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Differences Between Offshore and FZ Company

Offshore areas are one of the options of free economic zone. They are usually created in small countries that do not have their own economic and business base and strive to attract foreign capital by providing tax benefits to foreign companies.
The main advantage of offshore zones is an extremely low level of tax payments. Usually it is about 8-15%, and in some cases, offshore companies are exempted of tax payment during a few years.
Some problems may arise in the implementation of offshore companies while operating from others countries. Generally, banks are reluctant to offer any kind of loans to offshore companies and many enterprises may refuse to sign lucrative contracts with them.
Speaking about the problems of companies registered in offshore zones, we must also mention the strong measures taken to segregate the domestic market from offshore. Practice shows that the offshore companies have minimal chances to enter in the domestic market. And this is not by accident - meaning through tax exemption is a significant competitive advantage over local companies, offshore companies can significantly undermine the local tax, currency and customs legislation.

How to fight offshore world?

In USA, from the 100 largest corporations, 83 have their own offshore structure, while in UK, 97 of the hundreds did the same.
In the last couple of weeks only, coffee chain Starbucks has been accused in the UK of tax optimization through the transfer of funds to an offshore company. Same accusation has been rained down to Apple, the social network Facebook, Ebay, Google and Amazon.

The French and German companies have difficulties with Tax evasion. Now on, the world has more or less established a clear mechanism to combat this phenomenon, mainly based on the tax information exchange. OECD has identified all of the most popular tax havens, and is trying to persuade them to sign transparency agreements. This allows the tax authorities to request at any time, the so-called offshore haven, to provide information data on the shareholders and bank accounts status. The OECD is putting pressure onto those countries (offshore havens) to enter into agreements for tax information exchange. As a result, in the recent years different countries have signed more than 700 transparency agreements. Simultaneously, a tax amnesty was conducted in various European countries – the essence of which was to pay less for those ones recognizing tax evasion, than for the ones who have been exposed by the tax control authorities. The best results have been seen on the countries having in place the strongest policy control on money withdrawals, combined with the investment climate. For example in Germany, the list of tax benefits has been expanded in 2010 for many companies, and they have returned to the budget 4 billions EUR. In France who applied the same policy, the amount has been less with 1 billion EUR. President Barack Obama initiated the battle with offshore companies under his personal control and reduced domestic abuse of offshore havens by automatically charging taxes on all incoming payments. One of the last bastion of offshoring, Cayman Islands, are still not cooperating and disclosing information about the accounts owners.

Companies registered in the UAE Free Economic Zones are tax exempted, no VAT applied, no charges related to the payment of wages. The only exceptions are for some activities, such as oil sector and tourism. Consequently, the United Arab Emirates in fact, being a tax-free country, do not fall under the category of “tax havens” and has never been a blacklisted offshore jurisdiction.

The UAE signed treaties with the following countries for avoidance of double taxation:
Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bulgaria, Bosnia and Herzegovina, Brazil, Chile, China, Germany, Holland, Hong Kong, Greece, Egypt, Georgia, India, Indonesia, Ireland, Italy, Yemen, Jordan, Canada, Cyprus, China, Colombia, Korea, Lebanon, Libya, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Mozambique, New Zealand, Pakistan, Poland, Romania, Russia, Seychelles, Singapore, Syria, Sudan, Tajikistan, Thailand, Tunisia, Turkey Turkmenistan, Ukraine, Uzbekistan, Finland, France, Czech Republic, Chile, Switzerland, Sri Lanka, South Korea and Japan.

The main advantages of UAE free zones are:
• 100% foreign ownership of companies
• No tax on imports / exports of goods and services
• No VAT
• No restrictions on capital and profits repatriation
• No income tax
• Cheap energy
• A stable legal framework
• A stable political and economic situation

There are no restrictions on residency and nationality of shareholders and directors. The shareholders may be physical or corporate legal persons.
Furthermore, the registration of the company in the Free Zone provides an UAE resident visa.
United Arab Emirates, as a tax jurisdiction, have concluded an extensive network of agreements to avoid double taxation - a total of more than 50 countries around the world, which gives obvious advantages to companies registered in the UAE.

The uniqueness of companies registered in the UAE Free Zones is no taxes, and the company can dispose a real office and truly operate in the UAE.
Classical offshore companies cannot operate on the territory where they have been registered. Otherwise, they will have to pay tax on the registration country. That’s the reason why the principle of residency determination may be applied to classical offshore companies, meaning that tax authorities prefer to consider the country of operation instead of the country of registration. This entails high taxation risks in relation with the tax authorities from the different countries concerned. If the company is registered in a UAE free zone, this kind of taxation risk does not exist, because the company can justify and prove his residency in UAE, and there is no tax on the UAE free economic zones.
The real acute question is recently for resident company. Business relationships with offshore companies become complex, and the situation becomes more complicated every year.
In fact, on-shore companies registered in the free zones of United Arab Emirates (not offshore) are considered as full-resident company, but there are no taxes. Thus, in contrast to classical offshore, which financial movements are scrutinized by banks and supervisory bodies, companies incorporated in the UAE, do not cause such investigation problems'.

In addition to the above:
• Presence in the UAE may open new opportunities to work with the markets of the region.
• Opportunities to transfer the production chain in the free zones with the absence of taxes and cheap labor.
• Extensive UAE logistics infrastructures can be used effectively working with international markets.

Companies in the Free Economic Zones of United Arab Emirates can be registered as both: a new independent company and as subsidiary or representative office of a foreign or local company.
The authorized capital of the company, depending on the Free Zone, the activity and the number of partners in the company amounts from USD 14,000 (for example, trading, holding and consulting companies) to USD 300.000 and above (for example, universities or large manufacturing companies). After completion of the registration process, there are no restrictions on the use of the company share capital deposited.
Companies registered as onshore in UAE free zones are resident and have to get a license for the selected activity.

More information about the UAE Free Zones companies is available on our next section.

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