Importance of Economic Substance(ESR)in the UAE

Determining where a company is tax resident is important as this will typically be the jurisdiction that has primary taxing rights over the company’s income. A company will generally be tax resident in the jurisdiction in which it is incorporated, but circumstances can arise where another jurisdiction also claims primary taxing rights.

In the UAE, for example, case law has determined that a company that is not incorporated in the UAE is tax resident in the UAE if it is ‘centrally managed and controlled’ in the UAE The test applies to identify where the highest level of management and control over a company’s affairs is exercised (ie where the key strategic business decisions are made), as opposed to decisions over normal day to day operational matters.

Where more than one jurisdiction claims primary taxing rights and a double tax treaty applies, the treaty will typically require consideration of where such strategic decisions take place in determining the territory of residence recognised under the treaty. This will generally be where board meetings take place, but the location of such meetings is not necessarily conclusive and the facts of each case need to be considered on their own merits. 

It is therefore important to ensure that management’s actions do not cause the company to unintentionally become tax resident in another jurisdiction. Being resident in more than one jurisdiction can give rise to unexpected tax liabilities and compliance costs, either through dual residence itself, or the need to claim relief from double taxation where available.