When considering you options in setting up an offshore company with the help of an international corporate service provider, chances are, you will always be pitched by the “tax free” feature provided by tax havens.
Indeed, there are offshore jurisdictions that adopt zero-tax policies, but that's usually when an international corporate service company stop in their explanation. To us, it's quite similar to pitching prospects with credit card offers but without any mentions about the hidden fees.
With this article, we hope that we can offer you an objective view on offshore taxation, which can help you understand what's included in the “tax free” category and what's not.
Zero tax defined
“Zero tax” often explained as it is: The exemption of your offshore company from taxes. Unfortunately, that's just the first half of the explanation. The second half of the explanation: There are certain income types that can be categorized as zero tax, and the rest will require you to pay taxes accordingly.
To better-explain, let's take a reputable jurisdiction, the UAE, as an example.
Ras al-Khaimah (RAK), one of the emirates of the UAE, is a popular destination for offshore company formation for a couple of reasons: RAK's business-friendly policies and the fact that your company's address will be registered in Dubai.
Whether you form your company via RAK or directly in Dubai, you will enjoy some great additional perks: Not only you will benefit from the reputable and stable jurisdiction, you will also benefit from the no-tax and no-paperwork policy, as well as the ability for you to own real estate property in UAE.
So, it's easy to assume that everything is tax-free in UAE. Unfortunately, it's far from the truth. There are some circumstances in which taxes might apply.
As each person's situation is different, the taxation is also different from one to another. Here are some tax/no-tax policies, and the possible scenarios:
No income taxes
It's true that you may be able to earn your income in Dubai 100 percent free of income tax. However, there is a 'catch': Your tax-exemption depends on your residential status.
If you are a resident in UK and work in Dubai for, say, six months, you still need to pay for income taxes to your home country. However, if you move permanently to UAE region, in a UAE region for a full tax year, you will follow the UAE's income tax policies, which mandate that no tax will be required from your income.
If you are a UK resident, you can refer to this page: http://www.hmrc.gov.uk/cnr/faqs_general.htm
No corporate taxes
The similar arrangements also apply for company – with some requirements that should be considered beforehand.
If your company is headquartered in RAK, Dubai or other UAE emirates, you are not required to pay local corporation tax on your business profits. However, if your presence in the UAE is as a branch of your company headquartered in your home country, there will be a requirement to file a tax return.
No property taxes
So, suppose you are a British citizen who owns an investment property in, say, Dubai. While owning the property in non-taxable, if you rent the property out the circumstance is different: Your rental income is taxable and should be declared to your home country.
You can be exempt from taxes for the same requirements as income taxes: If you are mostly live in the UK for the tax year, then your rental income should be declared. If you are a resident of UAE, then you will be exempt from any taxes.
There ARE Taxes on certain business types
On certain organizations, UAE does apply tax requirements. For example, there are taxes on profits generated by international banks and energy firms.
The same thing also holds true for hotels and restaurants – they are required to pay an additional 10 percent in the form of taxes – this is reflected in guests' bills.
There are more taxes applied to local businesses – so be sure that you do your due diligence.
Setting up a company in an offshore jurisdiction that offers zero-tax benefits is indeed an interesting proposition. However, every offshore jurisdiction that offer such benefits has its own unique tax laws, which may exempt you from one thing, but not on another.
You need to consult your lawyer and, again, do your due diligence in understanding the local tax laws to fully-understand what entails in zero tax offshore jurisdictions.
To get started, you may want to consult with us about the zero corporate tax and other offshore jurisdiction's features/requirements.