UK Tax Risks of Running a Dubai Company

Running a Dubai Company from the UK? Here's the Tax Risk No One Warned You About

Introduction: The Appeal of Dubai for UK Entrepreneurs

Dubai has become a hot destination, attractive to UK entrepreneurs looking to take advantage of its 0% corporate tax rate, favorable location, and active business-friendly infrastructure. With the promise of golden visas and ease of set-up in Free Zones, it has become a haven for company formation. However, a very real tax risk lurks below the radar for most people: the “central management and control” (CMC) test as interpreted by HMRC. These regulations can make you pay the UK tax even if your company is registered in Dubai.

Understanding Central Management and Control (CMC)

What is CMC?

Under UK tax law, a CMC is a company’s top level of decision-making. It is not the day-to-day operation of things but where decisions are made strategically. For such choices in the UK, HMRC may consider the company a tax resident in the UK, irrespective of incorporation location. If the board of directors or executives of the company registered in Dubai are present in the UK and deciding companies’ policies and decisions, then the HMRC may make the company pay taxes in UK.

Legal Foundations

The concept of CMC was established in the case De Beers Consolidated Mines Ltd v Howe (1906), which stated that a company is resident where its real business is transacted—the location of its central management and control. In the UK case of Bullock v Unit Construction Co Ltd (1959), UK resident control over African subsidiaries was sufficient for those subsidiaries to be considered UK tax residents.

The Hidden Trap: UK Management, UAE Registration

Several entrepreneurs in the UK incorporate companies in Dubai and assume they are not subject to UK taxation. However, if they:

Manage and Take care of business in the UK
In the UK, conduct QA Zoom Board meetings
Authorize transactions or sign contracts from the UK
Are the only or principal director and remain resident for tax reasons in the UK

In that case, HMRC might reconstruct the Dubai company as a UK resident for tax purposes, and it would be subject to UK corporate tax on its worldwide profits which would make the company pay high taxes with respect to the UK taxation policies.

Tax Comparison between UK and UAE

Type of Tax	UK Tax Rate	UAE Tax Rate
Corporate Tax Rate (CTR)	25% for profits over £250,000 19% for profits up to £50,000	9% on profits exceeding AED 375,000. 0% on profits up to AED 375,000.
Value Added Tax (VAT)	20% standard rate. 5% reduced rate for certain goods and services	5% standard rate.
Personal Income Tax (PIT)	20% basic rate on income up to £50,270 40% higher rate on income between £50,271 and £150,000. 45% additional rate on income over £150,000.	0% on personal income.
Capital Gains Tax (CGT)	10% for basic rate taxpayers. 18% for higher and additional rate taxpayers.	0% on Capital gains Tax
Dividend Tax (DT)	7.5% for basic rate taxpayers. 32.5% for higher rate taxpayers. 38.1% for additional rate taxpayers.	0% on Dividend Tax

VAT Obligations in the UAE

Mandatory VAT Registration

In the UAE, businesses need to register for VAT if their taxable supplies and imports exceed AED 375,000 annually. Businesses not based in the UAE that make taxable supplies within the UAE must also register for VAT, no matter the value, unless another person is liable to pay the tax due on these supplies.

Voluntary VAT Registration

If a business’s taxable supplies and imports (or taxable costs) are more than AED 187,500, they may voluntarily register for VAT.

Another possible and an early option is to register for VAT voluntarily, which gives us some fixed advantages along with reclaiming VAT on business-related expenses and credibility. But the admin work and possible pricing effect need to be explored first. It is suggested that businesses consider their individual circumstances and speak with tax professionals to determine whether voluntary VAT registration is appropriate for their objectives and operations.

Here comes our assistance so your business can run smoothly and generate maximum profit with the least taxation on the revenue generated. Lanop Business and Tax Advisors helps you to manage these aspects of your business and provides many more perks so you can avoid all the unnecessary and avoidable taxes.

The UK-UAE Double Taxation Convention

A Double Taxation Convention (DTC) between the United Kingdom (UK) and the United Arab Emirates (UAE) was signed on 12 April 2016, effective from 25 December 2016. The object of the DTC is to prevent double-income taxation in both countries. However, eligibility for the DTC is subject to a company being tax-resident in one of the contracting states.

Risks of Misplaced CMC

Dual Taxation

If HMRC considers your Dubai company to have been UK-resident because CMC was exercised in the UK, you may even find yourself liable to be taxed in both the UK and UAE. The DTC is supposed to prevent that, but tax mismanagement can result in a complicated situation. Therefore, an authentic and well-reputated company such as Lanop with seasoned experts is a must for your business.

Tax Investigations

HMRC may investigate companies suspected of misrepresenting their tax residency, resulting in penalties and backdated tax liabilities.

Loss of Credibility

During an audit, authorities might consider your corporate structure as a sham, thus ruining your business’s goodwill and credibility.

HMRC Tax Penalties for UK Tax Residents

Penalty Factors	Penalties for UK Residents
Corporate Tax Penalty	19% for profits up to £50,000 25% for profits over £250,000
Value Added Tax Penalty	Penalties for late returns start at £100, increasing with delay.
Personal Income Tax Penalty	20% on income up to £50,270 40% between £50,271 and £150,000 45% on income over £150,000
Late Filing Penalties	£100 for late submission £10 per day after 3 months Additional penalties after 6 and 12 months up to 5% of tax due
Late payment Penalties	3% of unpaid tax after 15 days 6% after 30 days 10% after 12 months
Failure to Notify HMRC Penalty	0% to 30% for non-deliberate 20% to 70% for deliberate 30% to 100% for deliberate and concealed
Inaccurate Returns Penalties	0% to 30% for non-deliberate inaccuracies 20% to 70% for deliberate inaccuracies 30% to 100% for deliberate and concealed

Best Practices to Ensure Proper CMC and Tax Compliance

Establishing Genuine Business Presence in Dubai

Put resident directors in charge who have real power to make decisions.
Put resident directors in charge who have real power to make decisions.
Keep a physical office and support infrastructure.

Documentation and Record-Keeping

Take minutes of meetings and decision processes.
Make everything, including communication/operational activity, transparent.

Seeking Professional Advice

Seek advice from tax advisers on both UK and UAE law.
Continuously review company structures for ongoing compliance.

How Lanop Business and Tax Advisors Can Assist in Managing Cross-Border Tax Risks

We want to introduce Lanop, a company that works with international tax law in the business world. At Lanop, we specialize in helping businesses navigate the complexities of international tax laws.

Expert Guidance on CMC and Tax Residency

Our CMC professionals provide tailored counsel on completing the required steps in your firm’s CMC so that you don’t inadvertently make that business a UK resident for tax purposes. Our seasoned experts make sure that your business pays the least amount of tax possible and all the taxation related work goes smoothly for your business.

VAT Compliance Support

We help with UAE VAT registration and compliance to ensure your business complies with all national requirements.

Strategic Tax Planning

We deal with strategic tax planning and advice in the UK and UAE for the best possible tax escalation and regulatory compliance. We provide the best accountancy solutions possible to your business so it can generate fruitful results.

Ongoing Compliance and Advisory Services

We can also conduct periodic reviews of your structures and practices for your input and advice on changes in the tax laws and regulations that may affect your corporation.

Conclusion

Setting up a company in Dubai offers several advantages. However, it is essential to understand the implications of CMC and execute that correctly to avoid surreptitious UK tax exposure. To ensure compliance and maximize tax advantages, taking proactive action and seeking professional advice is critical. Lanop is here to help you through the complexities of tax planning, so please reach out.

FAQs:

1) Can I live in the UK and own a Dubai company?

Yes, you can live in the UK and own a Dubai company. However, it’s crucial to understand the tax implications, particularly regarding Central Management and Control (CMC). If the management and control of the Dubai company is effectively exercised from the UK, HMRC may consider the company to be a UK tax resident. This means the company could be subject to UK corporation tax on its worldwide profits. HMRC’s definition of place of effective management is pretty clear, even if the company is registered in Dubai. If those decisions took place in the UK (whether in Zoom meetings, over email, or face to face), then the company could be considered to be UK-resident for tax purposes.

2) How does HMRC treat foreign companies?

HMRC treats foreign companies with consideration for their country of tax residency and whether or not they have a permanent establishment in the UK. A non-UK company is subject to tax on its worldwide income only if it is managed and controlled from the UK (i.e. is UK-resident).

The company is incorporated in a foreign jurisdiction; however, if it is controlled and managed (effectively managed) out of the UK, then it will likely be viewed as UK-resident for tax purposes.
A non-permanent establishment foreign company that is neither managed nor controlled from the UK will not normally be within the charge to UK corporation tax, although it may remain within the charge to UK withholding taxes on its UK income (for example, on dividends, interest or royalties).

3) UK tax on income from Dubai?

If your tax residency is based in the UK, you will need to report and pay tax on your global income, including that from the Dubai-based company. Jakarta, 3rd July 2023 – Taxation is an essential aspect of conducting business, as it impacts business activity and profitability.

Dubai companies: Although Dubai has no personal income tax, corporate tax (other than in certain designated free zones) or capital gains tax, UK tax residents are still subject to UK tax on their overseas income, including profits of a Dubai company.
The DTA is set up in such a way for UK tax residents that relief or exemption can be claimed to prevent dual tax on the same income.

It is important to understand the rules regarding double taxation relief under the DTA, which could allow you to reduce taxes paid in Dubai against UK tax liabilities.

4) Setting up business in Dubai but working from the UK

You can establish your business in Dubai and operate it in the UAE. But much like with a Dubai company, Central Management and Control (CMC) is important to determining your tax residency. If you run the business from the UK (signing contracts, making decisions, and so on), HMRC could consider your Dubai company UK-resident for tax purposes.

The company will now pay UK corporation tax on its global profits, and you would have UK tax obligations such as corporation tax returns and possibly VAT.

In practice, key decisions for the Dubai business must be made in Dubai to achieve this goal, and the management and control function should also sit outside the UK.

5) Is my Dubai company tax-free if I live in the UK?

Your UK residency does not automatically mean your Dubai company is tax-free. Although business activity is tax-free in Dubai (0% corporate tax rate for most industries), as an individual person and if you are considered as administering the business in the UK, the UK tax residency rules will apply!

As a UK tax resident, it is applicable and that means to say you are bound to report and pay tax on worldwide income including income from workable in Dubai company.

If the company is liable for UK-corporation tax through CMC, it will remain liable to pay UK tax regardless of the fact that it is based in Dubai.

In conclusion, while Dubai is a tax friendly jurisdiction, depending on whether the company is UK-resident under the UK laws due to your management and control, it could incur UK taxes.

Aurangzaib Chawla

Tax Partner

Aurangzaib Chawla is a UK-based tax advisor and Managing Partner at Lanop Business & Tax Advisors. With nearly two decades of experience supporting individuals, landlords, and SMEs, he specialises in tax planning, compliance, and business advisory tailored to the evolving needs of today’s entrepreneurs. Zaib is known for breaking down complex legislation into actionable strategies, helping clients stay ahead of regulatory changes while building financially resilient businesses.

Book a call and let’s talk through your options, no jargon, no pressure.