Is Your Place of Effective Management in the UAE?

When UAE companies ask the FTA to issue a Tax Residence Certificate (TRC), there is often surprise when the FTA requests confirmation that the applicant’s place of effective management — its POEM — is in the UAE.

The surprise rests on the understanding that a UAE juridical entity is tax-resident in the country in which it was incorporated. Most UAE double-tax conventions accept that principle. POEM should therefore become relevant to a UAE-organised company only where another country also considers the same company tax-resident. That tie must be broken, and the internationally accepted tie-breaker gives precedence to the country in which the company’s POEM is found. Asking for POEM makes more obvious sense where a foreign company applies for a UAE TRC.

Case law

The UAE courts have yet to issue a decision on the meaning of POEM, but decisions in other jurisdictions provide relevant precedents.

In HM Revenue and Customs v Smallwood, the English Court of Appeal confirmed that identifying the location of a company’s central management and control involves the same enquiry as identifying its POEM. The court said that POEM is where high-level decisions are made — normally where the authorised decision-making body meets — unless those functions have been usurped elsewhere.

Italian Supreme Court Case 35085 confirmed that a Luxembourg company’s POEM existed where its administrative headquarters were located: the place where its main business decisions were taken. The court concluded that POEM was in Italy because the company’s strategic, industrial, financial and planning decisions were taken there.

The Belgian Court of Appeal in Ghent considered POEM in the context of the OECD Model Tax Convention and its commentary: the place where fundamental decisions were taken, the company was effectively managed and business decisions were made. Its analysis included whether the company had Belgian shareholders; whether directors were nominees or natural persons; where real business activity occurred; whether the registered seat was accommodation or a real office; where financial management took place; and whether related-party profit margins reflected any added value. The court ultimately concluded that the taxpayer was a letterbox company operated entirely from Belgium and that its POEM was in Belgium, not Luxembourg.

Of particular relevance is Interworld Shipping Agency LLC v DCIT, which concerned POEM under the India–UAE double-tax convention. The court held that the UAE company was managed and controlled by a Greek national who had not shown that he exercised that control from the UAE. Apart from a copy of a residence card, no details confirmed he had spent more than 183 days in the UAE. This mattered because he was the company’s sole effective manager and controller. The court also considered the substance of the board minutes.

The FTA’s published position

The FTA states that POEM is the place where the key management and commercial decisions necessary for the conduct of the juridical person’s business as a whole are, in substance, made.

Decisions relevant to POEM include:

• setting general policies, such as investment and operational policies;
• determining the company’s strategic direction;
• deciding which types of transactions the company may enter into, including mergers, acquisitions and the purchase or sale of significant assets;
• appointing senior executives and granting them authority over day-to-day operations;
• overseeing those appointed to manage the company’s day-to-day business; and
• handling key financial matters, including the use of profits and declaration of dividends.

The FTA therefore appears to place POEM where strategic control, rather than day-to-day management, is exercised. This aligns its position with the OECD commentary.

The FTA has also confirmed that the following are not, in themselves, key management and commercial decisions: formally approving decisions already made by others; merely implementing others’ decisions; conducting day-to-day activities; and performing legal and administrative tasks such as maintaining a share register or taking the minimum steps needed to preserve registration.

Why the answer matters

When the FTA asks a taxable person to confirm its POEM, the question cannot be treated lightly or answered retrospectively. Without genuinely taking and documenting the decisions that count in the UAE — particularly strategic, industrial, financial and planning decisions — a company should not expect the FTA to issue the TRC.

The cost falls on the taxpayer. It may lose the right to claim treaty benefits, including reduced withholding-tax rates and treaty treatment of capital gains and trading profits.

References

1. HM Revenue and Customs v Smallwood [2010] EWCA Civ 778.
2. FTA, Tax Procedures Guide: Tax Resident and Tax Residency Certificate, TPGTR1, p. 16.
3. Ibid., p. 16.
4. Ibid., p. 17.