on the potentially bad side of bringing taxation while such places are visionary in their moves which lead to a successful & fast economic development

Not one world about real international relation, financial flow improvement and global improvement of making Dubai a real player in the "current" world.

Dubai's owner made their place what it is within a dozen of years only and you should be really over confident coming in a forum and by your own perspective of life thinking you can get better analyze of the best advisor around Dubai's rulers regarding their financial development.

"Almost all companies in these free zones will be affected by the tax. This includes small businesses, startups, and multinational corporations. The tax will make it more expensive for these companies to operate in Dubai, and it could lead to job losses and a decline in investment."

-> If you want to play big as a International business Hub, you can't stay on your side not even asking people to do proper accounting )) As a reminder - we are here for most of us entrepreneur - You are speaking about companies which are starting from 0 and should create proper history records. Leveraging in banking can offer the opportunity to accelerate capital creation.

Dubai's taxation enjoys of SBR (Small Business Relief) - exempted up to 750K USD revenu - or 100K USD threshold tax means Small Companies / Sole entrepreneur will not be really impacted.

"The UAE government is gambling that the tech and e-commerce sector will still be able to thrive in Dubai despite the tax. However, this is a risky gamble. There are many other attractive places for tech companies to set up shop, and the UAE government could easily lose out on business to its competitors."

Which one ?

"The recent influx of Russian population to Dubai may have given the government some confidence. However, this influx is not sustainable in the long term. The UAE government needs to focus on creating a business-friendly environment for all companies, not just those owned by Russians. "

Russians got any exemption of corporate tax ?

 

[kekmaw]

Well, this sucks.

But as long as there are no laws in place regarding how much a sole owner can take out as a salary, it shouldn't be an issue to stay below the 375k AED bracket.

Whether that is a $200k salary or a $5M salary.

At least a temporary solution for most of us that are "stuck" until we figure out something else.

Am I right?

 

[troubled soul]

Well, this sucks.

But as long as there are no laws in place regarding how much a sole owner can take out as a salary, it shouldn't be an issue to stay below the 375k AED bracket.

Whether that is a $200k salary or a $5M salary.

At least a temporary solution for most of us that are "stuck" until we figure out something else.

Am I right?

Right....wait and watch.....May Government issue new notification for Tax Free status....Hope for the best....It is monarchy....Decision can be change in seconds.......Finger crossed

 

[alexrinse]

If a Free Zone Person earns income from ‘Excluded Activities’ or earns any other income that is not ‘Qualifying Income’, they will be disqualified from the Free Zone Corporate Tax regime. However, there are de minimis requirements which allow the non-qualifying revenue earned by a Free Zone Person to not exceed the lower of either 5% of their total revenue or AED 5,000,000. If these de minimis requirements are not met or the Free Zone Person does not continue to meet any of the other qualifying conditions, the Free Zone Person will no longer be able to benefit from the Free Zone Corporate Tax regime for a minimum period of five years. During this period, the Free Zone Person will be treated as an ordinary Taxable Person and be subject to Corporate Tax at the rate of 9% on their Taxable Income above AED 375,00012.

The law also requires Free Zone Persons to have adequate substance in the UAE to be treated as a Qualifying Free Zone Person (QFZP). This includes performing core income-generating activities in a Free Zone, having adequate assets and an adequate number of qualifying employees, and incurring an adequate amount of operating expenditure2. Furthermore, Free Zone Persons seeking to be treated as a QFZP are required to prepare audited financial statements for the tax year2.

Based on this information, if your consulting business is not considered a 'Qualifying Activity', your income from the US clients could be subject to the 9% corporate tax if it exceeds the de minimis threshold.

This applies to all online/consulting/marketing businesses

Sounds like the de minimus is irrelevant if your activities don't qualify you as a QFZP - then you fall under the normal tax regime @9% above 375k.

 

[stronco]

The limits we are talking about is 375k NET PROFIT per fiscal year, correct? There are no limits on gross revenue?

Can someone confirm this? I am finding conflicting information.

 

[alessio]

Well, this sucks.

But as long as there are no laws in place regarding how much a sole owner can take out as a salary, it shouldn't be an issue to stay below the 375k AED bracket.

Whether that is a $200k salary or a $5M salary.

At least a temporary solution for most of us that are "stuck" until we figure out something else.

Am I right?

At arm's length -

Of course you can't cash out your net income this way - but reduce your % absolutely

The limits we are talking about is 375k NET PROFIT per fiscal year, correct? There are no limits on gross revenue?

Can someone confirm this? I am finding conflicting information.

Correct. We are talking about net profit

 

[Marzio]

By imposing a tax on these companies, the UAE government is essentially shooting itself in the foot.

UAE government is smarter than the majority in this forum thinks.

They created a giant mousetrap like Microsoft did way back when they deliberately let people install on their PC illegal copies of Win XP.

The result?

95% of world's computers were running Microsoft software.

What happened when they released software updates?

You had to pay for the update.

At the time there wasn't another option because the majority of software where built for PC.

UAE is doing the same: they welcomed all sort of businesses with the 0% CIT promise but i'm 99% sure they knew that this was a temporary promotion like phone companies do.

And now they are waking up everybody to the reality: pay 9% CIT

Do you think people will move from Dubai to not pay CIT?

To go where?

To some 10 square foot island in the middle of nowhere?

There are zero better options.

The only potential one is Malta at 5% but i don't see millionaires moving there to save 4% on taxes and live a miserable life because, let's be real, Malta is not everybody's cup of tea.

If you take everyhting in consideration the force of inertia will win and people will stay in UAE because it's still the best option for those who want to minimize taxes.

 

[stivemoose]

Hi there,
I've gone through the entire post, but I feel like there's still something I'm not quite grasping. I'm in the consulting business, providing IT services internationally, not in the UAE.

If my Free Zone (FZ) company, doesn't engage in any trading activities during the year, and also create a Limited Liability Company (LLC) in Delaware, which I use for my professional dealings isn't that the best solution? Becuase If I distribute profits from the Delaware LLC directly to my personal bank account as dividends, I'd be able to bypass the 9% tax, given the distinct nature of these two entities.

Is there something I'm not accounting for in this scenario?

 

[troubled soul]

Suppose I establish a Free Zone (FZ) company, which doesn't engage in any trading activities during the year, and also create a Limited Liability Company (LLC) in Delaware, which I use for my professional dealings. If I distribute profits from the Delaware LLC directly to my personal bank account as dividends, what would be the implications for corporate tax?

It is called your personal income....and It will not subjected to New CIT......Yes...Dubai is still personal tax Free country......only plus point left in Dubai.....

 

[Au999]

Hi there,
I've gone through the entire post, but I feel like there's still something I'm not quite grasping. I'm in the consulting business, providing IT services internationally, not in the UAE.

If my Free Zone (FZ) company, doesn't engage in any trading activities during the year, and also create a Limited Liability Company (LLC) in Delaware, which I use for my professional dealings isn't that the best solution? Becuase If I distribute profits from the Delaware LLC directly to my personal bank account as dividends, I'd be able to bypass the 9% tax, given the distinct nature of these two entities.

Is there something I'm not accounting for in this scenario?

Single member us LLC is passthrough, so UAE would consider the earnings of the LLC to be either yours if you were the single member, or earnings of the FZCO if it was the single member.

It's my understanding that the new rules would catch you in either case as the LLC income is not tax free salary but becomes by magic onshore income. I may be wrong

 

[stivemoose]

It is called your personal income....and It will not subjected to New CIT......Yes...Dubai is still personal tax Free country......only plus point left in Dubai.....

So to keep the setup tax-free need to maintain all the trading activities from the LLC and not make any connection with the free zone company, jus that?

Single member us LLC is passthrough, so UAE would consider the earnings of the LLC to be either yours if you were the single member, or earnings of the FZCO if it was the single member.

It's my understanding that the new rules would catch you in either case as the LLC income is not tax free salary but becomes by magic onshore income. I may be wrong

This can be but it's a very strange stuff... If I don't work in UAE how it can be..

 

[troubled soul]

So to keep the setup tax-free need to maintain all the trading activities from the LLC and not make any connection with the free zone company, jus that?

Yes....Even IF you open USA LLC as a branch of Dubai freezone.......USA LLC income is still tax free as per New CIT

 

[alessio]

Is there any specialist to approach the sense of manage & controlled in the State ?

Means the US LLC owned by sole entrepreneur in FZ will be also taxed on the potential dividends ?

 

[Au999]

This can be but it's a very strange stuff... If I don't work in UAE how it can be..

Sorry I should've said that's if you're personally tax resident in UAE

 

[JackAlabama]

Sorry I should've said that's if you're personally tax resident in UAE

Which you become if present over 90 days per calendar year. So it could lead to the consequence of people reducing their time inside the uae?

 

[Au999]

Is there any specialist to approach the sense of manage & controlled in the State ?

Means the US LLC owned by sole entrepreneur in FZ will be also taxed on the potential dividends ?


View attachment 4866

If it's a single member LLC as most folks use then there are not dividends - the whole profits are considered pass through to the single member wherever they may be tax resident

 

[bnpsu]

UAE government is smarter than the majority in this forum thinks.

They created a giant mousetrap like Microsoft did way back when they deliberately let people install on their PC illegal copies of Win XP.

The result?

95% of world's computers were running Microsoft software.

What happened when they released software updates?

You had to pay for the update.

At the time there wasn't another option because the majority of software where built for PC.

UAE is doing the same: they welcomed all sort of businesses with the 0% CIT promise but i'm 99% sure they knew that this was a temporary promotion like phone companies do.

And now they are waking up everybody to the reality: pay 9% CIT

Do you think people will move from Dubai to not pay CIT?

To go where?

To some 10 square foot island in the middle of nowhere?

There are zero better options.

The only potential one is Malta at 5% but i don't see millionaires moving there to save 4% on taxes and live a miserable life because, let's be real, Malta is not everybody's cup of tea.

If you take everyhting in consideration the force of inertia will win and people will stay in UAE because it's still the best option for those who want to minimize taxes.

There are other options... how about Panama or Thailand?

Hi there,
I've gone through the entire post, but I feel like there's still something I'm not quite grasping. I'm in the consulting business, providing IT services internationally, not in the UAE.

If my Free Zone (FZ) company, doesn't engage in any trading activities during the year, and also create a Limited Liability Company (LLC) in Delaware, which I use for my professional dealings isn't that the best solution? Becuase If I distribute profits from the Delaware LLC directly to my personal bank account as dividends, I'd be able to bypass the 9% tax, given the distinct nature of these two entities.

Is there something I'm not accounting for in this scenario?

UAE doesn't recognize US LLC's as tax transparent. So it sees it as a corporation for tax purposes. Since they're introducing management and control rules, it'll be taxed as if a local UAE company if it's managed here.

 

[Cloudbanck]

If it's a single member LLC as most folks use then there are not dividends - the whole profits are considered pass through to the single member wherever they may be tax resident

The US considers anything passed from the single member LLC to the owner as "distributions" which are neither salary nor dividends.

The country of tax residence of the owner however, may very well treat such flows differently. Totally depends from country to country, but for the UAE this is has not been clarified.

The limits we are talking about is 375k NET PROFIT per fiscal year, correct? There are no limits on gross revenue?

Well, beside the 375k profit exemption, there seems to also be an exemption for turnover below 1M AED . At least it's mentioned in the following articles:

https://gulfnews.com/business/corpo...n-to-pay-corporate-tax-in-uae-1.1684318157806
https://www.trenchlaw.com/the-minis...r-annual-turnover-exceeds-dh1-million-272294/
https://www.thenationalnews.com/bus...rate-tax-only-if-their-turnover-exceeds-dh1m/
https://www.gulf-insider.com/uae-to-introduce-corporation-tax/

 

[Marzio]

There are other options... how about Panama or Thailand?

Yes those could be options for a solopreneur but are also dangerous options because:

1. Panama is a territorial taxation country and if you manage your offshore LLC from there technically you are generating local sourced income but up to this point Panama is closing eyes.

2. In Thai you are not allowed to work but up to this point Thailand is closing eyes too and let farangs do their thing because they spend money in the country but things could change very quickly.

https://thethaiger.com/news/busines...cial-data-to-combat-transnational-tax-evasion
If you need to hire people then the only available option to this day to pay 0% tax is Georgia virtual zone with a UAE holding.

 

[bnpsu]

Yes those could be options for a solopreneur but are also dangerous options because:

1. Panama is a territorial taxation country and if you manage your offshore LLC from there technically you are generating local sourced income but up to this point Panama is closing eyes.

2. In Thai you are not allowed to work but up to this point Thailand is closing eyes too and let farangs do their thing because they spend money in the country but things could change very quickly.

https://thethaiger.com/news/busines...cial-data-to-combat-transnational-tax-evasion
If you need to hire people then the only available option to this day to pay 0% tax is Georgia virtual zone with a UAE holding.

I think you can manage from Thailand right? Since there are no management and control rules. What's the difference managing and working?