POEM – Place of Effective Management

If a company’s POEM is situated in UAE; it will be treated as a UAE resident. Its global income will be taxable in UAE.

 

An Overview:

POEM has been defined to mean “a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made”. OECD provides various factors to be considered in respect of determining the POEM of a company:

1. a) Place where Board meeting of the company are usually held;
2. b) Place where the chief executive officer and other senior executives usually carry on their activities;
3. c) Place where the senior day-to-day management of the person is carried on;
4. d) Place where the person’s headquarters are located;
5. e) Place of which country’s laws govern the legal status of the person;
6. f) Place where its accounting records are kept

 

How is POEM distinct from Permanent Establishment (“PE”)?

A foreign person with PE in the UAE will be subject to tax only on the income attributable to such PE. Whereas in case of POEM, the worldwide income of the foreign person will be taxable in the UAE.

 

Impact of POEM on Foreign entity:

• Worldwide income liable for tax in the UAE.
• Compliance with Transfer Pricing (“TP”) Rules and documentation.
• Filling of CT Return and CT payment.
• Issue of Double Taxation and Tax Credit.

 

Controlled Foreign Company (CFC) Rules:

CFC rules are anti-tax avoidance measures that aim to tax passive income earned by offshore entities that are controlled by residents of a country. The UAE has implemented CFC rules to prevent the diversion of taxable income to low-tax jurisdictions. BVI and Cayman Islands shareholding companies operating in the UAE may be subject to these rules if they are deemed to be controlled by UAE residents. This can result in the taxation of certain types of income, such as dividends, interest, and royalties, earned by the offshore entity.

 

Dual tax Residency & Double taxation related issues:

Where the issue of Dual residency arises, to determine where the income is taxable the countries may refer to the

• Corporate tax law
• DTAA (double taxation avoidance agreements) / International agreement

As per Article 66 – International Agreements of UAE Corporate Tax Law, where there is a conflict between the provisions of the CT Law and the terms of an international agreement (e.g. double tax treaties), the terms of the international agreement will generally take precedence.

 

Illustrations on determination of POEM in certain circumstances:

In case of companies having substantial business, the place of management will refer to the place from where the Key Management normally functions. The directors would have their office. The place where the directors actually manage the business will be considered to be the place of management.

The place of management of the company may be different from the place of residence of the directors and residence of the shareholders.

• For example, the directors may be residing in BVI. The company may have office in Dubai. In such a case, the place of management for the company will be in Dubai.

Where movement of citizens from one country to another country is unrestricted and regularly taking place, this issue becomes important.

The residence of shareholders is normally irrelevant. In some cases, if the shareholders actually take even management decisions, then the place of effective management may be affected. Even in this case, if the shareholders travel to the office of the company and take company management decisions in that office, then the shareholders’ residence will not be relevant for determining POEM.

• A company may have several business functions. It may have a few factories, several shops, different offices for purchase and administration where day-to-day operations and business transactions will take place, and one head office where the directors and chief executive officers function. However, those operations are not important while determining the key management. Directors and CEOs take key managerial decisions. Hence company’s POEM will be considered where the key managers function. This group is referred to in this article as “Key Management.

Key international rulings on concept of POEM

 

Macmillan Inc. v. Inland Revenue Commissioners (1999):

In this case, the House of Lords held that the PoEM of a company is not necessarily the place where the board of directors meets or where the company is incorporated. The court found that the PoEM of Macmillan Inc. was in the United States, even though the company’s board of directors met in the United Kingdom and the company was incorporated in the Cayman Islands. The court found that the real business decisions of Macmillan Inc. were made in the United States, where the company’s senior management was located and where the company’s most important assets were held.

 

Royal Bank of Scotland Group plc v. Inland Revenue Commissioners (2004):

In this case, the House of Lords held that the PoEM of a company is the place where the real business decisions that affect the company as a whole are made. The court found that the PoEM of Royal Bank of Scotland Group plc was in the United Kingdom, even though the company’s board of directors met in the United States and the company had a significant presence in other countries. The court found that the real business decisions of Royal Bank of Scotland Group plc were made in the United Kingdom, where the company’s headquarters were located and where the company’s most important assets were held.

 

British American Tobacco (Investments) Ltd. v. Commissioner for South African Revenue Services (2006):

In this case, the Supreme Court of Appeal of South Africa held that the PoEM of a company is a question of fact and that the court must consider all relevant factors in order to determine the PoEM of a company. The court found that the PoEM of British American Tobacco (Investments) Ltd. was in the United Kingdom, even though the company’s board of directors met in South Africa and the company had a significant presence in other countries. The court found that the real business decisions of British American Tobacco (Investments) Ltd. were made in the United Kingdom, where the company’s headquarters were located and where the company’s most important assets were held.

 

Standard Bank of South Africa Ltd. v. Commissioner for South African Revenue Services (2007):

In this case, the Supreme Court of Appeal of South Africa held that the PoEM of a company may change over time, depending on the circumstances. The court found that the PoEM of Standard Bank of South Africa Ltd. had changed from the United Kingdom to South Africa, as the company’s senior management had relocated to South Africa and the company’s most important assets were now located in South Africa.

 

De Beers Consolidated Mines Ltd v. Howe1

South African company held resident of UK as London office controlled key management decision

In the case of De Beers Consolidated Mines Limited, a South African company, the House of Lords held that the company should be considered a resident of the United Kingdom for income tax purposes. Despite being registered in South Africa, the majority of directors and life governors lived in England, and important business decisions were made in London. The London office exercised real control over various aspects of the company’s operations, including negotiations with diamond syndicates, policy determination, mine development, profit allocation, director appointments, and expenditure decisions.

The House of Lords emphasized that a company should be deemed a resident where its real business is conducted to prevent it from avoiding appropriate taxation by merely being registered abroad and distributing dividends abroad.

Therefore, the company was considered a resident of the United Kingdom as its trade and business activities were carried out and controlled from its London office, despite being registered in South Africa.

 

Bywater Investments Ltd. & Ors. Vs. Commissioner of Taxation (Australian Federal Court)

Australian Federal Court holds POEM as place where the board of directors makes its decisions

In case of appellant companies – Chemical Trustee, Derrin, Bywater, and HWB (out of which first 2 were incorporated in United Kingdom and remaining 2 were incorporated in Bahamas and Samoa respectively), the issue of determining their residential status had come up before the Federal Court of Australia. The Court noted that though the shares of these companies were held by JA Investments & MH Investments (a Cayman Island based groups) and Mr. Borgas and family were directors and shareholders on record, but ultimately the affairs of appellant companies were controlled by Mr. Gould from Sydney. HC observed that Mr. Borgas and family (only recorded directors and shareholder) just mechanically carried out Mr. Gould’s decisions, thus place of central management and control was Sydney from where Mr. Gould made substantive decisions.

 

Referring to the POEM definition in relevant DTAAs, Court noted that the place of effective management may “ordinarily” be the place where the board of directors makes its decisions, “all relevant facts and circumstances must be examined to determine [where] the place of effective management” of a company is located. Court concluded that as the key management and commercial decisions were made by Mr Gould in Australia, it was the “place of effective management”.

 

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