Priority Tax Considerations in the Current Middle East Market: Tax Residency and PE Risks
INTRODUCTION
Rapid workforce displacement across the Middle East is creating immediate and often unrecognised tax exposure. Some UAE-based businesses are allowing employees to temporarily work outside the country, whether for personal, family, or operational reasons. At the same time, businesses are implementing remote-working and decentralized decision-making as quick crisis-response measures.
While these responses are understandable considering the current events, they may lead to a subsequent increase in tax residency and compliance risk. An extended period working outside an individual’s tax residency may create exposure for them personally, as well as potential employment tax obligations, corporate tax residency and permanent establishment (PE) risks for their employer.
Although many organizations will be able to promptly implement procedures developed in response to the COVID-19 pandemic, such as systems readiness and remote-working policies, responding to the current situation presents unique challenges.
In this article, we focus on some of these challenges from a tax perspective, providing guidance, practical solutions and mitigating measures.
TAX RESIDENCY IN AN INTERNATIONAL SETTING: A DOUBLE-EDGED SWORD
Although the Middle East region is at the center of this conflict, individual domestic tax-residency frameworks have, for the most part, remained consistent. However, regional tax residency policy is not determined solely by the rules of countries that make up the Middle East region. For instance, in the UAE, the Corporate Tax law framework includes mechanisms to cope with unexpected events and tax implications that may arise when individuals are involuntarily stranded in the country.
On this point, Ministerial Decision No. 27/2023 addresses the issue by providing that days spent in the UAE due to exceptional circumstances are disregarded when determining whether a person is a UAE tax resident. This is particularly relevant for anyone who, since the start of the regional conflict, has been in the UAE and has not yet been able to leave.
However, in circumstances such as these, many organisations support people to temporarily relocate to another country to preserve their wellbeing. In such cases, the relevant tax laws are no longer those of the UAE (or another Middle Eastern country), but rather those of the country to which they have relocated.
Some countries may have similar mechanisms to those provided under Ministerial Decision No. 27/2023 in the UAE; however, the same rules won’t apply in every jurisdiction. Even where a country has a similar rule, it is crucial to assess whether the individual relocating can benefit from such protection.
UAE residents may therefore be regarded as tax resident in another jurisdiction simultaneously, such as in European countries with broad tax-residency rules.
For corporates, the implications are also significant. Organisations may face the same issue of effectively becoming tax resident in another country because some, or all, of its key personnel have relocated there.
As a starting point, an entity is usually tax resident in the country where it is registered or incorporated. This is the most common corporate tax-residency rule across the globe. However, many countries have expanded beyond this criterion to include a more nuanced test based on an entity’s place of effective management (POEM). In practice, under this test, an entity’s tax residency may be determined by where its key strategic decisions are made, even if it is incorporated elsewhere.
A key consideration is whether the temporary relocation of senior executives or decision-makers could shift the POEM of a UAE entity elsewhere. If strategic decisions are made from another jurisdiction on a sustained basis, foreign tax authorities may assert that the company is effectively managed and controlled from that location, potentially resulting in the company becoming tax resident outside the UAE. This assertion naturally depends on whether a country has a POEM test (or a similar concept) as a tax-residency criterion.
Such movement can trigger a range of tax implications, including business-restructuring analyses for transfer pricing (TP) purposes, potential exit charges, and the need to review and update existing TP policies.
Should dual tax residency arise, individuals and entities may still seek relief under a double taxation treaty (DTT), if one is in force between the relevant countries. As a rule, DTTs include specific provisions to address dual tax-residency risks through residency tie-breaker rules, where both countries claim tax residency. This mechanism reflects the international tax principle that a person, individual or entity should be tax resident in only one country at a time.
The tie-breaker rule differs depending on whether it applies to an individual or an entity, and it may also differ across DTTs, as countries may tailor their treaties based on bilateral relations. It is also worth noting that the UAE is among the countries with the widest DTT networks.
On this basis, it is important to closely monitor the overseas footprint of key personnel and cross-reference it against relevant DTTs to assess and, where possible, mitigate tax-residency risks.
REMOTE WORK AND THE BLURRING OF TAX BOUNDARIES
The widespread adoption of remote working, while operationally efficient, can blur traditional tax boundaries.
For individuals, performing their employment duties outside the UAE may trigger local personal income-tax obligations, even if remuneration continues to be paid from the UAE. For employers, this may result in payroll obligations, social security and withholding requirements, and broader compliance exposure in the host jurisdiction.
From a corporate perspective, the cumulative effect of multiple employees working abroad (even temporarily) can materially increase an organisation’s tax risk in those jurisdictions, particularly where substance and decision-making begin to shift away from the UAE. This heightened tax risk is not only related to residency but may also be linked to PE.
A PE may arise where a UAE entity has a sufficient taxable presence in another jurisdiction, such as an office, a place of management, an agent, or even through the provision of services. Common triggers include:
- A home office or fixed workspace used on a continuous basis.
- Individuals habitually concluding contracts or negotiating key terms.
- Employees present for a defined period delivering services locally.
The threshold for a PE is highly jurisdiction-specific and increasingly subject to broad interpretation, therefore requiring close monitoring.
Where employees habitually work from a foreign jurisdiction, this may be viewed as creating a taxable presence of the UAE entity in that country. The risk is heightened where individuals are engaged in revenue-generating activities, contract negotiation, or senior management functions, whether from their home (a home office) or from their employer’s office abroad.
Even relatively lean structures including family offices, holding platforms and fund/portfolio managers are not immune to scrutiny where key individuals operate from abroad for prolonged periods. Tax authorities will examine the duration of stay, the nature of activities performed and the individual’s overall connection to the jurisdiction to assess whether the presence is material and whether tax implications may arise for both the individual and the entity.
TRANSFER PRICING IMPLICATIONS OF REMOTE WORKING ABROAD
Remote working from overseas can give rise to significant TP considerations for organisations. When employees perform their roles outside their home country, they may contribute to value creation in another jurisdiction, potentially altering the group’s functional and risk profile. This shift may necessitate a reassessment of profit allocation to ensure alignment with the arm’s length principle.
Such arrangements can trigger business-restructuring analyses for TP purposes, particularly where key functions or decision-making capabilities are performed abroad. In certain cases, this may lead to exit charges or require the attribution of profits to a foreign jurisdiction, especially where a PE risk arises. Consequently, companies should review and update their existing TP policies, intercompany agreements and supporting documentation to reflect evolving work arrangements and ensure compliance with international standards and UAE Corporate Tax regulations.
NAVIGATING THE RISK WITH PROACTIVE MEASURES
In this environment, managing tax exposure requires deliberate, proactive steps. The distinction between what should and should not be done is often where the greatest value lies.
From an individual perspective, maintaining a clear and demonstrable connection to the UAE is critical. This includes preserving strong ties to the UAE. Individuals should carefully monitor the number of days spent in each jurisdiction and maintain records, as day-count thresholds remain a primary trigger for tax residency globally.
For corporates, governance and control should remain anchored in the UAE as much as possible. Strategic decisions should continue to be made within the UAE, with appropriate documentation to support this position. The location and activities of senior executives should be carefully managed, particularly when they have authority to bind the business or play a key role in decision-making. Organisations should also monitor whether key employees (such as senior executives and board members) relocate to the same jurisdictions and perform activities on behalf of the UAE entity, including participating in Board meetings.
Similarly, organisations should review their remote-working policies and assess whether any tax implications may arise in countries where their workforce is relocating. In this regard, it can be particularly helpful to put in place clear rulebooks that limit actions that may trigger tax implications or increase the organisation’s tax risk, such as negotiating and executing contracts abroad.
PRACTICAL DOs AND DONT's FOR BUSINESSES
WHAT TO DO
- Actively manage the entity’s tax position abroad.
- Track days spent by personnel in each jurisdiction and monitor headcount/location changes.
- Maintain accurate, up-to-date records of all decisions and policies.
- Ensure a continued economic connection to the UAE.
- Review and update TP policies to reflect remote working arrangements abroad.
- Assess potential business restructuring implications, including profit attribution and exit charges.
- Actively review business continuation and remote working policies for tax risks abroad.
WHAT NOT TO DO
- Operate as if personnel were all in the UAE.
- Negotiate and/or execute contracts abroad.
- Concentrate key executives in the same location abroad while taking key/strategic decisions for the UAE business.
- Assume remote work has no impact on value creation or arm’s length profit allocation.
- Overlook the need to align TP outcomes with PE risks and overseas functions.
- Ignore tax obligations abroad.
KEY TAKEAWAYS
- Tax residency is determined by facts on the ground, and those facts must be actively managed.
- Each case is different, and a person working from their home country (or abroad more generally) can lead to tax consequences for the individual, the business, or both.
- The current conflict has dictated a response. Months into the ongoing situation, it is now important to mitigate risks and limit exposure caused by those actions.
We recommend you address these matters promptly, assess the specific circumstances of your people, and your business, identify potential risks, and implement pragmatic solutions. Contact our team of experts if you wish to discuss how these developments may affect you or your organisation—we would be happy to support you.
