WHEN THE DECISION-MAKERS LEAVE THE BUILDING

Place of Effective Management (POEM) Risk Under UAE Corporate Tax Law

Recent disruptions in the Gulf region, including security concerns, airspace closures and travel restrictions, have forced many businesses to confront an unexpected question: what happens to a company’s tax residency when its senior management can no longer operate from its usual location?

This article examines the Place of Effective Management (POEM) implications under UAE Corporate Tax Law across three hypothetical scenarios involving the temporary dislocation of key management and commercial decision makers of juridical persons.

Scenario 1 – Outbound Management Displacement A company incorporated in the UAE whose key management and commercial decision makers become temporarily located outside of the UAE.
Scenario 2 – Inbound Management Displacement A company incorporated outside the UAE whose key management and commercial decision makers become temporarily located in the UAE.
Scenario 3 – Interruption of UAE POEM A company incorporated outside the UAE but normally treated as resident in the UAE due to its effective management and control being exercised there, whose key management and commercial decision makers become temporarily located outside of the UAE.

All three situations raise practical questions about where the company’s effective management may be considered to take place. In brief:

Scenario 1 – Outbound Management Displacement: The UAE tax residency position is generally resilient. Incorporation alone secures Resident Person status under Article 11(3)(a) of the Corporate Tax Law, regardless of where management is exercised. The primary risk is the foreign jurisdiction asserting its own taxing rights over the company, and a dual-residence situation arising. However, the OECD’s “usual and ordinary” principle issued during the Covid-19 pandemic but having broader relevance, provides a strong basis for resisting such outcomes, provided the disruption is genuinely temporary and properly documented.

Scenario 2 – Inbound Management Displacement: The FTA’s TPGTR1 Guide expressly recognises carve-outs for temporary and exceptional circumstances, including acts of war, travel restrictions, and force majeure, which, reinforced by the OECD’s “usual and ordinary” principle, provide meaningful protection against the company inadvertently acquiring UAE tax residence. This protection holds so long as the disruption remains genuinely temporary and is properly documented.

Scenario 3 – Interruption of UAE POEM: The substance-over-form approach and the “regularly and predominantly” standard adopted by the FTA’s TPGTR1 Guide support the view that a short-term displacement out of UAE should not upend an established pattern of UAE-based management.

Across all three scenarios, the practical imperative is the same: document the exceptional circumstances from the outset, preserve the company’s connection to its ordinary place of management to the greatest extent possible, monitor the duration of the disruption carefully, and seek appropriate expert advice on the potential tax implications.

Scenario 1 – Outbound Management Displacement

UAE-Incorporated Company Whose Key Management and Commercial Decision Makers Become Temporarily Located Outside the UAE

Consider a company incorporated in the UAE. Its board of directors ordinarily holds monthly board meetings in Dubai, where all key management and commercial decisions are made. Due to a sudden change in security conditions or flight cancellations in the region, the company’s directors find themselves stranded/ residing abroad. During this period, board meetings continue to be held virtually, with directors joining from their locations outside the UAE. Key strategic decisions continue to be taken at these virtual meetings.

The Incorporation Limb: Article 11(3)(a)

Under Article 11(3)(a) of the Corporate Tax Law, a juridical person incorporated or otherwise established or recognised under the laws of the UAE is a Resident Person. Accordingly, A UAE LLC remains a UAE Resident Person by virtue of its incorporation alone, regardless of the location from which its board conducts business.

Therefore, even if the company’s senior management is temporarily or indeed permanently making key management and commercial decisions from outside the UAE, the company does not lose its status as a Resident Person under the Corporate Tax Law. Its income remains subject to UAE Corporate Tax.

The Dual-Residency Risk

However, this does not mean that the situation is without tax risk. While the company’s UAE tax residency is secure, the converse risk arises: the foreign jurisdiction from which the directors are now operating may seek to assert its own taxing rights over the company. If the directors are making key management and commercial decisions from, say, Country X for a sustained period, the tax authority of Country X may argue that the company has become tax resident in Country X under that country’s domestic law (many jurisdictions apply a POEM or central management and control test to establish corporate tax residence). This could result in dual residency, the company being tax resident in both the UAE and Country X simultaneously.

Where this occurs, the applicable Double Taxation Agreement between the UAE and Country X (if one exists) would typically provide a tie-breaker rule to resolve the dual residency. As noted in Section 6.1.3 of the TPGTR1 Guide, this may be determined by reference to the place of effective management, a Mutual Agreement Procedure, or other criteria such as the place of incorporation.

OECD Guidance: The “Usual and Ordinary” Principle

It is pertinent to refer to OECD’s Analysis of Tax Treaties and the Impact of the COVID-19 Crisis (April 2020), and its subsequent update in January 2021, the Updated Guidance on Tax Treaties and the Impact of the COVID-19 Pandemic. While issued in the context of the pandemic, the principles it articulates are of broader application to any temporary and exceptional dislocation of senior management.

It was acknowledged that the pandemic may raise concerns about a potential change in the place of effective management as a result of a relocation, or inability to travel, of board members or senior executives. However, the conclusion (at paragraph 29 of the Guidance) was unequivocal: it is unlikely that such a situation will create any changes to an entity’s residence status under a tax treaty. A temporary change in location is an extraordinary and temporary situation and should not trigger a change in treaty residence.

Even where dual residency arises, the applicable DTA would provide a tie-breaker rule. Whether the treaty follows the 2017 OECD Model (where competent authorities resolve dual residency by mutual agreement) or the pre-2017 Model (where the place of effective management is the sole criterion), the key factors, i.e. where board meetings are usually held, where senior executives usually carry on their activities and where headquarters are located, all point to the ordinary pattern of management, not to the exceptional period. For a company whose board ordinarily meets and makes decisions in the UAE, a temporary dislocation to Country X should not alter the treaty residence determination.

Several jurisdictions issued domestic guidance consistent with this approach. Canada, Ireland and other States confirmed, in varying terms, that the temporary presence of directors resulting from exceptional circumstances would not, by itself, alter the corporate tax residence of the company concerned (Box 2 of the OECD Guidance).

It should be noted, however, that the OECD Guidance addresses the treaty-level analysis. A company’s tax residence under the domestic law of Country X remains a matter for that jurisdiction’s own rules. Whether Country X’s domestic legislation recognises an equivalent carve-out for temporary and exceptional circumstances, or whether its tax authority has issued administrative guidance consistent with the OECD’s approach, will need to be assessed on a jurisdiction-by-jurisdiction basis.

The OECD Guidance was issued in response to the COVID-19 pandemic. However, the underlying principles, that POEM should be assessed by reference to the “usual” and “ordinary” pattern of management, and that temporary and exceptional dislocations should not alter the analysis, derive from the existing OECD Commentary and are not confined to a public health context.

Practical Considerations

Documentation: Prepare and document board resolution or internal memorandum at the outset stating that, due to acts of war, closure of airspace, security concerns, or other exceptional circumstances, the specific key management and commercial decision makers are temporarily operating from Country X until it is safe and practicable for them to return to the UAE.

Maintaining connection with the UAE: Ensure that the company’s centre of management remains anchored in the UAE. If one or more decision-makers are temporarily abroad, this should be the exception, not the rule.

Keep detailed records: Maintain minutes of all board meetings and strategic discussions during the period of disruption, clearly recording: (i) the physical location of each participant; (ii) the temporary nature of their absence from the UAE; (iii) that decisions are being made remotely as a direct result of the exceptional circumstances; and (iv) the intention to resume physical decision-making in the UAE at the earliest opportunity.

Defer significant strategic decisions where possible: Where major key management and commercial decisions can reasonably be deferred until the Board / Senior Management has returned to the UAE, consider doing so.

Avoid formalising the temporary arrangement: Do not register a branch office, enter into an office lease, or establish any formal corporate presence in Country X during the period of disruption. Such steps, even if taken for practical convenience, could be treated by Country X’s tax authority as evidence of a more permanent connection to that jurisdiction.

Monitor duration: Track the length of the disruption carefully. What begins as a temporary dislocation may, if prolonged, weaken the argument that the situation is exceptional. The protective principles are predicated on the disruption being genuinely temporary. If the disruption extends over several months or across tax periods, specific advice should be sought.

Seek advice: Seek and obtain advice from tax experts on Country X’s domestic rules on tax residency, including whether that jurisdiction applies a POEM or central management and control test. It should also be determined whether the tax authorities in that jurisdiction have issued any guidance recognising carve-outs for temporary or exceptional circumstances. In addition, review the applicable provisions of the DTA between the UAE and Country X to understand the tie-breaker mechanism available in the event that Country X asserts tax residence over the company.

Scenario 2 – Inbound Management Displacement

Foreign-Incorporated Company Whose Key Management and Commercial Decision Makers Become Temporarily Located in the UAE

Consider a company incorporated in Country Y, where its board of directors ordinarily meets and makes all key management and commercial decisions. Due to a sudden disruption, whether flight cancellations, imposition of travel restrictions, or a security-related event, the company’s key decision-makers find themselves temporarily present in the UAE. During this period, they continue to discharge their responsibilities, holding board meetings and making strategic decisions from the UAE.

The POEM Limb: Article 11(3)(b)

Unlike Scenario 1, the tax residency of a foreign-incorporated company under UAE law is not automatic. Under Article 11(3)(b) of the Corporate Tax Law, a foreign-incorporated juridical person becomes a UAE Resident Person only if it is effectively managed and controlled in the UAE.

The FTA’s POEM Framework and its Application

The Tax Resident and Tax Residency Guide (TPGTR1) issued by the FTA clarifies what constitutes effective management and control. It provides that the place of effective management and control is understood as the place where key management and commercial decisions that are necessary for the conduct of the juridical person’s business as a whole are, in substance, made. The test is one of substance over form, and all relevant facts and circumstances must be examined on a case-by-case basis.

To determine the POEM, the Guide addresses three questions, each of which must be considered in the context of this scenario.

(a) What decisions could be treated as key management and commercial decisions? (Section 4.1.4)

Key management and commercial decisions include those necessary for the conduct of the juridical person’s business as a whole, broadly, strategic-level decisions, as opposed to decisions related to day-to-day management. The Guide provides the following inclusive and exhaustive lists:

Inclusive list of what could be key management and commercial decisions Exhaustive list of what could not be key management and commercial decisions
Setting general policies, like investment policies and operational policies. Determining strategic direction of Company’s operations. Deciding the type of transactions that the Company can enter into. Appointing C-suite / other executives and granting them authority to manage or carry out day-to-day operations of the Company. Directly or indirectly overseeing the persons appointed to manage or carry out day-to-day business of the Company. Handling key finance matters such as the determination of how profits are used and declaration of dividends. Formal finalisation or approval of decisions made by others. Mere implementation of decisions made by others. Day-to-day conduct and management of a company’s activities and operations. Legal and administration matters such as keeping a share register. Undertaking minimum acts necessary to maintain a company’s registration.

(b) Who can be treated as the person making the said decisions? (Section 4.1.5)

The Guide clarifies that it is necessary to look beyond the persons who merely formalise or approve decisions, and instead focus on the persons who substantially make the key management and commercial decisions. The analysis requires consideration of three key factors: who has the legal power or authority to make such decisions; whether the persons with such legal power in fact exercise it; and if they do not, who actually does.

The Guide sets out three tests to identify such persons:

Board of Directors Test (Section 4.1.5.1):

The starting point is the relevant company laws and governing instruments of the juridical person to identify the persons legally entrusted with effective management and control. Typically, this is the board of directors, though in some cases it may be a single managing director. However, simply holding this legal authority is not determinative. The Guide requires an assessment of whether the board in fact makes the key decisions, or whether it merely “rubber stamps” decisions made by another person. Relevant factors include whether the directors are suitably qualified and experienced, whether they take instructions from another person, and the composition and roles of different directors (executive vs. non-executive).

Delegation of Authority Test (Section 4.1.5.2):

Where the persons granted legal authority do not in reality actively participate in the decision-making process, or have delegated some or all of their powers (formally or informally) to others, for example, to board executive committees or senior management those delegated persons may be the ones exercising effective management and control. The critical distinction is whether the board independently evaluates advice from senior management and exercises its own judgment (in which case the board remains the decision-maker), or whether the board merely implements or approves decisions provided by senior management without independent consideration (in which case senior management is likely exercising effective management and control).

Shareholder Activity Test (Section 4.1.5.3):

A shareholder’s actions can, depending on their nature and extent, amount to effective management and control. However, shareholders generally contribute only to fundamental corporate decisions (dissolution, share issuance, appointments), and such decisions are not, of themselves, relevant to the POEM determination. For a shareholder to be considered as exercising effective management and control, the key decisions taken must go beyond decisions related to mere guidance or influence on normal management. Undue influence on the board by a shareholder, or outright assumption of board powers, may constitute effective management and control. This risk is particularly acute where the juridical person is wholly owned or controlled by a single person and its Related Parties or Connected Persons.

(c) Where can such decisions be said to have been made in substance? (Section 4.1.6)

Once the persons exercising effective management and control are identified, the second step is to determine the location of those persons when making the key management and commercial decisions. The place of domicile and/or residence of such persons may be a relevant consideration but is not necessarily the determining factor. The Guide identifies the following factors:

The place where board meetings are physically held, but only as a significant indicator if the board retains and exercises its authority and does in substance make the key decisions during those meetings.

Where meetings are held wholly or partly virtually, the physical location of the board meeting may not be determinative. Instead, the relevant factor is the physical location of the directors with the overriding decision-making powers. Factors include the regularity of virtual vs. physical attendance, the physical location of directors when attending virtually (and whether that location changes), the level of influence each director has, and the proportion of directors attending virtually vs. physically.

If key decisions are made outside formal board meetings, consideration should be given to who participates, what decisions are made, and where such meetings take place.

Where decisions are made via written resolutions or email circulated among decision-makers in different physical locations, the location of the persons ultimately making the decisions may determine the place of effective management and control.

Board minutes and other documents recording the key decisions may be relevant. Details such as the reasoning behind decisions, whether alternatives were considered or rejected, and papers circulated in advance of meetings can all provide valuable evidence.

If effective management and control is exercised by persons other than the board (whether by delegation or implicitly), the relevant place is where those persons make the key decisions.

The nature of the business itself may determine where key decisions are made in practice.

The Guide expressly states that legal, administrative, and operational factors — such as place of incorporation, location of the registered office, location of the shareholder register, place where accounting records are kept, and the place of day-to-day operations — are generally not relevant to determining the place of effective management and control.

Where a juridical person’s key decisions are made in more than one place, the relevant facts and circumstances must be examined to identify the place where effective management and control is exercised as a matter of substance.

If the above factors are inconclusive, the Guide provides that the place where the juridical person has the strongest economic nexus may be considered, determined by examining where the juridical person has most of its employees, assets, activities, and revenue sources, and where senior management functions are carried on.

Application to Scenario 2

On the facts, the indicators would, at first glance, point toward the UAE: the directors are physically present in the UAE, board meetings are being held from the UAE, and key management and commercial decisions are being taken here. However, the TPGTR1 Guide’s carve-outs are directly applicable.

The TPGTR1 Carve-outs

Importantly, the Guide recognises two carve-outs where POEM may not be created in the UAE even where key decisions are in fact made there:

Occasional or one-off decisions: Where key management and commercial decisions are made in the UAE on an occasional or one-off basis, this will not establish POEM. The assessment depends on how significant the decisions are and whether there is a regular pattern of key decisions being made in the UAE.

Temporary and exceptional circumstances: Where the presence of the decision-making persons in the UAE is the result of temporary and exceptional circumstances, POEM may not be created. The Guide provides a non-exhaustive list of such circumstances, including: public health measures adopted by competent authorities (in the UAE or another jurisdiction) or by the WHO; imposition of travel restrictions; legal sanctions preventing a person from leaving the UAE; acts of war or terrorist attacks; natural disasters or force majeure; and emergency health conditions affecting a person or their relatives (up to the fourth degree, including by adoption or guardianship).

The carve-out for temporary and exceptional circumstances is broad enough to encompass the disruptions contemplated in this scenario. The carve-out for occasional or one-off decisions may also apply if only a limited number of decisions are taken from the UAE before the directors return to Country Y.

OECD Reinforcement

The OECD Guidance discussed under Scenario 1 above reinforces this position. The Secretariat’s conclusion that POEM should be assessed by reference to the “usual” and “ordinary” pattern of management, and that temporary dislocations resulting from exceptional circumstances should not alter the tax residence determination, applies equally here, but in reverse.

Duration and Pattern

The critical variables remain duration and pattern. The Guide’s carve-outs do not provide a bright-line test. The longer the disruption persists, and the more key decisions are taken from the UAE, the weaker the argument that the presence is merely temporary or exceptional. If what begins as a short-term displacement extends over several months, with regular board meetings and strategic decisions being taken from the UAE on an ongoing basis, the facts may begin to point toward the UAE as the place where the company is regularly and predominantly managed, at which point the carve-out may no longer apply.

Practical Considerations

Document the involuntary nature of the UAE presence: The company should prepare contemporaneous records, such as board resolutions, internal memoranda, or management correspondence, demonstrating that the directors’ presence in the UAE is the result of exceptional circumstances (e.g., travel restrictions, security conditions, flight cancellations) and not a deliberate relocation of management. These records should be maintained for production to either the FTA or Country Y’s tax authority if the company’s tax residence is questioned.

Seek expert advice: If the disruption extends beyond what can reasonably be characterised as temporary, specific expert advice should be sought promptly. This should include advice on the company’s potential UAE tax registration obligations and on the terms of any applicable DTA between Country Y and the UAE, particularly the tie-breaker mechanism that may apply in the event of a dual residency dispute.

Apply other relevant practical measures: The company should also consider the practical safeguards outlined under Scenario 1, to the extent they are relevant in the circumstances.

Scenario 3 – Interruption of UAE POEM

Foreign-Incorporated Company Resident in the UAE by Virtue of POEM, Whose Key Management and Commercial Decision Makers Become Temporarily Located Outside the UAE

Consider a company incorporated in Country Z but which has, under normal operating conditions, its place of effective management and control in the UAE. Its board of directors is based in the UAE, holds regular board meetings in Dubai, and makes all key management and commercial decisions from the UAE. The company is therefore a Resident Person under Article 11(3)(b) of the Corporate Tax Law. Due to a sudden disruption, the company’s directors find themselves stranded/ residing abroad, and key management and commercial decisions begin to be taken from locations outside the UAE.

No Incorporation Safety Net: The Vulnerability of POEM-Based Residence

This scenario presents the most nuanced risk among the three. Unlike Scenario 1, the company cannot fall back on the incorporation limb of Article 11(3)(a). Its Resident Person status is entirely contingent on the ongoing factual reality that it is effectively managed and controlled in the UAE. If that factual reality changes, the company’s UAE tax residency may be called into question.

The core question is whether the temporary shift of decision-making abroad causes the company’s POEM to be considered as having moved out of the UAE.

The “Regularly and Predominantly” Standard

There are strong arguments that a temporary disruption should not displace an established POEM. The TPGTR1 Guide states that where key decisions are made in multiple locations, the place of effective management and control will be the location where those decisions are regularly and predominantly made. This implies a holistic assessment over a meaningful period, not a snapshot. If the company’s established pattern is that key decisions are regularly and predominantly made in the UAE, a short-term displacement caused by exceptional circumstances is unlikely to alter that conclusion, particularly if the ordinary pattern is resumed promptly.

OECD Guidance

The OECD Guidance discussed in Scenario 1 above supports this. The principle that POEM should be assessed by reference to the “usual” and “ordinary” pattern of management applies squarely. A company whose board has consistently met and made decisions in the UAE should not lose its UAE POEM merely because its directors are temporarily stranded abroad for a limited period.

Practical Considerations

The practical steps outlined in Scenario 1 above are directly applicable, with particular emphasis on the following:

Preserve the UAE as the centre of management: This is critical. Unlike Scenario 1, there is no incorporation safety net. Every effort should be made to ensure that UAE-based personnel continue to participate actively in decision-making, that board papers and resolutions continue to be prepared and circulated from UAE offices, and that the company’s governance infrastructure remains anchored in the UAE.

Resume UAE-based decision-making at the earliest opportunity: The strength of the company’s position depends heavily on how quickly the ordinary pattern of management is restored. The longer the directors remain abroad, the harder it becomes to characterise the situation as temporary.

Assess Country Z’s position: As with the Country X analysis in Scenario 1, with help of tax experts review whether Country Z’s domestic law would treat the temporary return of decision-making as creating (or re-establishing) tax residence there, and whether the applicable DTA provides an adequate tie-breaker mechanism.

Conclusion

The three scenarios examined in this note illustrate different dimensions of the same underlying risk: that a sudden and involuntary change in the location of senior management can have unintended consequences for a company’s tax residency.

Across all three scenarios, the analysis underscores a common practical imperative: businesses should not wait for the disruption to resolve itself. From the outset, boards should document the exceptional circumstances, preserve the company’s connection to its ordinary place of management, and monitor the duration of the displacement carefully.

What begins as a temporary arrangement may, if left unmanaged, crystallise into a permanent change, with potentially significant and irreversible tax consequences.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023, “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax.”

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

Scenario 1 – Outbound Management Displacement	A company incorporated in the UAE whose key management and commercial decision makers become temporarily located outside of the UAE.
Scenario 2 – Inbound Management Displacement	A company incorporated outside the UAE whose key management and commercial decision makers become temporarily located in the UAE.
Scenario 3 – Interruption of UAE POEM	A company incorporated outside the UAE but normally treated as resident in the UAE due to its effective management and control being exercised there, whose key management and commercial decision makers become temporarily located outside of the UAE.