There are several benefits of setting up a company in Dubai and one of the most important benefits is the low tax rates. Infact, in some areas (namely freezones) in Dubai – there is No Tax and that is why they are also called as Tax Havens. It is for this reason that I thought of incorporating an entity in Dubai.
As I have some investments in several crypto’s and I’m also into online work wherein I earn through Advertisements, e-book sales and other foreign consultancy services where my location is immaterial, I thought of opening an offshore entity in Dubai as well apart from the Indian entity.
Most of my clients are in developed areas like US, Canada, Europe, Australia etc and they don’t mind paying me in any country till the time their work is being done properly.
And as my clients are Ok to pay me in any country, I thought of operating an entity in a tax haven in UAE. As all freezones are completely tax exempt whereas Tax is levied in companies operating from Mainland, it was clear to me that I had to opt for a Freezone only and after thorough research, I opted for a Freezone in on the outskirts of Dubai (Refer: List of Freezones in UAE).
I currently receive payments from foreign clients in my foreign freezone entity and from my Indian clients in my Indian entity. Infact, even my crypto-currency investments are held by the foreign freezone entity wherein No Tax is levied on crypto currency investments as well in freezone as compared to holding them in India wherein flat 30% Tax has been levied.
After incorporating my entity in Dubai, I realised that a lot of Indian Importers and Exporters of Goods have also set up their entities in Dubai and do global trade via their Dubai entities. Not only, does it help save Tax but also helps in ease of doing business as there are no restrictions on fund transfer anywhere across the Globe from Dubai and there are no formalities on foreign remittances.
Tax Rates in Freezone vs Mainland
The main reason why a lot of Indians (especially online businesses) incorporate an entity in UAE is because of the tax rates.
Till a couple of years back, there was No Tax at all in the whole of UAE. Neither was there any Income Tax, nor was there any VAT/GST or any other form of tax.
However, 9% Corporate Tax has been levied on the profits above 3,75,000 UAE Dirhams (INR 75 Lakhs) of Mainland entities from June 2023. This tax is only levied on entities in Mainland and not on the entities in Freezone areas. (Refer: Corporate Taxation in UAE)
Apart from this 9% Corporate Tax, there is also VAT which is levied on Sales done in the UAE. The rate of VAT is 5% on most items. However, this is applicable only on Sales done in the Gulf and not on sales done where the clients are based outside of the Gulf area like US, Europe etc.
As my clients are mainly located in developed countries like US, Canada, Europe, Australia etc, it made no sense for me to be incorporating an entity in the Mainland region and pay these taxes. Therefore, I incorporated an entity in a Freezone and neither do I currently pay any Corporation Tax nor any VAT.
PS: It is also important to note here that VAT is not exempt in all Freezones. There are 2 types of Freezones i.e. Designated Freezones and Non-Designated Free Zones. 5% VAT will get levied on certain transactions in a Non-Designated Freezone and therefore it is recommend to set-up an entity in a Designated Free Zone only. There are around 20 Freezones which are considered as Designated Freezones and all other freezones are considered as Non-Designated Free Zones. (List of all the Designated Free Tradezones)
How to set-up a Company in Dubai?
Setting up an entity in a Dubai Freezone is a simple process and you are only required to give the name of the entity which you propose to incorporate along with Passports and photos of the directors. No other document is required to be submitted. Even a single person can open a company and you dont need 2 persons to open a company.
Once the name is approved, the Immigration and Entry Permit would be generated and this whole process will take around 2-3 weeks.
Post this, you would be required to personally visit the freezone to get their health check up done. Post the health check up, the Emirates ID would be created and your VISA Status changed from Tourist Visa to Investor VISA.
On the basis of this, the bank account of the company can be opened in UAE. A person can open a bank account in any bank and activate internet banking and operate the bank account from anywhere across the Globe without staying in UAE.
It is pertinent to note here that Health Check-up, Emirates ID and Bank Account cannot be opened in UAE without visiting UAE and a person would be required to visit UAE for doing these things.
Moreover, opening a bank account in UAE is not a simple process unlike India wherein Bank Accounts can be opened overnight. In India, we are used to seeing the bankers run after us to open a bank account but in the UAE – you’ll have to run after the banker to open a bank account. (Refer: Banking Struggles of UAE Startups)
If you know somebody in the bank or are going through some referral, it will help you expediate the process of opening the bank account.
Once the bank account is set-up, then everything is hassle-free as banking is very simple and hassle free in the whole of UAE.
Fees for Setting up a Company in Dubai
The Govt charges an Annual License Fees which is Rs. 6 lakhs (approx) for a 3 year license in a freezone. This fees basically covers the Registration Fees, Investor Visa Fees, Office space in a Co-working space, License Cost, Immigration fees etc. There is no other expense to be incurred as this fees is inclusive of everything.
The license fees for setting up an entity in the mainland is a bit higher and now Indians can also be the 100% owner of an entity in mainland as well which earlier not the case was. It makes sense to be opening an entity in the mainland only if you intent to provide services or sell products to customers in the mainland.
However, the disadvantage with mainland is the 9% Corporate Tax which gets levied and therefore all exporters prefer to incorporate an entity in the freezone. Mainland Companies are beneficial only if you intent to sell something in the Mainland like some Retail store or Restaurant etc. For somebody whose clients are mainly outside UAE, it makes sense to be setting up the company in a freezone.
The license fees varies from Freezone to freezone and some freezones charge much higher fees. The fees quoted above is what I pay for my freezone entity and this is the cheapest freezone which I could find which also allowed me to set-up my business there.
Managing the Entity
Managing the entity is simple as there are no compliances which are required to be done in my freezone. I’m only required to pay the renewal fees (approx Rs. 5.5 Lakhs for a 3 year license) which the freezone authorities help me comply with and apart from that there are no forms to be furnished or Balance Sheets to be prepared. Thus, their is no compliance cost which is to be incurred of hiring a CA or some consultant for the freezone in which I’ve incorporated my entity. You only need to have a consultant for setting up the entity and choosing the right entity structure and once it is set-up you dont need any consultant to help you manage the company.
However, some freezones do require an entity to do certain compliances and prepare Profit & Loss A/c as well as Balance Sheet which is required to be submitted with the freezone. It is always better to check with the freezone about these requirements before setting up a company in any freezone.
Compliances are required to be done in Mainland entities as both VAT and Corporate Tax is levied on Mainland entities but is not required to be done for Freezone entities. It is for this reason that most of the service as well as Goods exporters incorporate an entity in a Freezone in Dubai.
Through netbanking, I’m easily able to manage the funds as well. The banks also allow us to operated Multi-currency accounts without any need of a mandatory conversion to the local currency. In short – managing the entity is very simple.
Infact before setting up an entity in Dubai, I did evaluate other tax havens as well like Singapore, British Virgin Islands, Cayman Islands, Malta, Cyprus etc but realized that managing entities in these regions is quite difficult and very costly so I opted for incorporating a freezone entity in UAE. Setting up an entity in some of these countries may be cheaper but the annual compliance cost is so high that it just doesn’t make any sense to be incorporating an entity in these countries.
As my VISA Status has been changed to Investor VISA, I’m required to visit UAE once in a year to keep the visa status active. My stay in UAE is immaterial and physical presence for even a couple of hours in UAE solves the purpose. And therefore, now all my Interchange flights are via Dubai which ensures that my Investor VISA status stays active 😉
I personally havent relocated to Dubai and have only set up an offshore entity in Dubai. However, I’ve seen a lot of people who have settled there itself. The flight tickets for Delhi-Dubai also also not that expensive and costs around Rs. 9,000.
Does Indian Govt levy Tax on Profits earned by Indians in a Freezone?
Whether Indian Govt will levy tax on the Income earned by this Foreign Company will depend on whether the Company is being controlled and managed from India or not. In simple terms, it will depend on whether its Directors are residing in India or residing outside India.
If Directors are Residing outside India
If the Directors of the Dubai Company are residing outside India, then neither can the Indian Govt levy Tax on the Income of the Company and nor can they levy Tax on the Income of the Directors. In such a case, both the Company as well as its Directors would be considered as NRI.
If the Directors are Residing in India
Case I: If the Directors are residing in India and Turnover of the Dubai Company is more than Rs. 50 Crores
In such a case, the Company would be deemed to be Resident in India and Indian Govt will levy Tax on both the Income of the Directors as well as the Income of the Company.
Case II: If the Directors are Residing in India and Turnover of the Dubai Company is less than Rs. 50 Crores
A Foreign Company with turnover/gross receipts of less than Rs. 50 Crores p.a. cannot be considered to be a Resident in India (Circular No. 8/2017 dated February 23, 2017)
As the turnover of my UAE Freezone entity is expected to be less than Rs. 50 crores p.a., the Indian Govt considers the company a Non-Resident and therefore cannot levy any Income Tax or GST on this company. The Indian Govt cannot levy any Income Tax or GST on the freezone entity even though the freezone entity is being controlled by me from India as the provisions of Section 6(3)(ii) don’t get applicable in this case.
In such a case, the Indian Govt levies Tax on the Income of the Directors but not on the Income of the Foreign Company.
Thus, if you have a bank account in Dubai or US or Portugal etc. in your Individual Capacity, the income earned in that bank account would be taxable in India if you are residing in India from Rs. 1 onwards. However, if you own a Company outside India, Indian Govt cannot levy Tax on Income of such company which is registered outside India. And therefore, it is not recommended that you open a bank account in your Individual Name outside India and rather open a company outside India as in such a case the Indian Govt does not have the power to levy any tax.
If you are thinking how I know so much about taxes, then let me intimate you that I’m a CA by Qualification and earn through this blog through advertisements, e-book sales and by providing other services digitally to clients in India as well as outside India. (Refer: About Me)
Additional compliances to be done in India for the Dubai Company
Additional Compliances are also required to be done in India if any Indian resident opens a company in any country outside India.The additional compliances to be done are:-
- The shareholders of the Dubai company are required to disclose in their ITR Form under Schedule FA about the shares which they hold in the Dubai Entity
- The shareholders of the Dubai company are also required to comply with RBI Norms. The Investment outside India can either be done under the Liberalised Investment Scheme or the Overseas Direct Investment Scheme.
As additional compliance is required to be done in India while incorporating a company outside India, it is advisable to set up the company through a Chartered Accountant who understands both the Indian as well as Dubai/ UAE Tax and Investment Rules and stay legally compliant from the starting rather than regretting later.
My Entity Structure
I have registered a Limited Liability Company (LLC) in a freezone which is on the outskirts of Dubai. And as it is a Freezone LLC, the words FZ-LLC are mentioned at the end of my company name.
In freezones, even a single person can create a LLC and the maximum no. of shareholders can be 50 (while the minimum is 1). So my LLC is 100% on my name without any partners and I bill my foreign clients through the freezone entity and bill my Indian clients through the Indian entity. All my crypto investments are also via the freezone entity.
Similarly, I do the foreign expenses through the freezone entity and the Indian expenses through the Indian entity. If I have to make some expenses like Hosting Fees, Advertisement Fees or any other fees to somebody in the US, I make such payments as well through the freezone entity via netbanking. I avoid making such payments through the Indian entity as Indian Govt levies a host of taxes like GST Reverse Charge, TDS on Foreign Payments etc. so I avoid sending money outside India from my Indian entity.
This is also one of the main reasons why I incorporated an entity outside India in a freezone. I wanted to stay 100% legally compliant and by following this structure – I’m 100% compliant both in India as well as in UAE.
Post my entity incorporation, I have helped so many Indian entrepreneurs set up their company in a UAE Freezone that I myself have become an expert in this field and not only help people incorporate company in Dubai but also help them do all the necessary compliance in Dubai as well as in India. I would have helped around 10,000 businesses set up companies in past 10 years and after helping so many entrepreneurs, I realised that everyone has his own set of reasons to set up a company in Dubai. Some people set up company in Dubai for Income Tax benefits, some set up for GST Benefits and others for ease of doing business.
If you have any queries regarding any setting up an entity in any Dubai Freezone and the compliances to be done in India regarding the same, feel free to write in and I’ll try to help you to the best of my knowledge.