Introduction

The United Arab Emirates, especially Dubai, are an attractive location for starting a business due to tax advantages. However, important tax aspects must be considered when maintaining residency in Germany. In this article, we explain the tax liability under German law for corporations, the place of management of foreign corporations in Germany, the possible consequences illustrated by practical examples, the controlled foreign corporation taxation, and provide recommendations for optimal structuring.

Tax liability of (foreign) corporations under German law

According to German tax law, corporations are unlimited liable for corporate tax if they have their registered office or place of management in Germany. This means that a company established in Dubai may also be subject to taxation in Germany if the management is effectively conducted from Germany. This can lead to unexpected tax burdens and significantly diminish the intended tax advantages.

General information on the place of management of foreign corporations in Germany

The place of management is presumed to be where, among other things, the essential business decisions are made. If you, as a resident of Germany, manage the business from Germany, the tax authorities may assume that the place of management is located in Germany. Indicators for this may include business activities, decision-making processes, and day-to-day operations conducted from Germany.

Consequences of the place of management in Germany

If the place of management is in Germany, it has significant tax consequences. Your company will then be subject to German corporate and trade tax. There is a risk of double taxation, as there is currently no double taxation agreement between Germany and the United Arab Emirates.

Example: Your company based in Dubai generates an annual profit of 193,750 euros. In the UAE, as of June 1, 2023, a corporate tax of 9% applies with an allowance of approximately 93,750 euros (375,000 AED), so you would pay 9,000 euros in taxes in the UAE.

If the place of management is located in Germany, the profit is additionally subject to the German corporate tax of 15% and the trade tax, which is about 14% depending on the municipality. The total tax burden in Germany would then be approximately 29% or 56,200 euros. The taxes paid in the UAE can be credited against the German tax, reducing the German tax burden to 47,200 euros (56,200 euros minus 9,000 euros credit). Nevertheless, a significant additional tax burden arises.

Furthermore, extended bookkeeping and documentation obligations according to German standards must be fulfilled, which results in increased administrative effort. Missing or incorrect tax returns can lead to fines or even criminal consequences.

Controlled foreign corporation taxation

Another important aspect is the controlled foreign corporation taxation under the German Foreign Tax Act (§§ 7 ff. AStG). This comes into play when a taxpayer resident in Germany holds interests in a foreign company in a low-tax country, and that company generates passive income. The United Arab Emirates are considered a low-tax country in the sense of the AStG due to their low tax rates.

Example: You are 100% involved in a holding company based in Dubai, which exclusively generates passive income from capital assets amounting to 50,000 euros.

Although these profits are not distributed to you, they will be attributed to your personal income in Germany according to the rules of controlled foreign corporation taxation. Therefore, you need to pay income tax on these 50,000 euros in Germany, which can be up to 45% depending on your personal tax rate.

The controlled foreign corporation taxation aims to prevent taxpayers from saving taxes by relocating passive income to low-tax countries. It ensures that such income is taxed in Germany, regardless of whether it has actually been distributed to the shareholder.

Structuring options

To minimize the risks of controlled foreign corporation taxation and relocating the management to Germany, various strategies exist. An effective method is to actually relocate the management to Dubai by making all significant decisions locally. This can be achieved by employing a local manager or through regular personal presence in Dubai. The company should have its own office space, employees, and operational activities in Dubai to demonstrate real economic substance.

Careful documentation of all business processes is essential to prove the place of management and the economic substance. Legal advice from experts in international tax law is advisable to develop tailored solutions.

Recommendations

We recommend that you seek professional support from tax advisors specializing in international tax law. A clear separation between your residence in Germany and your business activities in Dubai is crucial to minimize tax risks. Ensure that your business in Dubai has enough economic substance to avoid controlled foreign corporation taxation. Stay informed about changes in tax law and regularly adjust your business strategy to current legal frameworks.

Conclusion

Starting a business in Dubai while maintaining residency in Germany offers numerous opportunities but also poses tax challenges such as controlled foreign corporation taxation and the potential relocation of the place of management to Germany. Careful planning and professional advice are essential to optimally leverage benefits and avoid unwanted tax consequences.

Are you planning to start a business in Dubai and need support? As experts in international tax law, we help you find the optimal solution for you. Contact us today for a personalized consultation! Schedule an appointment now for a non-binding initial consultation!