The New 2013 UAE Commercial Companies Law

According to a statement issued on 28 May 2013, the amended form of the UAE Commercial Companies Law (the "New CCL") has been approved by the United Arab Emirates Federal National Council (the "FNC"). It is now extensively anticipated that the New CCL will enter into full force in the final quarter of 2013.

The New CCL amendment has been long awaited and whilst further legislative steps are needed before it comes into force, FNC endorsement marks the resolution of dazzling discussion points, a number of which have been under debate in the UAE for more than a decade. As such, this is a major step.

Although the New CCL has yet to be publicly issued, we expect that the approved form will be broadly similar to the draft that was widely circulated in April 2011. If this is the case, the New CCL is likely to fit in a number of changes to the establishment and governance of UAE joint stock companies (JSC) and limited liability companies (LLC). Particular amendments are likely to include the introduction of unified accounting standards that UAE companies must stick to, and the ability for shareholders of a limited liability company to vow or pledge their shares to third parties as security.

At the same time as we cannot be certain as to the exact form of the New CCL until it is published officially, what is clear from the FNC announcement is that provisions paving the way for the potential relaxation of current foreign ownership restrictions have been removed. It is expected (but not certain) that this relaxation has been deferred for a separate foreign investment law (the timing for which is uncertain), rather than rejected entirely. It also appears from more recent press reports that the mandatory requirement for a branch of a foreign company to appoint a national service agent has been retained.

The New CCL must now be ratified by the Supreme Council and signed by the President before publication in the UAE Federal Official Gazette. It will then go into force on the date stated in the law, which is probable to be three months from the date of publication. Consequently, it is now widely anticipated that the New CCL will enter into full force in the final quarter of 2013, although this timeframe may be subject to further change.

The 2013 Draft CCL differs from the 2011 draft of the UAE Commercial Companies Law (the 2011 Draft CCL) 1 in the following key respects:

• Foreign ownership above 49 per cent postponed for consideration in a proposed new foreign investment law. The 2011 Draft CCL permitted the UAE Federal Cabinet to issue a resolution determining the form of companies and activities or classes of activities that may be held in full by a foreign partner, or where the share of the foreign partner may exceed 49 per cent of the share capital of the company. This provision has been deleted from the 2013 Draft CCL. Based on press reports at the time the Federal National Council (FNC) was debating the 2013 Draft CCL, we understand that foreign ownership above 49 per cent will now be considered in the context of a proposed new UAE foreign investment law to be circulated later this year.

• New provision allowing “reconciliation” of certain offences prior to offences being referred to court. A new provision has been added that allows companies which have committed offences specified in Chapter 1 of Part 11 to “reconcile” for such offences before the offence is referred to court. Reconciling can be accomplished by paying an amount of money not less than double the minimum amount of the fine and not less than the amount of the fine in the case of daily fines. Article 339 further provides that if the crime is repeated within a year of the “reconciliation” or after the issuance of a court judgment, the minimum and maximum amounts of the fines shall be doubled. Article 339 also requires the Minister or ESCA to issue regulations and procedures relating to “reconciliation”. Offences in Chapter 1 of Part 11 that may be “reconciled” include:

– Failure of a public JSC to list

– Refusal of a company to allow shareholders to inspect the minutes of general assembly

– Failure of a company to hold an annual general meeting within the specified period

– Failure of a joint stock company (JSC) to convene an extraordinary general meeting when its losses reach 50 per cent of its share capital

– Failure of a company to keep accounting records

– Failure of UAE nationals to hold at least 51 per cent of a company’s share capital

– Disposing of shares in a company in breach of the law and performance of commercial activities by representative offices of foreign companies

The introductory wording in Chapter 2 of Part 11 indicates that “reconciliation” is not permitted for the offences set out in Chapter 2 of Part 11. Offences in Chapter 2 of Part 11 that may not be “reconciled” include:

– Overvaluing non-cash contributions for shares

– Distributing profits in breach of the law

– Concealing the true financial position of a company

– Issuing shares in breach of the law

– Entering into transactions for the purposes of influencing the price of securities

• New offence: failure to keep accounting records to explain transactions. A new offence has been introduced relating to accounting records. Under Article 348 of the 2013 Draft CCL, a fine of between AED 50,000 and AED 100,000 shall be imposed on a national or foreign company that fails to keep accounting records for the company to explain its transactions.

• Provisions regulating joint venture companies deleted. The provisions in the 2011 Draft CCL relating to joint venture companies have been deleted. Apparently the FNC has taken the view that joint ventures are typically not regulated in company law statutes in other jurisdictions.

• Chairman of JSCs must be a UAE national. The 2011 Draft CCL did not require the chairman of a JSC to be a UAE national. The 2013 Draft CCL requires the chairman of a JSC to be a UAE national.

• Investment funds to have their own legal personality. New provisions have been added to address investment funds, although very briefly. Article 271 provides that investment funds shall be established in accordance with the conditions established by the Emirates Securities & Commodities Authority (ESCA) or the Central Bank in the case of investment funds licensed by the Central Bank. Article 272 provides that an investment fund shall have its own legal personality and legal form and a separate financial position.

• Council of Ministers to promote social responsibility. Article 375 of the 2013 Draft CCL is a new clause which provides that the Council of Ministers shall issue the necessary controls to motivate companies to carry out their social responsibility and its implementation phases.

• Objectives of the Commercial Companies Law specified. A new clause has been added which sets out the law’s objectives. Article 2 of the 2013 Draft CCL provides that the law aims to contribute to the development of the business environment and the capacities of the state and its economic standing by organising companies in accordance with global variables, especially those related to organisation of governance rules and the protection of shareholders and partners, as well as supporting the flow of foreign investment and promoting the social responsibility of parties.

• Government has improved director appointment right for JSCs. In the 2011 Draft CCL, the federal government or local government had the right to appoint representatives as directors pro rata to such percentage if the federal government or local government holds at least 10 per cent of the share capital of a JSC. The 2012 Draft CCL reduces the minimum holding requirement to 5 per cent for this right to apply.

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Winston Wambua

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Which offshore jurisdictions will be popular in upcoming year 2013/14?

Which offshore jurisdictions will be popular in upcoming year 2013/14?

Testimony provides imminent and data on company incorporations in offshore financial centers

 Though incorporation activity in the majority of offshore jurisdictions like Cayman, BVI, Hong Kong or Dubai was insignificant down in the second half of year 2012 when compared with the first six months of the year, company Set up in certain jurisdictions offered signs of optimism, according to Appleby, one of the world’s largest providers of offshore legal, fiduciary and administration services.

“There are signs that 2013 will be a watershed year in terms of seeing a universal return to pre-2009 activity levels across the offshore jurisdictions,” said Farah Ballands, partner and global head of fiduciary & administration services at Appleby.

Nonetheless, the on-going weakened economic conditions continued to impact the overall market in the second half of 2012. There were 37,881 new offshore company formations in the jurisdictions covered by the report, a decrease of 3.6% from the second half of 2011, and a deeper decrease of 11% on the preceding six months in 2012 from major jurisdictions.

A short time ago, Cyprus was the most fashionable and attractive offshore economy, while all settlements were made through Baltic banks. Favorable terms, easy registration and service in Russian attracted a lot of clients from Russia and the CIS countries.

 However, everything changes, and offshore jurisdictions either. Requirements related to transparency, control, anti-money laundering and counter financing of terrorism, extension of the tax information exchange practice, and other initiatives, which are implemented primarily by the OECD countries, make offshore jurisdictions closer to low-tax ones, and low-tax jurisdictions — to full-tax ones. A lot of established patterns do not bring any tangible benefits any more, or even become jeopardy for business.

 In the previous year there will be new favorites among offshore jurisdictions. Now, those are usually not traditional offshore economies such as Belize or Seychelles, Dubai but low-tax jurisdictions with elevated reliability and good reputation, i.e. European and Asian ones.

 Kazakh businessmen have found a new partner, a major Asian financial center Singapore, with reliable banks having brilliant reputation, transactions with which are not subject to withholding tax making offshore patterns unprofitable. Ukrainian businessmen have preferred Panama, Hong-Kong, Dubai and Ireland as countries potential for business. Russian businessmen are aiming at such jurisdictions as Hungary, Ireland, Denmark, Singapore, though they do not exclude the previous targets — Cyprus, Netherlands, Switzerland and BVI.

 Now new patterns are emerging, so called ‘sandwich’ patterns involving Irish, Danish, Hungarian firms, as previous ‘sandwich’ patterns like UK—BVI, Cyprus— Seychelles are becoming not extremely reliable. Speaking of trading patterns, the best economies for doing business for the CIS countries will be Singapore, Estonia, Hungary in partnership with the Netherlands and Denmark.

 Trying to avoid high taxes and tax information exchange, business is seeking new offshore or low-tax jurisdictions, beneficial offshore patterns and new banks to replace the Baltic and Cyprus banks. In the next year the offshore business will see high competition struggling for new patterns, where the winner will be the one, who will manage to create the most beneficial, reliable and legally ideal pattern.

 In this tough competition, the advantage will be enjoyed by those, who keep a watchful eye on the changes in the laws, assess the potential of new countries providing positive conditions for operations of offshore companies, create new patterns and seek advice of experts and consultants. Flexibility and inventiveness are the catchwords of the offshore business in the year to come.

Regards

Winston Wambua

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How to Open a New Franchise in Dubai

Franchising is a legitimate business method that involves the licensing of trademarks and methods of doing business, or an exclusive right, for example to sell branded merchandise. Franchising (from the French for honesty or freedom) is a method of doing business wherein a "franchisor" authorizes proven methods of doing business to a "franchisee" for a fee and a percentage of sales or profits. In the future the Dubai economy will more likely be filled by innovative and creative franchises which seek to capitalize on their market lead and intellectual property advantage. Franchises fill a market need and therefore, are the fastest growing way of doing business.

 

Dubai franchise market has witnessed supremacy of few big retail conglomerates having multi brands in their portfolio and pre-dominantly the Master Franchisee arrangements but now the trend for small franchisees and sub-franchising is picking up. Dubai has a pro-business environment , whose investor-friendly policies attest to if one considers its infrastructure, corporate taxes, transfer of profits to home countries, entity ownership and availability of large pool of human resources. Businesses located in the multiple free zones enjoy tax exemption. The franchise sector in Dubai gets generous support from the government. The state is promoting the franchise sector to induce growth and development of the small and medium size businesses. Government backed Mohammed Bin Rashid Establishment for Young Business Leaders provides business training to entrepreneurs and also encourages women entrepreneurs. Further, the government established the UAE Franchise Association in 2004.

The Dubai Islamic Bank (DIB) has a program for aid of young UAE citizens under which it extends to them for buying franchise business. Setting up this project need the following; • Business plan business, plan that includes your business overview, competitor review, market trend in the particular service, your core competency, your financial projections, marketing and distribution plans and your funding alternatives. • Franchise Arrangement, an arrangement whereby as a franchisor you license the franchisee, in exchange for a fee, to exploit the system developed by you if acting in the capacity of a franchisor. Generally a package including the intellectual property rights, trade mark logos, patents or designs, trade-secrets and Copy-righted protect your IP assets by Offshore Company and register in UAE Ministry of economic. Register your franchise agreement before a UAE court. You need a reputable Firm to complete this project. Dubai remains the preferred base for franchised operations in the region, given its tax status, the comparative stability of its legal and regulatory systems and it openness to foreign investment, though Most countries in the Middle East region do not have franchise- specific legislation The franchisee market is dominated by a small number of players who take multiple Brands franchise known as Franchise Conglomerates ,with some having as many as 50-55 brands in their portfolio.

Middle East's strategic location has a key role in expanding any business around the world. Franchisors seeking new markets favor the Middle East as a franchising destination as it assures easy accessibility and communication with the surrounding areas. The most moderate estimate of the franchise industry in the Middle East and North Africa put it at $ 30 billion today. It also puts the annual growth of Middle East franchising sector at 27 per cent. This frantic pace provides huge opportunities for franchisors to bring their brands to the region, as this trend is set to continue for years to come, powered by massive consumption appetite, economic growth and record oil prices. In the last decade many Middle Eastern businesses proved to be very successful in the rest of the world with their efficient style, cost management and competitive distinguished products, especially in the retail, food and catering sectors. Successful franchises in Dubai. There are many successful franchises in Dubai of which prominent examples include:

Heritage for Henna - Beauty Franchise Heritage for Henna started in Jumeirah Beach Hotel, Dubai. It was a huge success with foreign visitors and confirmed its owner’s belief that henna decoration has a massive market outside of this region. To maintain quality, Heritage for Henna sets up its own farms in carefully selected regions, where top quality henna shrubs are cultivated. In addition, considerable investment is made to select and train the most talented henna artists. Heritage for Henna provides a wide variety of drawings with traditional, classical, contemporary and modern designs. Unlike other projects that required large space and high rent, setting up a henna salon required only the minimum of 4 square meters. Heritage for Henna provides its franchise partners with a full range of support services that will enable them to manage their projects with a high level of efficiency and profitability.

Furthermore, it offers assistance with the location selection, rental negotiations and installation of decor. At the same time, staff will be selected and trained to ensure that they meet "Heritage for Henna's" high creative and professional standards.

Foot Solutions Health & Wellness Franchise - This franchise provides foot care solutions and use high-tech computer foot scanning equipment to produce a complete line of custom shoe inserts and orthotics. Malridge Master Distributor - Photographic Engraving Franchise - Malridge has developed a unique process for the customized engraving of photographs and graphics on glass surface, while, producing the highest finish and definition. They do photo engraving and personalized engraving on all types of glassware, from crystal awards and trophies to tableware. Apart from the regulars like McDonalds, Burger King and KFC, the 3 biggest growing franchise brands internationally, there are many new casual dining, fast food franchising ventures which seem to be showing interest in the Dubai market.
Egypt's Integrated Food Franchising is promoting its Pizza Conez product, a revolutionary new take on take away. The product is a pizza cone similar to an ice cream cone and it takes five minutes to prepare. The unique selling proposition of this product is that it is portable and has mobility. The fast food products from the US, for example, Pizza Hut and Dominoes have entered the Dubai market but Pizza Conez brand is about authentic Italian ingredients.

London Dairy - Is another food brand looking to increase its presence in the market. London Dairy is a complete Dessert Destination that offers the entire exclusive range of London Dairy Premium Ice Creams, dessert sundaes, pastries, cakes and single origin coffee

 Subway
Subway franchise business is pushing the fast food market to continue the globalization of its company, and there are no plans on stopping in Dubai, with multiple stores opening in Kuwait, Saudi Arabia, and Qatar. There are 60 franchises already present throughout Dubai, and this means tough competition for prospective franchisees in Dubai. Emerging markets are increasingly more important as opportunities for retail franchising in the West diminish because of market saturation and increased competition. Industries in which franchising is mature, offer fewer profits.

For example, fast food, retailing, hotels and other service based industries. Emerging markets are unsaturated, poised for growth and there is increased demand for products and services that embody international standards and quality. There are thousands of different business franchises, and there will be more than one and perhaps many in your chosen business area. Once you have made the decision to buy a franchise business it is difficult to turn back.

A wrong decision takes a few seconds to make, and for some, a lifetime to put right. So do your research. Look at the alternatives. Ask existing franchisees. Ask customers. Ask bank managers. Read the franchise trade magazines, newspapers, websites. Attend franchising exhibitions. Seek the advice and opinions of friends or Business Consultant. Do some local market research to gauge demand for the products and services, to test the reputation of the franchising companies, and to test their claims about pricing and any other relevant business claims or information you've been given. Become an expert before you sign the papers - don't wait to learn about the 'unknowns' after signing the contract and parting with your cash.

These days information is easy to find - don't be shy - look for it - ask and satisfy all of your concerns before you make your decision.

Regards

Winston Wambua

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Why Dubai is still unique for Business

Dubai has emerged as a leading regional commercial hub with state-of-the-art infrastructure and a world class business environment. It has now become the logical place to position your business in the Middle East, providing you with a unique and comprehensive value-added platform.

With its strategic location, 0% corporate and personal income tax and a consistently strong economic outlook, Dubai is the ideal base for multinationals, SMEs and start ups targeting markets in Central Asia, Middle East, Africa, Asian Subcontinent and Eastern Mediterranean with a population of over 2 billion people and a combined GDP of US$ 6.7 trillion. With a friendly beach front international and multi cultural environment and tax-free living and working it’s hard to find a more perfect setting to start a new business or set up a branch office.

Dubai is still unique in many respects: a major cosmopolitan city located in a country that does not levy direct taxes of any kind, has no VAT, and only a 5% customs duty. It is an offshore jurisdiction without the offshore stigma.

Operating a business in the UAE

Under UAE federal law foreign businesses have three main forms to choose from to conduct business in the UAE:

¨ As a local limited liability company;

¨ As a branch of a foreign company;

¨ As a representative office of a foreign company.

Alternatively, six out of seven Emirates (the exception being Abu Dhabi) offer the possibility to conduct business out of a freezone and two Emirates – Dubai and Ras al Khaimah – offer an International Business Company regime.

Free zones

If there is no need to sell goods directly to the local market then setting up in a freezone is often more attractive than setting up as a local company, which requires 51 per cent local ownership. The practice is to allow the provision of services through a freezone entity to the local market as long as a significant proportion of the turnover is realised abroad.

The main advantages of setting up in one of the freezones in the UAE are as follows:

• 100 per cent foreign ownership is allowed;

• A guarantee for 15-50 years against the  future imposition of corporation tax.

• The import of goods duty free provided the goods are not supplied to the local market;
 
• Streamlined procedures: all formalities are typically dealt with through the freezone  authorities instead of the various government departments;

• No restrictions on hiring expatriates.

The freezones each have their own freezone authority. These are profit-making entities. Their main source of income is derived from renting office space, collecting license fees, and providing services to the companies operating in the freezone. In all freezones financial statements need to be submitted to the freezone authorities annually.

The UAE is particularly well positioned to cope with the increasing pressure from onshore tax authorities to provide real economic substance. The UAE freezones offer a very easy and inexpensive way to obtain office space, locate a server, and hire staff:

International Business Companies (IBCs)

Dubai, through its Jebel Ali Freezone, and Ras al Khaimah, through the RAKIA freezone and the RAK Free Trade Zone, both offer an IBC regime. These companies are ideal for holding investments such as shares in local or freezone companies, UAE real estate, or for trading activities outside the UAE. IBCs cannot rent office space or apply for staff visas, and they are not allowed to trade with parties inside the UAE.

All in all, Dubai offers something that to many will sound too good to be true: an unrivalled lifestyle in a business-friendly, no-tax environment, with a strategic location and access to all the services that you would expect to be available in a world-class business Centre.

Winston Wambua

International Offshore Specialist

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Perfect Opportunity on franchising McDonald's

Perfect Opportunity on franchising McDonald's
What are the requirements to open a McDonald's franchise? If you qualify to open a McDonald's franchise and
are willing to invest your time and money it can be a very financially rewarding and life-changing experience.
Facts  about the McDonald's Franchise System
McDonald's has been a franchising company since 1955 and has relied on its franchisees to play a major role in the system's success. McDonald's remains committed to franchising as a predominant way of doing business. Today, the McDonald's franchise is the leading global foodservice retailer with more than 30,000 restaurants, located in more than 100 countries.

If you are considering buying a McDonald's franchise you will most likely buy an existing franchise restaurant. Most franchisees enter the system by purchasing an existing restaurant, either from McDonald's or from a McDonald's franchisee. A very small number of new operators enter the system by purchasing a new restaurant.

Financial Requirements and Start-Up Costs to Open a McDonald's

An initial down payment is required when you purchase a new restaurant (40% of the total cost) or an existing restaurant (25% of the total cost). The down payment must come from non-borrowed personal resources, which include cash on hand; securities, bonds, and debentures; vested profit sharing (net of taxes); and business or real estate equity, exclusive of your personal residence.
Since the total cost varies from restaurant to restaurant, the minimum amount for a down payment will vary. Generally, you need a minimum of $300,000 of non-borrowed personal resources to be considered to open a McDonald's franchise. Individuals with additional funds may be better prepared for additional or multi-restaurant opportunities which McDonald's encourages.
Other Requirements to Open a McDonald's

•Significant business experience - Individuals who have demonstrated successful ownership or management of multiple business units or have managed multiple departments.

•Rapid growth - Individuals who possess the capability to grow rapidly with McDonald's.

•Business plan - The ability to develop and execute a business plan.

•Manage finances well - Ability to manage finances including a thorough understanding
of business financial statements.

•Good management skills - Commitment to personally manage the day-to-day operations of the restaurant business.

•Training - Willingness to complete a comprehensive world class training program and   become proficient in all aspects of operating a McDonald's restaurant business.

•Exceptional customer experience - The capability to effectively manage an organization that recruits, trains, and motivates restaurant employees who deliver an exceptional customer experience.

•Good credit history - An acceptable credit history

Ongoing Fees to McDonald's
During the term of the franchise, you pay McDonald’s the following fees:

•Service fee- A monthly fee based upon the restaurant’s sales performance (currently a service fee of 4.0% of monthly sales).

•Rent - A monthly base rent or percentage rent that is a percentage of monthly sales. McDonald's usually owns the property and also acts as the landlord.

(Source: McDonald's.com) Acquiring a McDonalds Franchise

Once you get through the initial process of being approved for a restaurant franchise and secure your financing, you will sign a lengthy contract with the franchisor. Review the contract with a fine tooth comb before signing on the dotted line. Most importantly, know what can happen if the franchise fails. Are you locked into paying the franchisor a set amount of money each month or year, regardless of success? Who owns the equipment? Will you get any of your investment money back? Don’t assume that because it is a chain it will be an instant success. It still takes hard work and patience.

Winston Wambua

International Offshore Specialist
 
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Super rich hold $32 trillion in offshore tax havens:new study

Rich individuals and their families have as much as $32 trillion of hidden financial assets in offshore tax havens, representing up to $280 billion in lost income tax revenues, according to research published on Sunday.
The study estimating the extent of global private financial wealth held in offshore accounts – excluding non-financial assets such as real estate, gold, yachts and racehorses – puts the sum at between $21 and $32 trillion.
The research was carried out for pressure group Tax Justice Network, which campaigns against tax havens, by James Henry, former chief economist at consultants McKinsey & Co.
He used data from the World Bank, International Monetary Fund, United Nations and central banks.
The report also highlights the impact on the balance sheets of 139 developing countries of money held in tax havens by private elites, putting wealth beyond the reach of local tax authorities.

The research estimates that since the 1970s, the richest citizens of these 139 countries had amassed $7.3 to $9.3 trillion of “unrecorded offshore wealth” by 2010.
Private wealth held offshore represents “a huge black hole in the world economy,” Henry said in a
statement.

Winston Wambua

International Offshore Specialist
 
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The inbound guide summary to US corporate tax

The inbound guide summary to US corporate tax

Foreign investment plays an important role in the US economy. According to the latest data from United Nations Conference on Trade and Development, the United States had more foreign direct investment from 2006 through 2009 than any other country in the world. Majority owned US affiliates of foreign parents produced $670 billion in goods and services, accounting for nearly 6% of total US private output in 2008. In addition, foreign investors in the US invested $188 billion in capital expenditures and $40.5 billion in research and development. Despite the economic downturn, which resulted in a 50% drop in foreign investment in the United States between 2007 and 2009, foreign investment activity in the United States remains strong and has increased by 49% from the economic crisis level it reached in 2009.1 Indeed President Obama affirmed the value of investments by foreign-domiciled companies to the US economy and made a commitment to treat all investors in a fair and equitable manner so that the United States remains the “destination of choice for investors around the world.” 2
As the world’s largest economy, the United States provides abundant opportunities in which to operate, an innovative and productive workforce, excellent infrastructure and lucrative consumer and business-to-business markets. It also delivers a tax code that covers more than 17,000 pages — not to mention common law precedent. Although not all provisions necessarily apply to inbound investors, you must navigate your way through sometimes vague (and often confusing) tax regimes at the national, state and local levels to maximize the possibilities and manage the risks. Missteps and missing information can create undue risk and affect the ultimate success of your cross-border operations. I am here to help.

We know that every business has a unique set of circumstances and attributes that trigger specific tax obligations. That said, there are certain overarching regulations, policies and approaches that can help make the process of doing business in the US smoother. This is designed to provide you with a ready guide to some of that information. However, we urge you to consult with a qualified and trusted advisor before you make any significant business or tax-related decisions to more fully understand what impact the US tax code and financial landscape may have on your corporate entity. Structuring your US business entity and activities;

There are number of ways in which your inbound company can structure business activities in the US, depending upon your business model. What is important is choosing a structure that is compatible with the way the group anticipates operating in the US. Just remember not to do anything purely for tax reasons. That said, there will be tax consequences to your choices, so be sure to consider those in advance as well.

US tax authorities assume that a business purpose exists for so-called “greenfield” opportunities — opportunities that are largely unexplored and undefined. Based on that premise, investors are allowed to arrange their operations as they see fit. Initial transactions in a Greenfield investment are presumed to be for some business purpose and not solely for the purpose of tax avoidance.

Forms of enterprise and their tax implications

How you structure your long-term operations in the US effectively defines how you will be taxed, so the choice can have a potentially significant impact on profitability. US Treasury regulations generally allow many business entities to choose classification as a corporation, partnership or entity disregarded from its parent. There are flow-through entities, unincorporated branches and Limited Liability Companies (LLCs). There are distributor and manufacturer representatives, joint ventures and partnerships. Where will the head office be located and what activities will go on in the US? Each choice has its own implications, complications and criteria. The various ownership structures also have financing, legal liability and growth flexibility issues. So given several viable structures that could work for your business, how do you decide which one to choose? Typical business models include a representative office, branch office or wholly owned subsidiary

Representative office.

A representative office is the easiest option for a company starting to do business in the US. You do not have to incorporate a separate legal entity and you will not trigger a corporate income tax, 5 as long as the activities are limited in nature. That would include such ancillary and support activities as advertising and promotional activities, market research and the purchase of goods on behalf of the headquarters office. A representative office is most appropriate in the very early stages of your corporation’s business presence in the US. Then, you may want or need to transition to a branch or subsidiary structure as your business in the US grow. You and your advisor should periodically review the suitability of your structure and its activities to make sure that you are not inadvertently triggering a taxable presence in the US by exceeding the permissible activities. Branch
A branch structure is similar in nature to a representative office in that it does not require incorporating a separate legal entity. The benefit of having a branch rather than a representative office is that the range of activities that can be performed by a US branch office can be substantially increased. That will, however, constitute a taxable presence in the US, which means that you must annually account for and file US corporate income tax on the branch’s profits. Generally, the branch is subject to a corporate tax rate of up to 35%6 in the US. In addition, any remittance of post-tax profits by the branch to the head office is subject to branch remittance tax of 30%. However, US tax treaties typically reduce the branch remittance tax.

A branch structure is suitable when you anticipate incurring losses in the near future or repatriating profits on a current basis. The US branch’s trading losses can be offset against the home office’s trading profits. In a reverse situation, where the branch is profitable, the parent company may also be subject to tax in the home country on the US profits. Keep in mind that an inbound corporation considering a branch structure may expose a disproportionate share of the parent company’s profits to a higher US tax rate since attributing the profits to branch activities requires arm’s length consideration. There is also a risk that intangibles such as intellectual property and brand identity may build up in the US over time. That could give rise to larger US tax liabilities in the longer term as the group becomes more successful in the US marketplace because these intangibles would necessitate attributing more of the profits to the branch.

Subsidiary

In a subsidiary structure the inbound company incorporates a wholly owned subsidiary in the US, making it a separate legal identity distinct from the parent company. This can be used to cap any risks that may be inherent in a branch option. The profits earned by the US subsidiary would be liable to tax in the US at up to 35%7. Further, the repatriation of profits (dividend distribution) by the US subsidiary to the parent is subject to a withholding tax of 30%. However, US tax treaties typically reduce the dividend withholding tax. The chart on the following page provides a high-level look at some of the considerations specific to each of the three typical models.

Tax treaties, the US has income tax treaties with more than 60 foreign countries, providing substantial benefits by reducing or eliminating the 30% withholding tax on US source FDAP income. In addition, US business profits can only be taxed to the extent that the foreign person’s involvement in the United States rises to the level of a permanent establishment. Generally, a PE does not include activity that is considered auxiliary and preparatory. The threshold for a PE is higher than the threshold of a US trade or business, and an entity that might otherwise be subject to US net tax on ECI can be exempted under an applicable treaty from paying federal income tax if its level of activity does not rise to the threshold of a PE. The exemption from paying tax does not exempt the foreign person from otherwise applicable filing obligations (e.g., an annual income tax return).
What may come as a surprise to treaty countries is that under the US Constitution, treaties and laws passed by Congress are the “supreme Law of the Land” and have equal authority. That means US statutory guidance requires only that “due regard” be given to treaties. In addition, US case law generally supports the idea that precedence be given to the most recently enacted authority. Thus, it is possible for Congress to enact laws overriding existing US treaty commitments. Even when the treaties are upheld, they do not govern taxation by the individual states.

To combat potential abuse of the treaty system, the US tax authorities have tried to limit the extension of treaty benefits to residents of a treaty country that satisfy three conditions:

1. Economic ownership — the resident must economically or beneficially own the income.
2. Tax ownership — the resident must be subject to tax on the income imposed by the treaty country as a resident of that  country. An example of rules limiting treaty benefits due to tax ownership are the regulations regarding hybrid entities under IRC Section 894.
3. Economic nexus — the resident must have a sufficient economic nexus with the treaty country to establish that it is not merely using the country to obtain a tax advantage. Two restrictions on nexus are the Limitation on Benefits (LOB) articles, which define additional qualifications beyond mere residence that must be met, and triangular provisions, which deny or reduce benefits for certain income earned through a third-country PE. US tax authorities limit access to preferential treaty rates to entities that have economic ownership of the income eligible for treaty benefits.

Access to treaty benefits may be limited to the extent that the entity subject to tax does not have an economic nexus with the jurisdiction that is granting treaty benefits. Most US treaties have an LOB article that prevents non-residents from obtaining treaty benefits by establishing intermediary entities in treaty countries.

Controversy, misconceptions and potential trouble spots, Transfer pricing controversy
One consequence of this expanding global marketplace is the increasing potential for double taxation – the result of two or more taxing authorities attempting to tax the same profits because they do not agree with your transfer pricing. Experience tells us that the best plan is to assume controversy will happen and be prepared with a strategy for managing. Among the options are Advance Pricing Agreements (APAs), Competent Authority relief and arbitration.

Accidental expatriates, Employees living and working outside their home country are typically referred to as expatriates. That arrangement would generally involve your human resource department and include a predetermined contract that takes into account the tax and other business ramifications for both the individual and the company, at home and abroad. But what happens when the employee or contractor is sent to the US for only a short-term assignment or immediate business requirement without following formal procedures? Depending upon some clear — and less clear — factors and circumstances, such as length of stay or amount of compensation earned while in the US, you may have created an accidental expatriate.

The activities of these individuals can carry significant risk for you and your employees, primarily:

• Non-compliance with US immigration, tax and social security laws
• Double taxation of business profits by the home country and the US
• Assessment of penalties
• Failure to properly budget and allocate costs
• Employee exposure to taxation related to short-term international business travel

Keep in mind that although our handbook is specific to inbound companies doing business in the US, accidental expatriates can arise in other countries as well. The best approach is not to take any overseas business travel lightly, and to make sure that your local and US human resource professionals are involved in any contract and placement processes.

Treaties and state tax liability foreign investors in the United States should also keep in mind that availability of treaty benefits to offset the federal taxation of income may not necessarily apply to mitigating state income tax. As a general rule, states are not a party to tax treaties between the United States and foreign nations. In fact, some states, such as California, do not recognize the PE article of the US income tax treaties and do not contain any other rules that would exempt income generated by activities in their state from state income tax. For example, assume a Foreign Corporation (FC) sells goods on an arm’s length basis to its wholly owned US subsidiary, a California corporation, (US Sub) on consignment. US Sub then sells the goods on its own behalf to independent retailers and wholesalers throughout the United States. FC has no employees in the US and conducts no other business in the US. Pursuant to the treaty, FC’s US activities may not rise to the level of a permanent establishment, so FC may not be subject to US federal income tax. However, the apportioned net California source income generated by the activities would be subject to California income tax. That means FC would need to file in California to report its worldwide income and apportion that to California based on that state’s tax laws.

Winston Wambua

International Offshore Specialist
 
For more information please contact me on

Mobile +971553350517

Email: winstonk@live.com
 
Skype: Winston.Wambua