Insights · India-UAE Corridor
POEM Risk for a Dubai Company Owned by Indian Residents
When a UAE company becomes tax resident in India, the Rs 50 crore threshold, the active business test, and the governance that keeps effective management in the UAE.
A company incorporated in Dubai is treated as tax resident in India if its place of effective management is in India. If the people who take the key management and commercial decisions sit in India, the UAE company can be taxed in India on its worldwide income, and the 0% or 9% UAE outcome the structure was built for is lost. For Indian promoters with a UAE entity this is the single largest Indian tax risk.
Key points
- The test is where key management and commercial decisions are made in substance, not where the company is registered
- CBDT Circular 8 of 2017: the POEM guidelines do not apply to a company with turnover or gross receipts of Rs 50 crore or less in the year
- A company with active business outside India is presumed to have POEM outside India if the majority of board meetings are held outside India
- The presumption falls away if the board is not actually taking the decisions
- Company residence sits in section 6 of the Income-tax Act, 2025, as it did in section 6(3) of the 1961 Act
What place of effective management means
The law defines it as the place where key management and commercial decisions that are necessary for the conduct of the business of the entity as a whole are, in substance, made. The Central Board of Direct Taxes issued guiding principles in Circular 6 of 2017. The approach has two steps: identify who actually takes the key decisions, then identify where those persons are when they take them. Substance prevails over form throughout.
The Rs 50 crore threshold
Circular 8 of 2017 provides that the POEM provisions shall not apply to a company having turnover or gross receipts of Rs 50 crore or less in a financial year. For many founder-owned UAE trading and services companies this is the practical protection in the early years. It is tested every year on the foreign company’s own figures, so a business that grows through the threshold needs its governance in order before that happens, not after.
The active business outside India test
A company is engaged in active business outside India if all of these are met:
- passive income is not more than 50% of its 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
- payroll on such employees is less than 50% of total payroll
Passive income here includes income from transactions where both the purchase and the sale are with associated enterprises, plus royalty, dividend, capital gains, interest and rent. A Dubai company that simply buys from and sells to Indian group companies can fail the test on this limb alone.
Where the test is met, POEM is presumed to be outside India if the majority of board meetings are held outside India. The presumption does not apply if the board is standing aside while the Indian parent or an Indian resident actually exercises the powers of management.
Where the test is not met, the enquiry is fully factual: who takes the decisions and where. Board location matters less than the location of the people whose decisions the board merely formalises.
Facts that point towards India
- The Indian promoter approves pricing, contracts, hiring and banking from India, and UAE directors sign what they are sent
- Board meetings are held by video with most directors dialling in from India
- The UAE company has no senior employee with real authority
- Email and messaging trails show instructions flowing from India on matters beyond shareholder-level decisions
- Bank mandates can be operated only by persons resident in India
Shareholder decisions, such as approving a sale of the business or a change of capital, do not by themselves establish POEM. Nor do routine support functions such as accounting or HR performed in India under a group policy.
If POEM is in India
The company becomes resident in India for that year and is taxable on its global income. It is still a foreign company, so the rate is 35% plus surcharge and cess, not the domestic company rate. Withholding, transfer pricing, advance tax and return filing obligations follow, with special transition rules for the first year. A finding requires prior approval of the Principal Commissioner or Commissioner, and a panel of three senior officers must give the company a hearing, but the dispute itself is expensive and slow.
The treaty does not rescue a company managed from India
Under the India-UAE tax treaty, a company is a UAE resident only if it is incorporated in the UAE and managed and controlled wholly in the UAE. A company whose effective management is in India will struggle to meet that definition, so it cannot rely on the treaty to override the Indian residence finding. A UAE tax residency certificate is necessary evidence, but the Indian tax officer is entitled to look at where management actually happens.
How to keep management in the UAE
- Appoint at least one UAE-resident director or general manager with real authority and the experience to use it.
- Hold board meetings physically in the UAE, with a majority of directors present there, and minute the discussion, not only the resolution.
- Set written authority limits showing which decisions are taken by UAE management and which are reserved for shareholders.
- Keep contracts, bank mandates and key records in the UAE.
- Track the four active-business ratios and the Rs 50 crore threshold every year.
- Price transactions with Indian group companies at arm’s length and document them.
Our UAE international tax and India international taxation teams run POEM health checks on existing structures. The FEMA side of funding a UAE company is covered in ODI vs LRS for setting up a UAE company from India.