Introduction
The introduction of Place of Effective Management (POEM) rules in India has brought uncertainty for multinational groups operating in India and UAE. As per POEM, a foreign company can be considered an Indian taxpayer if key decisions are made in India. This changes tax planning for groups with UAE subsidiaries.
This blog will explain how POEM may impact UAE subsidiary taxation from 2025. It will provide context on POEM rules, consequences, effects on subsidiaries, strategies to address POEM risks and answer commonly asked questions.
Understanding Indian POEM Rules
POEM refers to the place where important business and financial decisions are effectively made. New Indian tax laws say a foreign company can be a tax resident in India if its POEM is located here.
The Central Board of Direct Taxes (CBDT) has issued guidelines on determining residency based on POEM. It looks at where executives make major commercial decisions crucial for business operations.
The CBDT has also clarified POEM through circulars. They explained concepts like the active business test used in POEM analysis.
POEM Consequences
If a foreign company is seen as a POEM resident, it must follow rules for Indian resident companies. Its worldwide income will be taxed in India rather than income from Indian sources alone. It also pays tax at rates for foreign companies which are higher.
Impact on UAE Subsidiaries
Application via Indian Headquarters
If a UAE subsidiary’s key decisions are taken in India by its Indian head office, POEM could apply to the subsidiary.
Increased Compliance & Documentation
The subsidiary must prove its management is independent. It has to maintain evidence major choices occur in the UAE.
Global Taxation in India
Instead of taxing based on income source, the subsidiary’s entire global profits could be taxed in India under POEM.
Strategies for UAE Subsidiaries
Establish Independence
The subsidiary must pass the Active Business Outside India (ABOI) test. Under CBDT guidelines, a company’s POEM is presumed to be outside India if it meets four cumulative conditions: passive income is 50% or less of total income, less than 50% of its total assets are situated in India, less than 50% of its employees are situated in India or are resident in India, and less than 50% of its payroll expenses are incurred on such employees. Additionally, under CBDT rules, the majority of board meetings must be held outside India and practically, these must physically take place in the UAE to satisfy the Federal Tax Authority’s (FTA) effective management and control rules for UAE tax residency.
Maintain UAE Presence
It must have physical offices and daily operations run from the UAE to show real economic activity outside India.
Review Structures
Large companies need to examine current decision making and structures to identify any POEM risks.
Common Queries
What is the Applicable Tax Rate?
As a foreign company, the base corporate tax rate in India is now 35%, following reductions made in the Finance Act 2024. Once you add the applicable surcharge (2% or 5%, depending on income) and the 4% Health and Education Cess, the effective tax rate lands between 36.4% and 38.22%. This remains higher than the rate for domestic Indian companies.
How can MNCs Limit POEM Surprises?
They must evaluate structures to improve transparency and reduce uncertainty arising from different POEM interpretations over time.
Conclusion
With the UAE now enforcing its 9% Corporate Tax regime, an overlap with Indian POEM rules can trigger severe dual-residency issues. If a UAE subsidiary is deemed an Indian tax resident under POEM, it must rely on the tie-breaker rules and Foreign Tax Credit (FTC) mechanisms under the India-UAE Double Taxation Avoidance Agreement (DTAA) to mitigate being taxed twice. Multinationals must proactively re-examine their boardroom structures to avoid unfavorable tax outcomes and protect all units, including those in the UAE. Proper planning and documentation are crucial under these evolving regulations.
