An Indian entrepreneur wants to set up a company in Dubai to serve global clients while still managing the business from India. What tax issues would you raise?
What the interviewer wants to hear
- Place of effective management could make the UAE company resident in India
- Permanent establishment risk in India
- Founder’s own residential status and taxation of salary or dividends
- UAE corporate tax and substance requirements
- Transfer pricing, treaty eligibility and anti-avoidance rules
Model answer
The biggest issue is where the company is really managed. Under Indian law, a foreign company whose place of effective management is in India is treated as an Indian resident and taxed on worldwide income. If key decisions are made by the founder sitting in India, the Dubai company could be taxed in India, defeating the purpose. Even if it is not resident, its activities in India could create a permanent establishment, making attributable profits taxable in India. Next is the founder: if he stays resident in India, his worldwide income, including salary or dividends from Dubai, is taxable in India, with treaty relief only where tax is paid in the UAE. On the UAE side, the company falls under UAE corporate tax and needs real substance, such as staff, office and decision-making in Dubai. Any dealings with an Indian entity must be at arm’s length, and GAAR or treaty anti-abuse rules may apply to arrangements lacking substance.
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