An Income tax regulation revolves around two main concepts, one is the person who should be taxable (residency test), and the other is the income that should be taxable (source test). For a country to exercise a taxing right either one of the concepts as mentioned above should be fulfilled.
A Place of Effective Management is one of the tests of residency of a company, especially when the company is legally situated offshore however managed/ controlled through a different jurisdiction. It is a well-stated global principle that is also mentioned in the UAE corporate tax.
What is different with the UAE corporate tax is that the same has been implemented for the first time in the country, and the country was an attractive jurisdiction for many headquarter regimes for control and management of many offshore businesses.
The UAE corporate tax law is embedded in the Federal Decree -Law no 47 of 2022 on the Taxation of Corporations and Businesses (CT Law). Article 11 of such CT law in Clause 3b mentions the concept of effective management and control of a company incorporated in a foreign jurisdiction.
Article 11(3)(b) reads as follows:
A Resident Person is any of the following Persons.“A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.”
POEM is a globally recognised test for determining whether a foreign-incorporated firm can be regarded as a tax resident in another nation. As a result, PoEM serves as the location where vital management and business choices that are required for the operation of the entity’s company are made.
Objectives of POEM:
- To bring such entities under the tax net that were registered outside UAE but managed and controlled from the UAE.
- To introduce globally accepted residency rules.
The concept is further clarified in the Corporate tax FAQs issued by the ministry. Question 20 of such FAQS provides information on the concept of POEM of an entity in the UAE. It states that “A foreign company may be treated as a resident person for UAE CT purposes if it is effectively ‘managed and controlled’ in the UAE All facts and circumstances must be considered in determining where a company is effectively managed and controlled, but a relevant indicator may include the place where the strategic decisions affecting the business are made.”
As per the above clarification the facts and circumstances needs tone considered for considering whether there is a POEM or not. What could be such facts and circumstances is not clarified by the FAQ, however, based on the past experience, the following could be the indications:
- Place of strategic decision making
- Place where meetings of Board of Directors are held
- Place where the executive board is based along with integral management functions
- Place of influence of Shareholders
- Place of residence of management and board members
- Place where accounts and financial statements are maintained
- If the entity is managed through a manager, the place where manager takes decisions
The above list is only an indicative list and there could be other additional considerations to take into account before holding whether the foreign company has POEM in the UAE or not. What is the impact of having a POEM in the UAE.
- The foreign entity would be treated as a resident entity in the UAE
- The worldwide income could be taxable in the UAE
- Applicability of the entire corporate tax regulations of the UAE
- Possibility of dual taxation due to dual resident
- Issues around accessing the tax treaties
- Issues around foreign tax credit and its utilisation
How should you plan for the avoidance of the formation of POEM in the UAE?
- Undertake an in-depth impact analysis on the qualitative aspects of corporate tax and do not stop at the financial numbers but also analyse such qualitative aspects.
- Re-analyse the operational structure around headquarter services, including the conduct and the contracts
- Undertake an in-depth analysis of GAAR and analyse if the foreign entities have full fledged substance and whether the HQ services are a service provider rather than control and management
- Delineate the management from the HQ services and place respective management and control in respective legal entities.
For any Uae corporate tax matters, you can write to us at firstname.lastname@example.org.