If you want to emigrate to Dubai, you should know the five tax mistakes, which we outline in the following article. This includes the misconception about the tax advantage of letterbox companies as well as the risk of exit taxation. In addition, one should definitely avoid the relocation of the location of the management to Dubai for a German company. Taxation of profits of German companies should also be tax-proactive. And the transfer of assets can also be taxable from Dubai for up to ten years, if only in Germany.

1. 5 Mistakes When Migrating to Dubai – Introduction

Have you read one or the other of our articles about tax law in the United Arab Emirates (UAE), especially in Dubai? Maybe even because you have the motivation to emigrate to Dubai? Then you should definitely read this article, because you will learn here which tax mistakes you should be prepared for when emigrating to Dubai and how to avoid them.

2. Mistakes when emigrating to Dubai: tax easing

One of the main mistakes when emigrating to Dubai is tax easing. This tax concept was created to treat entrepreneurs who want to emigrate from Germany with final tax treatment. Because if you have already emigrated abroad, Germany no longer has the right to tax them. But this also means that the hidden reserves in the companies of emigrant entrepreneurs are now taxed abroad instead of in Germany. This is the case, for example, with a sale of the company.

If you as an entrepreneur make the mistake of emigrating to Dubai without a design, you are subject to tax easing in Germany. And this means that you have to pay a tax on the fictitious company value, which the tax office determines by company valuation. The fact that neither a real sale nor any other transfer took place when moving to Dubai – and even no money inflow – is irrelevant for taxation. This may irritate many who are unfamiliar with the subject of tax easing, in particular with the special case of exit tax. But even the fact that there are good reasons to consider the current regulations on the exit tax to be contrary to European law has so far no influence on the sending of the corresponding tax assessment.

3. Mistake when emigrating to Dubai: Starting a mailbox company

Something incredible about letterbox companies is circulating worldwide. Such stories can now be regarded almost as urban legends: entrepreneurs abroad with low or no taxes start a company whose headquarters is without employees or other substance. Nevertheless, the entire profit flows through this letterbox company and remains almost tax-free up to the level of the shareholders. Anyone who believes in this old-fashioned promise and has the UAE tax law in mind is likely to stumble upon additional taxation in Germany – a sudden awakening. Because if abroad does not levy a tax, Germany allows itself to take over. A classic tax mistake, which only lay people make when emigrating to Dubai, who still have a residence in Germany.

4. Mistakes when emigrating to Dubai: Relocating location of management

Anyone who wants to emigrate to Dubai as an entrepreneur, but at the same time also wants to manage their own company in Germany, could commit one of the most serious tax mistakes. Because those who simply carry out the management from Dubai after emigrating have moved the management location there. This has two tax consequences.

On the one hand, this meets one of the criteria by which the UAE assesses the tax liability in the country. In other words, the profits of the German company are subject to taxation in the UAE. Since the UAE knows no income tax and at most a corporate tax of 9%, you might say that you can live with it. However, it must be remembered that there is no valid double taxation agreement (DTA) between Germany and the UAE. So the German taxes are added again.

But this is the lesser evil. On the other hand, Germany will also react to the change in the location of the management. In tax law, this is called a relocation of the business overhead line. The consequence of this is that the tax authority treats this practically like an exit taxation. Specifically, this means that the company value is subjected to a fictitious taxation. Without any liquidity inflow, you have to pay taxes in Germany as if you had sold the company profitably.

5. Mistakes when moving to Dubai: Profits without tax design

If you have heeded the aforementioned tax mistakes when emigrating to Dubai and now live there, there are still risks. Because the move to Dubai alone does not lead to any change in the taxation of the profits of a German GmbH or a German partnership. The reason for this is on the one hand that a German company is generally also taxed in Germany, but on the other hand also the lack of a DBA with the UAE. Nevertheless, there are tax arrangements for this to limit taxation solely to Germany, so that no tax is incurred in the UAE. One option here is the early implementation of a holding structure. In it, a partnership, often a GmbH & Co. KG, ensures that the profit distribution in Dubai remains tax-free. Ideally, you only pay about 30% tax in Germany.

6. Mistakes when moving to Dubai: inheritance and gift tax liability

Hurrah, you have emigrated and have given up all German tax obligations by moving to Dubai. All of them really? When it comes to inheritance and gift tax liability, you have to be very careful. Because if a person transfers assets to another person and at least one of them is taxable in Germany, then inheritance or gift tax still applies in Germany. So if you want to transfer assets tax-free, both people should best emigrate to Dubai. Because only this gives you the chance to escape the German inheritance and gift tax obligation. In the UAE, on the other hand, neither an inheritance nor a gift tax is known.

However, there are two other aspects: Normally, German citizenship plays no role in domestic taxation. However, if a German citizen moves abroad, one remains taxable in Germany for a further five years according to § 2 (1) no. 1 letter b ErbStG. This also applies to foreign citizens who have been taxable in Germany for at least seven years in the past ten years before leaving Germany. And if you are still tied to economic interests in Germany, the tax liability is extended to ten years, which you spend abroad before it expires. So if you want to make a gift after emigrating to Dubai, you should avoid these tax mistakes.

7. Avoid Tax Mistakes When Moving to Dubai – Conclusion

Those who are enthusiastic about living in a world-facing metropolis of superlatives, want to breathe their entrepreneurial spirit and benefit from tax advantages, are at the right place in Dubai. But beware: such a step wants to be well thought out and even better planned. Especially on a tax level, many mistakes threaten when moving to Dubai. Few of them are related to UAE tax law, but all the more so to German tax law. Because Germany is not a country for entrepreneurs that allows an easy move abroad. In the case of the exit tax alone, there are enough points to view the conformity with applicable EU law critically.

We therefore recommend comprehensive tax advice on moving to Dubai – before implementation. Because many mistakes are irreversible once they are in the world. Anyone who shuns the risk of such tax errors when moving to Dubai, turns to individual advice at an early stage with tax consultants who are well-versed in this field.