A German GmbH pays about 30% in corporate tax and business tax. A Dubai LLC based in a free trade zone in the United Arab Emirates (UAE), on the other hand, pays only 0% in taxes. Local shareholders of a Dubai LLC also pay 0% income tax on dividends. It makes sense to combine a Dubai LLC with a German GmbH in order to optimize these taxes.

Combining Dubai LLC with GmbH – Introduction

One of the most frequent inquiries we receive as a tax consultancy firm concerns the reduction of taxes of GmbH shareholders and their companies. In addition to the 15% corporation tax, about as much business tax is added to a GmbH in Germany. However, if shareholders also want to receive a dividend, the distribution is subject to the capital gains tax with 25% plus any church tax and solidarity surcharge. Only the remainder is the net amount. Let’s calculate: Of the approximately 70% of the profit that remains to the GmbH after deduction of corporate and business tax, in the ideal case 25% of the capital gains tax goes away, so that at most 52.5% of the original profit reaches the shareholders. No wonder there is a need for advice.

Fortunately, there are a lot of solutions with which GmbH shareholders receive more net of gross. We would like to introduce a particularly creative approach in this article. All you need is our advice and a ticket to the modern fairytale wonderland. Because today we seduce you into the entrepreneurial serail to Dubai to combine your GmbH with a Dubai LLC.

2. different taxation of Dubai LLC and GmbH

First of all, we look at the differences between a Dubai LLC and a GmbH. In detail, of course, there are a great many differences between these two legal forms, first and foremost the fact that they are subject to different legal norms and that completely different conditions must be met for their establishment. In principle, however, in both cases these are corporations which are relatively easy to set up with only one person as a shareholder. Both are therefore to be understood and treated as legal persons. They are therefore both subject to corporate taxation. Unlike the GmbH, however, a Dubai LLC pays only 9% in corporate tax and no business tax. Another difference between the two forms of company is also evident in the taxation of a profit distribution: in Dubai, dividends are tax-free.

Speaking of tax-free, in fact, a Dubai LLC can remain completely tax-free. To do this, however, you have to set them up in one of the many free trade zones in the United Arab Emirates (UAE). But then you can only do business with other companies that are also located in free trade zones, as well as those from abroad. Since we plan to combine a Dubai LLC with a German GmbH anyway, could this even be useful to us? We shall see...

Our design model: Combining Dubai LLC with GmbH

The first step in our design model is to emigrate to Dubai as a GmbH shareholder. Of course, we are designing this in such a way that no exit tax is incurred. What we also want to pay attention to is that we want to remain directly involved in our German society. Furthermore, when we move to Dubai, it is particularly important that we move our residence there completely from Germany. Because if we move to Dubai and still have a residence in Germany, no matter how minor this accommodation may be, we remain unrestrictedly taxable in this country. In our design model, however, we absolutely have to escape the unlimited tax liability.

Step two is then done from Dubai. Because now we found a Dubai LLC in one of the Free Zones. We deliberately found this company as a new company instead of as a subsidiary of the Deutsche GmbH. The purpose of this company is to provide consulting services for the Deutsche GmbH. It is important that the company also has a certain substance and does not represent a letterbox company.

Step number three is the provision of consulting services to our German company by Dubai LLC. We want to set the value of these services as high as possible. Because in Germany, these consulting fees should also cause the highest possible operating expenses for tax purposes. However, a measure must also be taken here. Because the amount of the fees should be appropriate, at least to avoid discussions with the German Treasury. Which brings us to the tax considerations we present in the next chapter.

Combining Dubai LLC with GmbH: Tax Effects

How do the measures of our design model affect tax? First of all, let’s look at our company in Germany. The advisory fees of our Dubai LLC should have the effect that in the end only the lowest possible profit is subject to tax liability in Germany. This will shift the profit to the UAE. But let’s stay in Germany for a moment. Because on the potential profit distribution, there is at best a very low tax on the private level. The same applies to a withdrawal if we have in the meantime converted the GmbH into a partnership. It should be noted that there is only a limited tax liability. In addition, the examination of double taxation agreements (DTAs) that are often applicable in such cases is omitted. After all, there is currently no DTA between the UAE and Germany in force.

If Dubai LLC uses a large part of the profit of the German company via its consultancy fees, its own profit is correspondingly high. And now we remember that there is no corporate tax on this in Dubai because we set up our Dubai LLC in one of the free trade zones. If, for whatever reason, we wanted to work for business partners in the UAE, we would either have to set up our Dubai LLC in an area outside the Free Zones, or we would set up a third company there, which would then be subject to local corporate tax. From a tax point of view, the latter approach would certainly be more advantageous. Furthermore, there is no tax on the distribution of Dubai LLC profits in the UAE. And that means in the end that you can operate practically tax-free. All you have to do is combine the German GmbH with a Dubai LLC.

Combining Dubai LLC with GmbH – Conclusion

Now you may wonder for which entrepreneurs it is worthwhile to combine a German GmbH with a Dubai LLC. It is clear that this is only possible in certain cases, namely when a company is particularly dependent on external services. But perhaps awarding contracts to Dubai LLC as a subcontractor would also be an option. However, it must be avoided that a functional shift occurs. This would have considerable tax implications in Germany.

In terms of tax law, the question remains to be examined whether this design model could possibly lead to additional taxation in Germany. In particular, attention must be paid to § 7 (1) sentence 4 AStG. Because there the law refers to cases in which in this country a limited tax liability applies.

At the end we play with another thought. A few years ago, there was once a DBA with the UAE. In 2021, however, this lack of interest in an extension on the part of Germany expired. In the meantime, however, the corporation tax has been newly introduced in the UAE, so there is the potential that there could be double taxation in this area in Germany and the Emirates. Perhaps this is now an occasion for the Federal Government to once again negotiate a DTA with the UAE.