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KCM Consultants LLC
Corporate Tax

UAE Company or Branch? POEM and Free Zone Tax Risk

An Indian promoter who sets up a UAE company but runs it from India can end up with an Indian tax resident, no treaty cover and a lost free zone rate, all at once.

By Suril Mehta, CA, Partner, K C Mehta & Co LLP | KCM Consultants LLC, Dubai

Published 11 November 202611 min

Key Takeaways

  • A UAE company whose key management and commercial decisions are in substance made in India is an Indian tax resident under the place of effective management (POEM) test in section 6(10) of the Income-tax Act, 2025. Its worldwide income is taxed in India at 35% plus surcharge and cess, about 36.4% to 38.22%.
  • Treaty residence is a separate and stricter hurdle. Under Article 4 of the India-UAE treaty, a UAE company is a UAE resident only if it is incorporated in the UAE and managed and controlled wholly in the UAE.
  • In the UAE, a free zone company that fails the Qualifying Free Zone Person (QFZP) conditions in any part of a tax period loses the 0% rate for that period and the next four. One bad year costs five.
  • A branch has no separate residence to defend. For an Indian company, UAE branch profits are taxed in India with credit for UAE tax, so chasing 0% for a branch usually saves nothing.
  • Where decision-making cannot honestly move to the UAE, a branch is often the better route. It is one factor among commercial, legal and other tax points, not a substitute for them.

The question, and why there is no clean answer

We are asked almost every week whether to set up a company or a branch in the UAE. The answer sits across commercial, contractual, legal and tax angles. This article takes one: where the entity is managed from, and what that does to residence in India, under the treaty and in the UAE.

An Indian promoter incorporates a company in a Dubai free zone. The board still sits in India, pricing calls happen in India and bank approvals happen in India. The company is registered in the UAE and run from India.

Company or branch: the decision table

Point UAE company (subsidiary) UAE branch of an Indian company
Legal status Separate legal person, liability ring-fenced Same legal person as the Indian company
Residence risk POEM can make it resident in India No separate residence to defend
Treaty residence Needs UAE incorporation and management and control wholly in the UAE The Indian company is the treaty resident (India); the branch is a permanent establishment in the UAE
UAE tax 0% only if it is a QFZP with real substance in the zone; otherwise 0% to AED 375,000 and 9% above A free zone branch can also be a QFZP, but the same substance conditions apply
India tax on profits Not taxed in India until distributed, unless POEM applies Taxed in India as the Indian company’s own income, with credit for UAE tax
Repatriation Dividend, taxed in the Indian company’s hands Remittance of profit, no dividend layer
Who can use it Individuals and companies A company (or other entity) that already exists

India: POEM

Section 6(10) of the Income-tax Act, 2025 (section 6(3) of the 1961 Act) makes a company resident in India if it is an Indian company or its place of effective management is in India in that tax year. POEM means the place where key management and commercial decisions necessary for the conduct of the business of the company as a whole are, in substance, made.

The CBDT’s POEM guidelines (Circular 6 of 2017) look at where those decisions are actually taken, not where the paperwork is signed. CBDT Circular 8 of 2017 says the POEM guidelines do not apply to a company with turnover or gross receipts of INR 50 crore or less in a financial year. This is an administrative position, not a statutory limit, and the Act as enacted has no turnover carve-out. It makes POEM largely a bigger-company problem today. It does not make a structure safe to build on, because it can change and it is tested each year.

Once a foreign company is held to be resident, it is taxed on its worldwide income. A foreign company is charged at 35% under Paragraph E of Part I-B of the First Schedule to the Finance Act, 2026, plus surcharge of 2% (total income above INR 1 crore up to INR 10 crore) or 5% (above INR 10 crore), plus 4% cess. That gives:

  • Income up to INR 1 crore: 35% x 1.04 = 36.4%
  • Above INR 1 crore up to INR 10 crore: 35% x 1.02 x 1.04 = 37.128%
  • Above INR 10 crore: 35% x 1.05 x 1.04 = 38.22%

For the first year in which a foreign company becomes resident through POEM, section 220 of the 2025 Act (section 115JH of the 1961 Act) lets the Government notify exceptions and adaptations for computing total income and losses. It softens the first year’s computation; it does not remove the residence.

Treaty residence: the “wholly” test

Article 4(1) of the India-UAE treaty treats a company as a UAE resident only if it is incorporated in the UAE and managed and controlled wholly in the UAE. The word is “wholly”. That is stricter than POEM, which asks where key decisions are in substance made. A company can have its management only partly in India and still be argued to fail the treaty test.

Treaty protection can slip away before POEM formally applies. A UAE company that is not a UAE resident under Article 4 does not get the treaty’s allocation of taxing rights, its withholding tax limits or its permanent establishment protections. The Tax Residency Certificate (TRC) is necessary evidence, because section 159(8) of the 2025 Act (section 90(4) of the 1961 Act) requires a residence certificate from the other country before treaty relief is claimed. But a TRC is evidence of UAE residence. It does not settle that the “wholly managed and controlled” condition is met on facts. See our guide to the UAE TRC.

UAE: the free zone loss risk

A QFZP gets 0% on Qualifying Income. One of the Article 18 conditions in the Corporate Tax Law is adequate substance. Article 8 of Cabinet Decision No. 100 of 2023 says the entity must undertake its core income-generating activities in a Free Zone or Designated Zone and, for each activity, have adequate assets, an adequate number of qualified full-time employees and adequate operating expenditure there.

Where the core activity is the decision-making itself (holding, treasury, group management or intellectual property) and it happens from India, the substance condition is genuinely at risk. Article 5(2) of Ministerial Decision No. 229 of 2025 (which replaced Ministerial Decision No. 265 of 2023 from 1 June 2023) says a QFZP that fails any condition at any time in a tax period ceases to be a QFZP from the beginning of that period and for the subsequent four tax periods. In fairness, the UAE tax of 9% would usually be creditable in India, so the damage is not 9% plus 38%. It is that you planned for a 0% jurisdiction and landed in a 38% one.

Other conditions apply, including the de minimis limit on non-qualifying revenue and audited financial statements. See our free zone guide and the QFZP distributor article.

Worked example 1: what POEM costs

An Indian company (on the 22% regime under section 200 of the 2025 Act, effective 22% x 1.10 x 1.04 = 25.168%) has a UAE arm that earns profit of 100 (INR crore, so the 5% surcharge band applies). Assume the UAE arm is a QFZP paying no UAE tax, and nothing is distributed further in India.

Case First layer of tax Dividend or remittance layer Total tax on 100 Net
1. UAE company, decisions taken in the UAE 0 Dividend 100 x 25.168% = 25.168 25.168 74.832
2. UAE company, decisions taken from India 100 x 38.22% = 38.220 Dividend (100 – 38.220) = 61.780 x 25.168% = 15.549 53.769 46.231
3. UAE branch, decisions taken from India India taxes branch profit 100 x 25.168% = 25.168; UAE tax 0 None 25.168 74.832

Check: 38.220 + 15.549 = 53.769, and 100 – 53.769 = 46.231. The gap between case 2 and case 1 is 53.769 – 25.168 = 28.601 points. If the UAE had charged 9% (9 on 100), the Indian credit would reduce India’s 38.22 to 29.22 and the total on the first layer would still be 38.22, so case 2 is unchanged. In case 3, with UAE tax of 9, India taxes 25.168 less credit 9 = 16.168, and the total is again 25.168. The branch lands exactly where a clean UAE company would, without a place of effective management to defend.

Worked example 2: the five-period cost

A free zone company earns taxable income of AED 4,000,000 a year. It qualifies as a QFZP and pays nothing. In one tax period its core decisions move to India and it fails the substance condition. It then falls under the standard regime: 0% on the first AED 375,000 and 9% above.

  • Annual tax: (4,000,000 – 375,000) x 9% = 3,625,000 x 9% = AED 326,250
  • Five tax periods (the failing period and four more): 326,250 x 5 = AED 1,631,250

This is before any Indian tax. For an Indian company with a UAE subsidiary that is a deemed Indian resident, the UAE tax is usually creditable in India, so the real damage is the one shown in example 1.

What to do: practical considerations

  1. Map where each key decision is made: strategy, pricing, treasury, hiring, major contracts and bank approvals. Do it now, not when a notice arrives.
  2. If you choose a UAE company, move the top strategic decisions to the UAE. Actual people with actual authority must take them. Paper minutes do not count.
  3. Put the substance in the zone for the whole tax period, not just at year-end. Test it against Article 8 of Cabinet Decision No. 100 of 2023.
  4. Keep the TRC and the board record together. The TRC shows UAE residence; the board record is your evidence for “managed and controlled wholly in the UAE”.
  5. Where decision-making honestly cannot shift, consider a branch. POEM is not relevant to a branch, because a branch is not a separate company and has no residence of its own.
  6. Do not rely on POEM litigation being thin. Reported litigation since FY 2016-17 has been surprisingly thin, but we would not build a structure on the hope that nobody looks.

See also equity vs debt for a UAE subsidiary and our India income tax guide for UAE residents.

FAQ

1. Does POEM apply to a UAE branch of an Indian company?
No, because a branch is not a separate company and POEM decides the residence of a company. The Indian company is already resident in India and is taxed there on its worldwide income, including the branch profit, with credit for UAE tax.

2. Is the INR 50 crore turnover threshold in the Income-tax Act, 2025?
No. Section 6(10) has no turnover carve-out. The threshold comes from CBDT Circular 8 of 2017, issued under the 1961 Act. It is still the working position, but it is administrative, applied by financial year, and not something to plan around.

3. Does a UAE Tax Residency Certificate prove treaty residence?
It is required for treaty relief (section 159(8) of the 2025 Act) and is strong evidence of UAE residence. It does not prove that the company is managed and controlled wholly in the UAE, which is what Article 4(1) of the India-UAE treaty requires. The TRC is necessary but not sufficient.

4. Can a UAE branch of an Indian company be a QFZP?
A branch of a non-resident registered in a free zone is a Free Zone Person, so it can qualify if it meets the same conditions, including substance. For an Indian company the 0% usually saves nothing, because India taxes the profit anyway and credits only the UAE tax actually paid.

Talk to KCM about structuring your UAE entry

Sources and last checked: 6 November 2026

This is not to be construed as legal advice. The actual advice will depend upon the facts and will have to take into consideration the case-specific facts and the anti-abuse regulations.

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