Place of effective management or control

Place of effective management or control – Can this lead to foreign companies and MNCs getting taxed in UAE?

Background:

One of the most important concepts introduced in Public consultation document (‘PCD’) released by UAE Ministry is the taxability to foreign companies and multinationals that are ‘effectively controlled and managed’ in UAE, wherein they will be treated as a resident person and will be taxed in UAE on their worldwide income.

The definition of a company which is effectively controlled and managed in UAE has been vaguely provided in PCD wherein it states that one needs to consider the place where the directors or other decision makers of the company make the key management and commercial decisions.

However, given the reference of OECD regulations at various instances in PCD, we can fairly assume that above definition has been designed in line with OECD Commentary in Model Tax Convention Article 4, which states that residency of a dual resident entity is determined to be in the country where its Place of Effective Management (‘PoEM’) is situated.

It further states that ‘PoEM is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.’ Also, it provides various factors which needs to be considered to determine the PoEM:

Consequences of becoming a resident in UAE:

A foreign company that is effectively managed and controlled in UAE will be subject to UAE corporate tax on their worldwide income.

Interplay with Transfer Pricing (‘TP’)

If the transactions of entity (that has a PoEM in UAE) and its group companies outside UAE, are considered to be within the ambit of transfer pricing regulations in UAE, it might increase the compliance burden of such entity to a great extent.

Way Forward

The POEM concept assumes significance to foreign companies having nexus with UAE, especially UAE based MNCs having outbound investments. It will be important for MNCs to assess functioning of group’s operations and evaluate impact on account of PoEM, if any, on its overseas entities to mitigate associated risks such as unexpected tax payments and penalties.