A Tax Haven in the Desert: Why Indians are flocking to Dubai?

A question that was shooting up recently, was: Why are so many Indians going to Dubai? After a detailed research and analysis I understood that there is a rush by the rich and business enterprises from different parts of the world to the United Arab Emirates (UAE) or Dubai where costly livings, advanced infrastructure as well as an outstanding location attracts. However, what is more appealing to the rich people in India or their corporates in the UAE is not the many glitzy buildings or premium property development so much as the competitive tax systems that have managed to attract the interest of Indian businesses and High Net-Worth Individuals (HNIs) who feel that they could make more ends meet if given some leeway.

With reinforced tax mechanisms under Indian laws, the UAE is looking crisp and is presenting itself as a plausible option for any company capable of restructuring operations to minimize tax exposure and avoid breaching laws. This is more particularly related to the Place of Effective Management (POEM) that is how overseas Indians have been managing their businesses in India. We will examine the context of these tax planning strategies from a more complete perspective and look at the legal, ethical, and risk dimensions associated with these new trends.

UAE’s handing tax matters: Do you think there is more to it than just tax free zones?

Compared to India, the structure provided for taxation in the United Arab Emirates (UAE) is a more lenient one. While in India, there is a working integrated taxation, which encompasses corporate taxes, Income taxes and Goods and Services Tax (GST), there’s an easier and business facilitated tax regime in UAE. The major highlights of this attraction are the free zones in the UAE which have the provision of complete foreign ownership, no customs duty and above all, no taxes at all.

1. Corporate Tax Incentives: In spite of this, certain attributes for free zone firms still stand. From June 1, 2023, UAE will introduce a 9% corporate tax applicable to businesses. Companies registered within these free zones are not subject to corporate tax on qualifying income up to AED 375,000 (around IRN 90 lakhs). In addition, the corporate tax does not cover companies with revenues below AED 3 million (around IRN 7 crores), making it appealing to small and medium-sized businesses in the UAE.
2. Absence of Personal Income Tax: Another incentive that the country has which several Indian expatriates or foreigners may perhaps not appreciate is the absence of a personal income tax. For Indian HNIs, this means there is a chance of saving a lot of money from high levels of income being taxed in India where up to 42.74% of tax is charged on high income earners. This is especially important for those individuals who are looking to optimize their wealth.
3. Double Taxation Avoidance Agreement (DTAA): In most instances this tax is not deductible, if one of the taxpayers is resident in one of the contracting countries. Most of these figures are reported under a DTAA that South India and UAE have. Most businesses are able to send and receive funds legally between the two countries without incurring high taxes at the point of remittance from income earned.

The Place of Effective Management (POEM) Strategy: A Closer Look

As Indian tax authorities become more vigilant about offshore tax arrangements, the (POEM) strategy has gained prominence. The POEM rule, introduced under the Indian Income Tax Act, determines the tax residency of a foreign company based on where its key management and commercial decisions are made.

1. Operational and Management Shifts: Many Indian corporates, to take advantage of the UAE’s exorbitant taxes, incorporate or open a branch office in the UAE and shift the POEM to this jurisdiction. It involves. essentially, more than a mail box or nominal office establishment. Such entities are required to prove that key functions including but not limited to strategic decisions, financials, and ordinary course business operations are being executed from the geography. This usually entails leasing in regional boards and management, separate office premises, and firming up that executive sessions and other important events actually happen within the confines of UAE.
2. Compliance with Indian Tax Laws: However, for all the possible benefits that can come along with POEM relocation to the UAE, there are some concerns and challenges too. Sections of the Income Tax Act prevent the tax authorities from such kinds of arrangements. They have every right to disregard any notion that a company’s company’s manager resides in the UAE and reclassify it as a tax resident in India and thus apply all the appropriate taxes. This means that they will have to ensure punitive restrictions as well including, amongst other requirements, applicably thorough rationalization, and detailed evidence documenting the UAE companies activities.

Legal Considerations: Navigating the Complexities

That is why although lower taxes seem like a great benefit, businesses should be wary. There is a progressive shift towards rationalising the tax system in India with the view to eliminating tax avoidance mechanisms. In this regard, some prominent measures are including General Anti Avoidance Rule (GAAR) which gives the legislative power in the hands of tax authorities to deny specific structures dues to the principal objective of obtaining tax advantage; and POEM regulations, which make an in-depth analysis of the offshore management claims.

1. Risk of Re-characterization: This means that if Indian tax authorities decide that a company’s POEM is still in India, they can recharacterise the company as an Indian tax resident. This may lead to backdated tax the taxes, interest and penalties are likely to be backdated. Consequently, companies who are seeking the POEM strategy need to get convinced that the management and control really move to UAE.
2. Substance over Form: In other words, the underpinning principle in tax planning is the substance over form rule, which requires that form of an arrangement yields or follows its substance or substance of the transaction. Hence it is said that you cannot transform by mere filling of papers or merely shifting of activities of the management. The companies are required to show that a substantial amount of economic activity, management and operations occur in the UAE.
3. Cross-Border Legal Risks: Companies must also ensure they understand the legal environment there are in each jurisdiction. For instance, although UAE laws allow independent oil companies like the ones classified under the Indian CIEL, tax treatments may be more liberal, non-compliance to the Indian laws will for instance lead to legal risks such as litigation and tarnished reputation. It is therefore important that the laws of India and the laws of the UAE are harmonized and there should preferably be legal planning at least once and regularity check to ensure law compliance.

Ethical Implications:

As we look at it, it is comprehensible as to why there is a grey area between Tax Planning and Tax Avoidance.

Even if the legal sanction of the POEM strategy and similar tax-planning schemes is within legal reach, it does present quite robust dilemmas of morality. The core of ethical concern is the conflict as to what is known as ‘correct’ or ‘right’ taxation. Is it right for oil giants and corporations or billionaires to take advantage of the taxation system in different countries to pay little tax?

1. Impact on Public Revenue: Every time persons of higher income and legal entities manage to transfer their taxes to other countries, the corresponding losses lead to cuts in social services within the country in question. This can culminate to a stage whereby the tax burden is more and more shifted to the middle and lower income earners which is not good for the economy as it escalates the degree of desperation.
2. Reputational Risks: There are two more dimensions to managing social risk: companies’ CSR and their image to the public. With globalization in the society, most insiders invest aggressively in tax evasion, a factor that can warrant bad publicity, making stakeholders and customers to turn a blind eye.
3. The Role of Governments: From an ethical point of view, one has to admit that the problem cannot be solved without the participation of enterprises. Governments also have the responsibility for designing the taxation systems that are both efficient and comply with equity to minimize on tax evasion. It’s a known fact that the argument towards and against tax havens tend to closely make reference to the necessity of international cooperation to combat BEPS (Base erosion and profit shifting).

Conclusion: An Appropriate Call with General Connotations

The tax system in the UAE can be concluded as position less for Indian businesspersons and investors who would like to become free from a considerable amount of taxes. However, choosing POEM strategy or any other tax optimization measure is not an easy task. It encompasses legal aspects such as legal compliance and legal liability and ethicalities such as ethical concerns of putting the concept into practice.

For senior tax professionals advising clients on such matters, the key lies in balancing the potential tax savings with the inherent risks and broader societal impact. While legal compliance is non-negotiable, understanding the ethical dimensions and public perception of tax strategies is equally important.

Finally, tax planning is all about the understanding of the numerous and often conflicting national and international tax rules and regulation on one hand, and the performance of organizational and individual responsibilities and obligations to the broader economy and society on the other. So, the path to the UAE for those who counted it among emerging international tax havens is filled with both opportunities and risks, it is necessary to move through it with purpose and knowledge.

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Deep Agarwal | B.Com.LL.B.(Hons.), A.C.A | ARP & Associates, Chartered Accountants, Kolkata | [email protected]