Unlike Germany, the United Arab Emirates (UAE) tax according to the territoriality principle. This means that only income earned domestically is tax-relevant. Since the UAE has recently levied a corporate income tax of more than 0%, the question of taxes on foreign income is quite significant. But the territoriality principle practically excludes this, so that from a German point of view, tax arrangements can be set up that can turn this special feature into a considerable tax advantage.

1. No Taxes on Foreign Income in the UAE – Introduction

Anyone who runs a company in Germany pays taxes on profits. Although there are differences as to whether someone should be taxed on the basis of the principle of transparency or on the basis of the principle of separation, the legislator has in fact deliberately sought taxation at a similarly high level. Therefore, it is no wonder that at the end of an entrepreneur only about 50% of the original profit is available for private purposes. Those who expect more must therefore follow the magic of tax design. This article aims to achieve this by taking advantage of the fact that the UAE does not impose taxes on foreign income.

Why the UAE taxed according to the territoriality principle

Like many other tax regimes that can be called tax havens, the UAE is a relatively small and still quite young state. What also connects them to other tax havens is their domination by Britain in the past. In many of these tax havens, this has been the reason why they levy taxes according to the territoriality principle. This in turn has become the basis for tax avoidance in international tax design models.

But the UAE is an exception. The founding of the state in the early 1970s was preceded by the discovery and use of rich reserves of oil and natural gas. So the then independent Emirates had, to varying degrees, an always bubbling source of money. There was thus no need for tax revenue to finance the young and then still clear state budget.

Meanwhile, the UAE, like other Gulf countries, is turning away from a petrodollar-based economy. The UAE has increasingly focused on revenues from tourism, trade, education, research and the development of new technologies. And this is accompanied by the trend towards the collection of taxes. So one cannot claim that the UAE is one of the classic tax havens, even if they share many characteristics with them. This is also supported by the fact that the UAE is committed to implementing most of the programmes developed by the OECD to combat profit reduction and profit shifting (BEPS) and other harmful tax practices.

This means that taxation in the UAE has a mosaic of modern tax legislation and characteristics of a tax haven. So let's see what beneficial opportunities this brings.

3. How to pay no taxes on foreign income in the UAE

We are now looking at a German company seeking tax optimization. Of course, this interest is ultimately aimed at maximizing the profit share of its shareholders. A German partnership is particularly suitable for this, with which one has in most cases a GmbH & Co. KG in view. This in turn is a subsidiary of a Dubai LLC. And the former shareholders in the German company are now shareholders of Dubai LLC.

How does taxation take place? As a partnership, Deutsche GmbH & Co. KG is subject to taxation in Germany. German tax law provides for the principle of transparency in the taxation of partnerships. So taxation takes place at the level of their shareholders. In our case, this is the Dubai LLC. However, since it was set up by us in such a way that it is to be regarded as a corporation under German tax law, it pays corporation tax and trade tax as a tax subject with limited taxation in Germany. This means that we can expect taxes of around 30%.

If Dubai LLC now wishes to access the net profit of GmbH & Co. KG, it will take out the profits already taxed. This is not a taxable process in Germany. In the UAE, Dubai LLC does not pay any further taxes on this foreign income due to the territoriality principle. And if their shareholders are also subject to the tax law of the UAE alone, they will also be protected from further taxation. Because the UAE does not know any income tax at the private level, especially if it is foreign income.

Tax design for German entrepreneurs in the UAE – Conclusion

This is a selected example of a tax design model using international corporate structures in the UAE. It reduces the tax payable in Germany from a part of the profit normally received to about 50 % to only 30 %. Such a saving of 20% points actually represents an enormous tax advantage. This is especially true when you consider that in some situations you are happy to be able to reduce taxes in Germany by a few percentage points. In our design model, however, we only succeed through the detour via the UAE, because they know no taxes on foreign income. The UAE is also so attractive for these purposes because, on the one hand, there is the possibility of establishing a legal form that is qualified as a corporation in Germany. On the other hand, the UAE also offers the special advantage of territoriality taxation. This enables us to pay out net profits tax-free at the level of shareholders abroad.