Individuals relocating to the UAE should be mindful of the UAE’s Place of Effective Management test in relation to UAE Corporate Tax law

The United Arab Emirates (UAE) is fast becoming a hub for High-Net-Worth Individuals (HNWIs), investors and businesses. In 2024 alone, the UAE recorded an estimated net inflow of over 6,700 millionaires, more than any other country in the world.

The UAE offers an attractive tax regime for individuals, as presently it does not impose personal income tax. Despite the absence of personal income taxation, since 1 June 2023, individuals conducting business or business activities under a license in the UAE and generating turnover in excess of AED 1 million per year may be subject to UAE corporate tax on the income derived from those activities. UAE corporate tax has been introduced at a 9% rate on taxable income exceeding AED 375,000.

Individuals relocating to the UAE may assume they will not be subject to UAE corporate tax since they are not conducting business (or business activities) under a license in the UAE. However, they should still consider the concept of Place of Effective Management (POEM) and the related test in the UAE, which determines the tax residency of a legal entity they may be engaged with.

While the UAE’s introduction of the POEM concept aligns with common international practices, its potential application is especially significant given the recent inflows of HNWIs who may be fulfilling decision-making duties in the UAE in their roles as directors (or shadow directors) of non-UAE incorporated entities. This highlights the unintended UAE corporate tax consequences that may occur from increased global mobility in the absence of effective planning.

Understanding the UAE’s Place of Effective Management test

According to Article 11(3)(b) of the UAE Federal Decree-Law No. 47 of 2022 (FDL 47/2022), on the Taxation of Corporations and Businesses, foreign entities are subject to UAE corporate taxation if “effectively managed and controlled” within the UAE:

‘Article 11 – Taxable Person

3. A Resident Person is any of the following Persons

(…) b) A juridical person that is incorporated or otherwise established or recognised under the applicable legislation of a foreign jurisdiction that is effectively managed and controlled in the State.’

The UAE’s Federal Tax Authorities (FTA) consider the POEM test to focus on where the strategic level of control is exercised. The POEM, in fact, refers to where vital management and commercial decisions fundamental to the business are taken. Such strategic decisions may include:

• agreeing high-level policies;
• determining strategic direction of the business;
• approving major transactions;
• appointing senior executives to manage routine business;
• determining financial matters, such as profit allocations and dividend declarations.

In contrast, the following are generally not considered to constitute effective management and control:

• implementation of decisions made by others;
• finalisation or approval of decisions made by others;
• day-to-day conduct and management of a company’s activities and operations.

The POEM test applies a “substance over form” approach, assessing all relevant facts and circumstances on a case-by-case basis. Broadly, two steps should be observed to comply with the test:

1. identifying the persons involved; and
2. verifying where the decisions are made.

In light of the above, if an individual manages and controls a foreign-incorporated business from the UAE, they may unintentionally trigger the foreign entity's classification as UAE tax resident by the FTA. As a result, the entity could become liable for UAE corporate tax.

This has significant implications for the HNWIs relocating to the UAE as they may assume they are not conducting a business or business activity under a license in the UAE, but they could still trigger UAE corporate tax obligations if they engage in high level decision-making duties for non-UAE incorporated entities.

Given that strategic decisions are often made at Board level, HNWIs participating in such Board meetings should take steps to ensure they do not inadvertently cause a non-UAE incorporated entity to fall under UAE tax residency.

Substance Matters: POEM risks for Offshore and Tax Transparent Entities

Consider the case of a HNWI who relocates to Dubai and continues to manage a foreign entity, such as a British Virgin Islands (BVI) holding company with global investments. The BVI entity may lack local substance, having no employees, physical office, or active board meetings conducted outside the UAE.

If strategic decisions, as described above, are made by the individual while residing in the UAE, the FTA may determine that the company is “effectively managed and controlled” in the UAE. As a result, the entity could fall within the scope of UAE corporate taxation.

Similar risks may arise in relation to tax-transparent structures, such as UK Limited Liability Partnerships (LLPs) or US Limited Liability Companies (LLCs). These vehicles are often used for cross-border investments and, where they have no UK or US nexus, are typically not subject to local taxation. However, where their members or partners reside in the UAE and exercise effective management functions from within the country, such entities may inadvertently become UAE tax residents.

Without careful structuring and governance, such entities, previously outside the reach of UAE corporate tax, may suddenly face unexpected obligations under the UAE’s POEM framework.

Conclusions

In an environment of increasing global mobility, the perceived tax advantages of relocating to the UAE may be undermined by unexpected corporate tax liabilities without proper planning.

HNWIs relocating to the UAE must be mindful that their involvement in key decision-making activities could inadvertently trigger UAE corporate tax obligations under the POEM test.

To mitigate these risks, individuals with international business connections should:

• Review the governance and substance of their foreign entities;
• Evaluate the location and nature of their decision-making activities.

By anticipating how the UAE's POEM rules may apply, HNWIs can preserve the tax benefits of their relocation while remaining compliant with emerging corporate tax requirements.

Statura Group - Donatello Pirlo and Guido Ravaglia