Indian Founder with a UAE Company: Place of Effective Management and the Tax Traps

“Set up a Dubai company and pay zero tax” is one of the most common, and most misunderstood, ideas among Indian entrepreneurs. If you remain an Indian tax resident and run the company from India, the structure can fall apart: the company itself can become taxable in India, and you may break FEMA. Here is what founders need to know.

Trap 1: You are still an Indian tax resident

Moving your company abroad does not move you. If you spend 182 days or more in India, or meet the other residence tests (see our article on residential status), you remain resident. As a Resident and Ordinarily Resident (ROR) you are taxed in India on your worldwide income. That includes:

salary or director’s fees from the UAE company
dividends from the UAE company. The India–UAE treaty caps UAE tax on these, but the UAE does not tax dividends, so in practice the full Indian tax applies at your slab rate, with no foreign tax to credit
any gains on selling the UAE shares

Trap 2: The company itself can become Indian-resident (POEM)

A company incorporated outside India is treated as resident in India if its Place of Effective Management (POEM) is in India during the year. This test is in section 6 of the Income-tax Act and continues under the Income-tax Act, 2025.

What is POEM? The place where the key management and commercial decisions needed to run the business as a whole are, in substance, made.

If POEM is in India, the UAE company’s global profits are taxed in India, at the rates for foreign companies, plus interest and compliance obligations. That wipes out any benefit of the UAE structure.

CBDT guidelines (Circular 6 of 2017)

Active Business Outside India (ABOI) test: a company with an active business outside India is presumed to have its POEM outside India, as long as the majority of its board meetings are held outside India. Broadly, a company has an active business outside India if its passive income is not more than 50% of its total income, and less than 50% of its assets, employees and payroll are in India.
Other companies: the tax officer looks at who actually makes the decisions, and where. This covers the board, any executive committee, and whether decisions are really made by someone else (for example a founder sitting in India).
₹50 crore threshold: under CBDT Circular 8 of 2017, the POEM guidelines do not apply to a foreign company whose turnover or gross receipts are ₹50 crore or less in the financial year.

In practice: for a small founder-run UAE company below ₹50 crore, POEM is less of a worry. But once the business grows, where decisions are made matters a great deal. Board meetings, contract signing and key hires managed from Mumbai are all evidence of an Indian POEM.

Trap 3: FEMA – how you invest

Indian residents investing in a foreign company must follow the FEMA (Overseas Investment) Rules, 2022:

A resident individual can make Overseas Direct Investment (ODI) only in an operating foreign entity that is not engaged in financial services.
There are restrictions where the foreign entity has subsidiaries or step-down subsidiaries that the individual controls. Control generally means 10% or more of the voting rights, or control of the board or management.
Investment is limited to the LRS limit of USD 250,000 per financial year, sent through your authorised dealer bank, with the required reporting.
An Annual Performance Report (APR) must be filed by 31 December each year.
Round-tripping: a foreign entity that invests back into India must not create a structure with more than two layers of subsidiaries. Using a UAE company to invest back into your Indian business needs careful structuring.

Getting FEMA wrong can lead to compounding and penalties, and banks are increasingly checking these structures.

Trap 4: Services rendered from India

If you personally carry out the UAE company’s work from India (for example consulting for clients while sitting in India), there can be other problems as well as POEM:

The UAE company may have a Permanent Establishment in India.
Transfer pricing and GST questions arise if an Indian entity is involved.
The UAE’s own substance rules for corporate tax may not be met.

What a sound structure looks like

Decide your own residence first. A founder who genuinely moves to the UAE and becomes non-resident in India has a very different (and much simpler) position.
If you stay in India, document real management in the UAE: board meetings held there, decision-makers based there, proper minutes.
Make the ODI correctly through your bank, and file the APR every year.
Report the UAE shares in Schedule FA and the dividends in your Indian ITR.
Keep a reasonable salary or management fee policy so that profits are not simply accumulated with no commercial reason.

Frequently asked questions

Is income of my UAE company taxable in India if I am an Indian resident?
The company’s income is not taxed in India unless its POEM is in India or it has an Indian Permanent Establishment. Your dividends and salary from it are taxable in India as an Indian resident.

Does the ₹50 crore threshold mean I don’t need to worry at all?
It means the POEM guidelines do not apply below ₹50 crore turnover. Practitioners differ on whether POEM can still be argued in extreme cases. Good governance documentation is always sensible.

Can I hold my UAE company through my Indian company instead?
Yes. An Indian company can make ODI under different, broader limits. The tax treatment of dividends and the compliance requirements change, so compare both routes.

Does the UAE’s 9% corporate tax give me a credit in India?
Corporate tax paid by the UAE company is the company’s tax, not yours. Generally it is not available as a credit against your personal Indian tax on dividends.

Founder with a business outside India? Garvita Jain & Co. reviews POEM exposure, ODI compliance and cross-border structures for founders and businesses. Contact us here, or at contact@garvitajainandco.com or +91 98678 16597.

This article is general information based on the law as of October 2026 and is not professional advice.

Sources

Official

Professional / CA publications