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 2024. 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 should demonstrate independent decision making without India’s involvement through qualified local management.
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 rate would be 40% excluding additional charges. This is higher than 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 introduction of POEM, there is overlap between Indian and UAE tax laws. Multinationals must re-examine 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.
