us expat tax guide – united arab emirates
Foreign corporation shares, Self-employment, and Owning a property
This chapter discusses what would happen if you have shares in a foreign corporation, self-employment tax filing, and owning a property in the UAE.
Foreign Corporation from a US tax perspective
A foreign corporation is generally defined as a business organization that operates outside of the country in which it was formed. The Internal Revenue Service (IRS) defines a foreign corporation as:
“One that does not fit the definition of a domestic corporation, which is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia.”
A US citizen or a green card holder (a US person) who has shares in a foreign corporation and an entity that is located outside the US will have different tax filing requirements than one who owns a domestic corporation. However, not all US foreign corporation shareholders have the same tax obligations. The ownership stake you own in that foreign entity will determine your filing requirements and the level to which you need to report information on your tax return.
Let us say we have an individual who owns 25% of the shares of a foreign corporation. The remaining 75% of this entity is owned by non-US individuals. In this case, the US person with 25% ownership in the foreign corporation is required to file Form 5471 with the IRS.
In Form 5471, this individual will report information about the foreign corporation, including the address of the corporation, the shares, and the value of the shares. However, this gets a bit tricky when you have more than 50% ownership as a US individual or own more than 50% when you have multiple shareholders.
Let us say you have multiple shareholders, and the majority of the shareholders combined own more than 50% of the corporation. Then, that entity is considered to be a controlled foreign corporation, which basically means that the individuals would be taxed on the net income of the entity.
If you own more than 60% of shares in a foreign corporation, then from a tax perspective, whatever sits in the company will be deemed taxable based on the US person’s shareholding percentage. The US person would have to pay taxes on the company’s income, even if they didn’t take the money out of that foreign corporation.
The tax filing process can get a bit tricky and messy, depending on your stake in the company. Therefore, I would recommend that all US citizens or green card holders contact us to ask questions before establishing any foreign corporation. Let us know your plan so that our experts can advise you accordingly.
Self-Employment Income: How Does It Work When Living in the UAE?
Self-employment is the ultimate goal for most individuals. This career route has been hailed as the key to financial independence for decades. The appeal of being your own boss, working your own hours, and even being able to work in any part of the world has only increased with time. This also comes with more opportunities to carry out one’s contractual work outside their country.
In fact, we have been seeing a lot more self-employment income in the United Arab Emirates (UAE) than we have in previous years. However, most people only focus on the social, financial, and emotional benefits of being self-employed, neglecting the tax implications of being “your own boss” in a foreign country.
It’s crucial to remember that carrying out your contractual work outside US soil does not automatically exempt you from Internal Revenue Service (IRS) filing requirements.
So, what does this mean for a US person in the UAE?
If a US citizen or green card holder is working as an independent contractor, that means they are collecting income from different sources based on the services they are performing and including expenses as part of receiving that income.
Let us say we have a US person living in the UAE. That person contracted with multiple other individuals or entities on the basis that they would perform certain work for them. Then, that person is anchoring certain costs out of his or her pocket to do these services and perform the work. That requires an additional form to be filed with the IRS along with your Form 1040.
The additional form reports on the cross-border revenue that the US person has received as well as the expenses incurred. The expenses could be, for example, if you use a part of your home to do some of the work, if you have advertising fees, license fees, commissions, or even meals. You would put in these expenses, and then you would end up with a net income.
Your net income could be excluded on the basis that you qualify for the foreign earned income exclusion. And if you have enough exclusions, that net income would still be taxed. It might be exempt from tax at the federal level but would still be taxed as self-employment income. In the US, self-employment income is taxed at a rate of 15.3%, and that percentage is basically a combination of Social Security and Medicare.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
Owning a property in the UAE
In the past few years, the United Arab Emirates (UAE) has been a very attractive place for some individuals to purchase properties. The appeal of living in big cities like Dubai and Abu Dhabi has continued to rise with professional opportunities, tax benefits, cultural diversity, and a lifestyle comparable to no other.
This makes the UAE ideal not only for living but also for property investment. With Dubai as a global tourist hotspot, a lot of United States (US) and non-US individuals have opted for rental properties to increase their income. But as you contemplate your property investment options as a US individual in the UAE, it is crucial that you evaluate the tax implications and filing obligations as well.
So, what does it mean to have property in the UAE?
A US citizen or green card holder may purchase property in the UAE. They might also rent that property out if they so wish. This means that the person will be generating rental income, which still needs to be reported and taxed on their US tax return.
There would still be some expenses that the individual pays for the property, which could be used to offset the rental income received. On the basis that it is a net income, then that income would be taxed on the US return. If it is a net loss, then based on the individual’s tax situation, they could either benefit from it in the current tax year or the net losses could be carried forward for future years.
If the US person decides to live on the property, then different regulations and filing requirements will apply. Living on the property will not incur any tax liability, but it will eliminate your ability to benefit from your housing expenses.
Housing expenses, depending on where you are in Dubai, could be a good tax deduction. However, living on your own property may eliminate that deduction. Some people would argue that the mortgage and interest they pay on the property should count as a form of expense that could be filed on your US tax return.
We can definitely take this stance into account and check whether the mortgage interest is worthwhile to take as a deduction on your tax return. But in most cases, it may not give you a high enough deduction compared to the housing expense deduction. Hence, it is always important to be aware of the options you have before you decide to live in your property or purchase a property altogether.
What if you decide to sell the home?
If a US person lives in and has owned the property for two out of the past five years from the date of sale, then that person is allowed to exclude a portion of the gain. The portion that is allowed to be excluded would depend on your individual filing status.
If your filing status is married filing separately or single, then the exclusion amount is $250,000. If your filing status is married filing jointly, the exclusion amount is $500,000.
Now, if the net gain from the sale of your property is, for example, $1 million, you may still be eligible for exclusion. In this case, if you sell your $1 million property and you’re married and filing jointly, you would get to exclude half of that $1 million. However, the remaining amount would still be taxed. This is very important to know and remember when you buy and sell UAE property as a US citizen.
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Do I need to file a tax return if I live in UAE?
AM I ELIGIBLE FOR FOREIGN EARNED INCOME EXCLUSION? Learn from Tanveer Mannan, a highly experienced IRS Enrolled Agent based in Dubai. Having worked at EY and PWC before joining EXPAT US TAX, Tanveer has 15 years’ experience of helping Americans get the correct advice when they come to work in UAE. Getting the correct tax […]