UAE clarification of Freezone Qualifying Income

JustAnotherNomad · Jun 3, 2023

I still think something like a US LLC with a nominee director can work well with UAE residency, especially for digital nomads.
Then you just pay out "dividends" (not a salary), the UAE would never know or care if you don't have local clients.
Seems to me like a cleaner solution than registering a UAE branch and paying a high salary to avoid the CIT.
But that's if you want to live in Dubai or need a tax residency certificate. Otherwise, as a nomad, it might be easier to just go with something like Paraguay or Thailand.

The UAE is a regulatory nightmare. You see it already with how they introduced the corporate tax.
I know someone who used to have a company in a very popular freezone. When he tried to close it, he had to sign papers stating that he was taking over all of the company's liabilities as his personal risk. Uhm, what's the point with a limited liability company again? And before they closed it, they had some organizational change, which should have brought the fees down (I don't remember exactly, something like 2 instead of 3 shareholders) - "No, once you are on the higher fee level, we never lower our fees again"
That's the kind of stuff you have to deal with. So even if you can still avoid taxes by paying a high salary, I would think twice if there's not some other way to set things up.
The UAE is a great country to live in - and a terrible country to do business in. I mean, rents are still paid with cheques...

lacomaco · Jun 4, 2023

azb1 said:
Perfect wording......Even In wildest dream they should not think of taxing freezone....that what is the meaning of freezone ?
May some lazy official write down rules in hurry.....wait and watch

What is the meaning of freezone? You are free to decide to use them or not

JustAnotherNomad said:
I also can imagine that there will be some way around this, like Malta's 35% head corporate tax rate, which nobody pays, but looks good on paper.
For now, you can just pay out a high salary. Or just an offshore company with a nominee and receive dividends.

Why would an offshore company with nominee and dividend payout a solution against the 9% corporate income tax to earn the profits?

jafo said:
For example?

Hungary at 9% corp tax and no withholding tax on dividends

fshore · Jun 4, 2023

JustAnotherNomad said:
I still think something like a US LLC with a nominee director can work well with UAE residency, especially for digital nomads.
Then you just pay out "dividends" (not a salary), the UAE would never know or care if you don't have local clients.
Seems to me like a cleaner solution than registering a UAE branch and paying a high salary to avoid the CIT.
But that's if you want to live in Dubai or need a tax residency certificate. Otherwise, as a nomad, it might be easier to just go with something like Paraguay or Thailand.

The UAE is a regulatory nightmare. You see it already with how they introduced the corporate tax.
I know someone who used to have a company in a very popular freezone. When he tried to close it, he had to sign papers stating that he was taking over all of the company's liabilities as his personal risk. Uhm, what's the point with a limited liability company again? And before they closed it, they had some organizational change, which should have brought the fees down (I don't remember exactly, something like 2 instead of 3 shareholders) - "No, once you are on the higher fee level, we never lower our fees again"
That's the kind of stuff you have to deal with. So even if you can still avoid taxes by paying a high salary, I would think twice if there's not some other way to set things up.
The UAE is a great country to live in - and a terrible country to do business in. I mean, rents are still paid with cheques...

You mean a nominee manager? as us llc doesn't have directors.
How would it matter if the income is dividends or pass through income? I assume you can call it dividends from the llc, while irs wouldn't view it as dividends, but UAE might accept it as dividends if the llc papers call it dividends. However would you have to tell UAE about this income?
What would be the issue if you call it salary?

algotrader · Jun 4, 2023

JustAnotherNomad said:
When he tried to close it, he had to sign papers stating that he was taking over all of the company's liabilities as his personal risk.

That would be an absolute no-go for me. The new tax rules are in fact a hidden liability because nobody understands exactly whether and how they apply to their business. These rules can theoretically be changed retroactively by ministerial decree together with the rate. So, everyone closing a company there better leaves the country or might face jail if he cannot or doesn't want to pay retroactive tax bills.

bnpsu · Jun 4, 2023

what about holding investments personally? Still 0 tax

lifeisfun · Jun 4, 2023

The prohibition of retroactivity in law is part of the principle of predictability in any civilized country. Every civilized country has a ban on legal retroactivity enshrined in the basics of law (many even in the constitution). A country that announces tax regulations during the current tax year is legally unstable and unsuitable for business.

TheCryptoAnt · Jun 4, 2023

what a ginormous amount of crap

Ive been using UAE as my banking center for a minute but tbh this is getting retarded. All this crap + the turbo loops Ive to go through to cash out crypto are making this place stink.

Imma open an account at UOB/DBS and move back to Thailand permanently.

JustAnotherNomad · Jun 4, 2023

fshore said:
You mean a nominee manager? as us llc doesn't have directors.

Tomato tomato

fshore said:
How would it matter if the income is dividends or pass through income? I assume you can call it dividends from the llc, while irs wouldn't view it as dividends, but UAE might accept it as dividends if the llc papers call it dividends.

At least on paper, the UAE now has rules similar to high-tax Western countries: A company that is effectively managed from the UAE is tax resident in the UAE and has to pay 9% corporate income tax.
This would make it easier to explain that the company isn't managed from the UAE.

fshore said:
However would you have to tell UAE about this income?

Look at this thread. There is no clear information on anything.
The only thing that is relatively clear still is that there is no requirement to declare passive investment income.

fshore said:
What would be the issue if you call it salary?

If you receive a salary as a UAE resident, couldn't that be interpreted as you working from the UAE? Maybe you're managing the company from the UAE?
Even if you aren't managing it, if you are working from the UAE, you would probably need a license (which then would also trigger corporate tax).
I bet most people here are unaware, but even if you just want to start selling stuff on eBay, you need to get an ecommerce license in the UAE.

Mercury · Jun 4, 2023

TheCryptoAnt said:
Imma open an account at UOB/DBS and move back to Thailand permanently.

Indeed, as a Thai resident cashing out crypto to an offshore bank account is for now a cost-effective and headache-less option.
If it's your case, was it easy to achieve priority banking with UOB/DBS/SC/Citi... (I assume in SG but could be in HK as well) having (clean) crypto as source of funds? How much money did you have to park/invest there?

Mike Forman · Jun 4, 2023

This is xoredt

jafo said:
Yes, but for certain people, we still have an area where we can remain as tax residents of nowhere. Think of a citizen of the Bahamas (with a Bahamian passport) who doesn't live full-time in the Bahamas and travels around. Has NO home overseas, except in the Bahamas. He may NOT even be a tax resident of the Bahamas due to traveling +11 months out of the year. Sometimes, this person doesn't return home for 3 years.

This person really has NO tax liability anywhere, whether the tax-exempt parasites at the OECD like it or not. Wouldn't you agree?

This is indeed the case if you are a resident or citizen from a non agressive jurisdiction. If you have ties with the EU or US it becomes much more complex and those countries agressively go after someone if they believe that person owns them tax (and they believe that rapidly) .

An EU citizen setting-up something in Hong Kong, Dubai or other tax heavens is assumed by EU tax authorities to do so with the sole purpose to avoid/evade taxes. So in this case you better make sure you have substance and you actually live in Hong Kong, UAE and/or have no ties with EU anymore, which means you have an actual real (not just paper) residence and vital interest outside EU in a non tax aggressive jurisdiction.

lifeisfun · Jun 4, 2023

JustAnotherNomad said:
Tomato tomato

At least on paper, the UAE now has rules similar to high-tax Western countries: A company that is effectively managed from the UAE is tax resident in the UAE and has to pay 9% corporate income tax.
This would make it easier to explain that the company isn't managed from the UAE.

Look at this thread. There is no clear information on anything.
The only thing that is relatively clear still is that there is no requirement to declare passive investment income.

If you receive a salary as a UAE resident, couldn't that be interpreted as you working from the UAE? Maybe you're managing the company from the UAE?
Even if you aren't managing it, if you are working from the UAE, you would probably need a license (which then would also trigger corporate tax).
I bet most people here are unaware, but even if you just want to start selling stuff on eBay, you need to get an ecommerce license in the UAE.

US LLC which is considered to be a tax resident in UAE will be considered as a local partnership. Even almost no one uses it, this structure exists in UAE law. Partnership is tax transparent in the UAE. All profits will be considered as business profit of the sole proprietors. Even non licensed sole proprietor working in the UAE will be taxed by a CIT.
So, US LLC will be not taxes in the UAE itself. All profits will be considered as business source profit of the partners which will be taxed in the UAE.

JustAnotherNomad · Jun 4, 2023

Have a look at this FAQ:
https://mof.gov.ae/corporate-tax-faq/
I still believe that a transparent US LLC would not be taxed in the UAE if it has no business activity/it's not managed in the UAE.

48. How will the UAE CT regime apply to partnerships?

The Corporate Tax Law makes a distinction between unincorporated and incorporated partnerships.
“Unincorporated Partnerships” (as defined in the Corporate Tax Law) are essentially a contractual relationship between two or more persons, as opposed to being a distinct juridical person separate from their partners / members. Unincorporated partnerships are treated as ‘transparent’ for UAE CT purposes. This means that an unincorporated partnership is not subject to UAE CT in its own right. Instead, each partner is subject to UAE CT on their share of the income from the business conducted through the partnership.
Incorporated partnerships include 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. Such partnerships are subject to CT in the same manner as a corporate entity (see Section D ‘Juridical persons’).

44. Are foreign juridical persons subject to UAE CT in the same way as a UAE resident person?

No (see question 68 ‘Will foreign companies and other juridical persons be subject to UAE CT?’), unless the foreign juridical person is “effectively managed and controlled” in the UAE and treated as a resident entity for UAE CT purposes.

45. When is a foreign juridical person considered “effectively managed and controlled” in the UAE?

This will need to be assessed on a case by case basis, and may look at the location where the key decision makers, such as the directors, make the strategic decisions affecting the juridical person.

68. Will foreign companies and other juridical persons be subject to UAE CT?

Foreign entities that operate in the UAE through a permanent establishment or that are considered resident in the UAE for CT purposes will be subject to UAE CT. Merely earning UAE sourced income would not trigger CT payable or require the foreign entity to register and file for UAE CT.

69. When will a non-resident person be subject to CT?

A non-resident person will be subject to UAE CT if the non-resident person has a permanent establishment in the UAE or earns income sourced from the UAE (subject to 0% taxation).
Income will generally be considered to be sourced from the UAE where it is derived from a UAE resident, a UAE Permanent Establishment, or the income is derived from activities performed or from assets located, capital invested and rights used in the UAE.

70. When will a foreign company be considered a resident person?
A foreign juridical person may be treated as a UAE resident for CT purposes and subject to UAE CT on its income sourced from both the UAE and abroad if it is effectively managed and controlled in the UAE (see above).

73. How do I know if I have a Permanent Establishment in the UAE?

Generally, a foreign person will have a Permanent Establishment in the UAE if:
● It has a fixed or permanent place in the UAE through which the business of the foreign person is carried on; or
● There is a person who has and habitually exercises an authority to conduct business in the UAE on behalf of the foreign person.
A fixed place of business would not be considered a Permanent Establishment if it is used solely to store, display or deliver goods or merchandise belonging to the foreign person or to conduct any activities that are of a preparatory or auxiliary nature.
A Permanent Establishment would not arise if the person who has and habitually exercises an authority to conduct business in the UAE on behalf of the foreign person acts as an independent agent.
Where relevant, the application of an international agreement should be taken into consideration when determining whether a permanent establishment exists.

75. What determines whether income is sourced from the UAE?

Income will be considered to be sourced from the UAE, if:
● the income is derived from a UAE resident;
● the income derived is attributed to a Permanent Establishment in the UAE of a non-UAE resident; or
● the income is derived from activities performed, assets located, capital invested, rights used or services performed or benefited from in the UAE.
The Corporate Tax Law includes a non-exhaustive list of income that is considered as being sourced in the UAE.
A Cabinet Decision may be issued in due course specifying the types of UAE sourced income subject to withholding tax. The UAE withholding tax rate is set at 0%.

Peter2023 · Jun 4, 2023

I own a holding company in a Dubai free zone that owns properties in my home country in Western Europe.

The UAE company currently pays 25% tax on these rents in my home country. Is it also liable now to a further 9% tax in Dubai?

Fred · Jun 4, 2023

lifeisfun said:
Fred will defend UAE as "the best solution for everything" as long as possible. His business is to sell IFZA freezone company formation service + visa. He is a main advertiser here.
Even when freezone business will not make sense to the most of the business world any more, he will defend UAE for a years. Why would he destroy his business and loose all the money paid for advertising here?

Condition with relevant substance is exactly set in a law. UAE position is absolutely exact. There are no unanswered questions any more. But Fred will argue that we have ro wait for more and more informations. To keep his business alive as lonf as possible.

What is freezone company usable for? For obtaining UAE visa. It was worth until UAE was not in a grey list. There are some better options now. Freezone company does not make any sense for international business from 1st June 2023.

In Germany we have a wording for something like your post:

"Keep the church in the village".

We are settled since years not only on the business side but on the personal side as well in Dubai and this won't change anytime soon.

Not sure what you think how many millions we are paying for supporting the Forum but we are fine - don't worry - we don't need to sell anything to anyone.

I don't know why there is sometimes so much negative energy involved especially against us and me as a person while in fact hundreds of people with our content provided here got settled in the UAE the past 3 years.

It's just fair that we earned something from it as well and in return we gave more and more back here.

If your mentioned KPI's here on your profile are correct - you are 41 and from Europe - I expect something different from someone in your age.

bedouin said:
Whilst we all take professional's in the company setup biz' advice with respect, we do have to keep in mind they have -understandably so- an agenda, and using their sole opinion as an absolute enlightening guide should be taken with caution.

For what it's worth, I will share the reply our law/tax advisor firm (the one that runs accounting etc for our business): he basically said that indeed typical digital FZ companies are subject to CT, but he also said he was expecting clarification and that he was reasonably convinced that there would be a legal exception added. His advice was to wait until further clarifications are released.

So it does seem indeed we've yet to wait to see exactly how bad they hammer digital FZ companies etc (eg, non Shipyard-oriented companies).

Second that - exactly what I mentioned in my earlier post.

Keeping a cool head and seeing things rational.

jafo · Jun 4, 2023

Fred said:
In Germany we have a wording for something like your post:

"Keep the church in the village".

We are settled since years not only on the business side but on the personal side as well in Dubai and this won't change anytime soon.

Not sure what you think how many millions we are paying for supporting the Forum but we are fine - don't worry - we don't need to sell anything to anyone.

I don't know why there is sometimes so much negative energy involved especially against us and me as a person while in fact hundreds of people with our content provided here got settled in the UAE the past 3 years.

It's just fair that we earned something from it as well and in return we gave more and more back here.

If your mentioned KPI's here on your profile are correct - you are 41 and from Europe - I expect something different from someone in your age.

Second that - exactly what I mentioned in my earlier post.

Keeping a cool head and seeing things rational.

I have to agree with @Fred here. We are all jumping to conclusions and he's on the ground and he's still not clear as to what is going on or what all this means. Any solution we adopt must work for our particular circumstances. There's no size fits all in this industry.

Mike Forman said:
(and they believe that rapidly)

#Bingo!
The government profits EVEN when they make mistakes or lies. You and I would have to hire lawyers to defend us. So, e.g. we would have to withdraw money from our investments in Singapore (for example) to pay e.g. a lawyer in the UK who then ends up paying his taxes (+35%) to the UK government. Even when the government makes a HUGE mistake, they STILL profit and NOBODY seems to bat an eye at this. How this is lost on most people, blows my f*cking mind!

lifeisfun · Jun 4, 2023

Fred said:
In Germany we have a wording for something like your post:

"Keep the church in the village".

We are settled since years not only on the business side but on the personal side as well in Dubai and this won't change anytime soon.

Not sure what you think how many millions we are paying for supporting the Forum but we are fine - don't worry - we don't need to sell anything to anyone.

I don't know why there is sometimes so much negative energy involved especially against us and me as a person while in fact hundreds of people with our content provided here got settled in the UAE the past 3 years.

It's just fair that we earned something from it as well and in return we gave more and more back here.

If your mentioned KPI's here on your profile are correct - you are 41 and from Europe - I expect something different from someone in your age.

Second that - exactly what I mentioned in my earlier post.

Keeping a cool head and seeing things rational.

We understand. You are advertising a charitable activity here. And of the hundreds of thousands of dollars a year you earn from it, you donate it all to charitable purposes and you have absolutely no reason to hide the truth that would ruin an activity from which you have nothing. Or would it be completely different?

Fred · Jun 4, 2023

Fred said:
Guys,

you see that they are talking all the time about Freezones making Business within the UAE? Either from Freezone to Freezone or within a Freezone - designated Freezone?

They ignore entirely the origin definition of a Freezone - a Company being located in a separate Freezone doing international business.

There is no single word about International Business - they mention only Business Activities happening locally in the UAE - hence the weird list of activities provided and nothing about modern Business Activities like E-Commerce, Marketing or Consulting.

We don't know yet - if they did forget to mention this or they didn't mention this for a reason.

A request to PwC through a Corporate Entity with 350+ Employees was sent earlier today and we read in the CC.

Expect further clarification after the weekend.

Yes - we see all your messages and Yes - everyone gets a response however we need to set priority to our own clients first.

Have a great weekend and don't take it too serious!

Just got a reply.

"The corporate income tax in the UAE , might cause some more attention to tax related issues, the fully understand the impact we need to understand your personal background. In general we want to point out that the corporate income tax rate for free zone companies is zero."

Meeting them tomorrow in person - keeping you posted

To be continued.

JustAnotherNomad · Jun 4, 2023

Who did this reply come from? The Federal Tax Authority? If it was the freezone, what authority do they have to make such statements? Honestly curious.

lifeisfun · Jun 4, 2023

Fred said:
Just got a reply.

"The corporate income tax in the UAE , might cause some more attention to tax related issues, the fully understand the impact we need to understand your personal background. In general we want to point out that the corporate income tax rate for free zone companies is zero."

Meeting them tomorrow in person - keeping you posted

To be continued.

Start writing a complete truth.
Freezone company is not tax free if:
- Company does not have a real office
- Company does not have a real staff
- More than half of decisions of director/directors is made outside of UAE
- More than half of suppliers are from outside of UAE
- Company is formed for tax optimization only
- Company has customers in UAE which are not in a freezone (mainland customers)

No freezone has authority to set any tax rules. Rules are set by the law only. Federal tax authority can issue explanatory acts.

I understand that the most of your customers are people who just form a company in IFZA by using your service, obtain visa, open bank account and use it all for tax fraud in a high tax country or at least wealth hidding. The most of them just use it for crypto withdrawal to fiat without legal tax reporting in a country where they reside in reality.

Just accept actual situatuon and say truth:
UAE is not willing to close eyes on all of this shady companies / residents any more. I understand, it will harm your business a lot. But that is how it is.

Law was published and is valid. There will be no more explanatory acts from FTA nor Ministry.
Telling that there is something ubclesr is not a truth. You are just trying to buy some time for your falling business this way.

jafo · Jun 4, 2023

lifeisfun said:
Law was published and is valid.

Can you please provide a link to the official UAE law you are quoting?

UAE clarification of Freezone Qualifying Income

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