Monthly Archives: February 2017

In continuing our examination of the United Arab Emirates as an emerging Offshore Tax Free Company Jurisdiction this week’s article looks at the UAE’s  latest Company offering the Umm Al Quwain Free Trade Zone Company.

The Umm Al Quwain Free Trade Zone (UAQ FTZ) is located in Umm Al Quwain (one of the UAE’s seven emirates) and is renowned for its modern infrastructure and impressive natural beauty (which is attracting tourists in ever increasing numbers).

Being a relatively new Free Trade Zone in the UAE, Umm Al Quwain offers competitive fees and the privilege of signing documents remotely. This means an Umm Al Quwain FZ company can be set up without the shareholders being present at the time as long as they have visited the UAE in the past.
Some of the key benefits of licensing a company in Umm Al Quwain (UAQ FTZ) include:

• Double tax treaty benefits (the UAE has signed DTAs with 80 other countries)
• 100 per cent foreign ownership
• Zero corporate and personal income taxes
• Allows up to 50 shareholders
• 100 per cent import and export tax exemption within the FTZ
• Fast registration process
• Proximity to two international airports, Dubai and Sharjah, and major sea ports
• No restrictions on hiring foreign employees

Types of licences allowed when registering an Umm Al Quwain Company 

1. COMMERCIAL LICENSE (TRADING LICENSE)
There are two types of license, which fall under this category: Commercial License and General Trading License.

Commercial License: This authorizes the import, export, distribution and storing of items specified on the license. A Commercial License can have three different product lines or 10 similar product lines.

General Trading License: This enables the licensee to trade in a wider range of activities and gives the freedom and flexibility to trade in any commodity, which is permitted within the UAE.
Note: Commodities which require special approval or clearance from various UAE authorities e.g. explosives and armaments cannot be traded with a General Trading license.
Usual activities include i.e. Trading with Automobiles, Seeds Trading, Coal & firewood trading, cotton and natural fibers trading, etc.

2. CONSULTANCY LICENSE
This is for entities which offer expert or professional advice and is issued to all manner of professionals including artisans and craftsmen. It allows two similar activities. Activities usually registered include Marketing Consultancy, Management Consultancy and IT Consultancy.

3. FREELANCE PERMIT
This allows an individual to operate as a freelance professional, and conduct business in one’s birth name as opposed to a brand name or company. The Freelance Permit is designed for individuals who operate in technology, media and film sectors, and is issued to talent roles, creative roles and selected administrative roles.Activities usually registered include Actors, Artists, Photographers and Producers.

4. INDUSTRIAL LICENSE
This enables the licensee to import raw materials, then manufacture/ process / assemble / package the specified products, and export the finished product. It allows the holder to import raw materials for the purpose of manufacturing, processing and/or assembly of specified products.

5. SERVICE LICENSE
This license is for service providers. It permits the licensee to carry out the services specified in the license within the Free Zone, such as Logistics; Courier Services; Insurance Service Provider; Travel Agency; Tour Services; Car Rental etc.

Obtaining an Umm Al Quwain tax resident certificate and residence permits

An Umm Al Quwain FZ can issue residence permits and obtain tax residence certificates from the UAE authorities for its foreign owners and executives. A FZ company, must have physical presence in the UAE and, in that respect, it must own or hire premises.

Private accommodation is not necessary for Umm Al Quwain Free Trade Zone Authority when applying for residence but many do this to reinforce their case for substance and legitimacy.

As far as the company is concerned, it must have physical presence in the UAE. In that regard, the most interesting and cost effective options are proposed by free zones situated in a number of emirates including Umm Al Quwain Free Trade Zone (UAQ FTZ). Usually, these options consist of “flexi desks” or “flexi offices”.

Furthermore, and if a local bank account is maintained with movements, the foreign owners and executives can apply to the UAE Ministry of Finance to receive UAE tax residence certificates.

 
A UAE residence permit and a tax residence certificate can be useful to foreign owners and executives who wish to register their tax residency in the UAE. It is worth noting, that banking institutions in UAE and many outside consider UAE tax residence certificates as sufficient proof of tax residency in the UAE.

The most common structure we are asked to form is an IBC (ie a Tax Free Offshore Company) + a Tax Free Private Foundation Combo. When advising on the formation of such an entity often we are asked Do I need a bank account for my Foundation?

In most cases your Foundation shouldn’t need a bank account right away. Why? Because usually the money flows in and through the company (see below which explains how/why).

The Company usually only pays a dividend to your Foundation:

(a) If the Company carries litigation risk and you want to park some money safely away from creditors/lawyers; or

(b) If you want to buy an investment; or

(c) If you’ve retired or moved to a tax free jurisdiction and you want to start drawing some Distributions from the Foundation

Offshore Company (IBC) Cash Flows

For most clients the money flows in and through the IBC/Tax Free Offshore Company.

Typically there are 6 ways that clients will access money via/from the IBC:

1. Set yourself up as an arms’ length consultant and have the IBC pay you consulting fees periodically. This means you should only have to pay tax on what the company pays you (and even that tax you should be able to minimise as a lot of what otherwise-might-be personal expenses could be written off as business costs, eg home office, utilities, car, phone, electrical/office equipment, stationery, computers travel etc etc etc).

2. Bring back the money as a loan. Yes this can be done but great attention to detail will be required particularly with respect to lending parties, loan terms and documentation.

3. Use an anonymous debit card and withdraw cash from automated teller machines. This can still work in some places though it should be noted that some of the bigger countries now have the ability to trace and connect one to such withdrawals (+ technically this is income that should be declared at home).

4. Have your IBC buy Bitcoin and then make a transfer of Bitcoin to yourself (you would need to firstly set up a Bitcoin account). You can then buy valuable goods and services using Bitcoin and none of these purchases should be seen by your local authorities.

5. Have your IBC form and fund a subsidiary ie 2^nd tax free Offshore Company and then have that 2^nd Offshore Company buy any substantial assets you’d like to have onshore (eg cars, real estate, shares, general investments etc). Yes in theory you could have your IBC buy these things but, given most likely there will be a Consultancy Agreement in place between you and the IBC (and payments going from the IBC to you which will be visible to your local tax authorities) the smarter thing to do would be to have a 2^nd (seemingly unrelated) IBC buy these items for you.

6. Another option is to take the long hold view. What this entails is letting your capital base build over a period of years; Then, when you get to the stage where you are ready to close down your Offshore business, (or you are ready to retire) you can do one of two things: Either

(a)   Expatriate your home country and become “non-resident for tax purposes”, shift to a country which has no income tax and/or CGT (eg Panama, UAE, Monaco, etc etc etc) and draw down the capital from your offshore entity (and bank the money tax free); or

(b)   Expatriate your home country, become “non-resident for tax purposes”, and become a PT ie a Perpetual Traveller. How this can work is you spend say 4-5 months a years in one country, 4-5 months a year in another country and the rest of your time travelling. This way, assuming you are not seen to have substantial ties with any one country, you should not be considered as tax resident in any one country. Then you simply draw down the capital from your offshore entity (and bank the money tax free).

(And provided you have successfully become a non-resident for tax purposes of your home country, there’s nothing stopping you from changing your mind a year or 2 later about the expat life and returning to your home country with a bunch of tax free dollars in your back pocket).

Local laws can have an impact. Hence it would be wise to seek local legal/financial advice before committing to establish a Corporate Structure such as that described above.

Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.

IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition and/or financial benefit from whatever it is he/she has invented or created.

An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.

Practicalities

So how does it work from a practical perspective?

At core the Offshore IP Company (which is usually set up in a nil or low tax country) is used to divert income from Trading Companies or Businesses trading in developed or high tax countries.

The first step is to transfer ownership of the IP rights to the Offshore Company/Entity.

Once that’s done the Trading Business then enters into a legal agreement (contract) with the IP Company whereby, in return for being allowed to use the IP, the Trading Company agrees to pay the Company royalties or license fees. The income arising from these agreements can then be accumulated offshore in a nil or low tax environment.

Timing is of critical importance – It is clearly preferable to acquire the IP (for example, a patent) at the earliest possible time (e.g. at the patent pending stage) before the IP becomes highly valuable. That way the capital payment for the acquisition of the IP (e.g. patent) can be set at a lower amount i.e. before its true worth has been determined in/by the market. (These capital payments may even be deferred and or staggered by way of an instalment contract such as would enable the IP Company to use subsequent royalty payments to fund the cost of the IP).

If a deal is struck for the Offshore IP Company to buy the IP before the IP gives rise to a product or service which is offered/advertised in the market the IP might even be transferred for nominal consideration enabling the IP inventor/creator to transfer patent, copyright or trademarks in favour of the low/nil tax company before the IP suffers significant appreciation in value.

Alternatively you might transfer ownership of IP to a tax free Offshore Company (“OC”) for an agreed price but subject to a deferred or gradual payment arrangement. How that would work is you would transfer ownership of the IP up front and agree for the OC to pay you in stages in consideration of a price premium and/or in consideration of the OC engaging you in an ongoing/consultancy capacity.

However you transfer ownership of IP to an OC the transaction should be seen to be on commercial terms for fair market value. If you are unsure of market value you could either brief a licensed Valuer for an opinion or advertise the IP for sale publicly. The highest bid would be fair market value. At the end of the day in the market place a piece of property is only worth what someone else is prepared to pay for it!