Introduction
In today’s globally connected business environment, Indian entrepreneurs, professionals, and companies increasingly use overseas structures to manage international operations. Dubai, in particular, has emerged as a favored jurisdiction due to its investor-friendly regulations, world-class infrastructure, and business-friendly tax regime.
However, a critical legal question arises:
Can an Indian resident or company set up a Dubai-based entity, earn foreign income through it, and retain such income abroad without violating FEMA or triggering income tax obligations in India?
The short answer is: Yes, if the structure is legitimate, operations are substantive, and all compliance requirements under Indian tax laws and FEMA regulations are fully met.
This detailed guide addresses the legal, tax, and procedural framework to enable such arrangements within the law.
Legal Structure of a Dubai Entity: Options for Indian Promoters
Eligible Participants and Applicable Routes
Indian resident individuals may invest in a foreign entity using the Liberalised Remittance Scheme (LRS) under FEMA, with an annual cap of USD 250,000 per individual per financial year. Multiple family members can pool this limit.
Indian companies can invest through the Overseas Direct Investment (ODI) route, governed by FEMA 120 and the RBI Master Directions of 2022. The investment ceiling is linked to the Indian company’s net worth and must be reported through prescribed forms.
Non-resident Indians are not governed by FEMA when remitting funds from NRE or FCNR accounts and may invest without restriction.
Choice of Dubai Entity
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Free Zone Entity: Ideal for service, technology, and trading activities. May qualify for zero percent UAE corporate tax if meeting qualifying income criteria.
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Mainland LLC: Required for operating with UAE domestic clients. Corporate tax at nine percent applies beyond the profit threshold.
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Offshore Entity: Such as RAK ICC or JAFZA. These are suitable for holding or investment purposes but cannot engage in operational activity within UAE.
Indian Income Tax Law: Applicability of Global Income and POEM Risk
Global Income Taxation under Section 5
Indian residents are taxed on their global income. Thus, any income earned through foreign entities becomes taxable in India unless the foreign entity is independently controlled and managed outside India.
Place of Effective Management (POEM) — Section 6(3)
A foreign company will be deemed a tax resident in India if its place of effective management is situated in India during the relevant year. This means that if key decisions, board meetings, or actual control is exercised from India, the entire global income of the Dubai entity may be taxed in India.
Indicators That Trigger POEM Risk
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Key strategic and operational decisions are made from India
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Dubai entity lacks a functioning office, local employees, or physical infrastructure
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Board meetings are conducted virtually or from India
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Contracts are negotiated and signed in India
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Email trails and IT infrastructure show Indian control
Preventive Measures
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Conduct board meetings physically in UAE and retain minutes
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Sign contracts from within UAE only
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Hire local staff and maintain an operational office in Dubai
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Use UAE-based communication systems and servers
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Maintain independent administration and governance in UAE
The guiding principle is substance over form. Legal and operational independence must be demonstrable through documentation.
FEMA and ODI Compliance: Making the Investment Legally
For Individuals (Using LRS)
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Maximum remittance is USD 250,000 per person annually
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Multiple family members may combine their limits
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Funds may be used to acquire shares or provide loans to a Dubai company
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Filing of Form A2 and declaration with authorised dealer bank is mandatory
For Companies (Using ODI Framework)
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Must obtain Unique Identification Number from RBI before remittance
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File Form ODI Part I for initial investment, Part II for annual reporting, and Part III for any change in structure
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File Form FC if the capital contribution is made in kind
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Submit Annual Performance Report every year
Common FEMA Pitfalls
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Round-tripping of funds where income is routed back to India
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Non-reporting or delayed reporting of investment transactions
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Setting up shell entities without genuine business intention
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Using layering structures without economic substance
Every investment must be in a bona fide business with clear disclosures and robust documentation.
Holding Foreign Income in Dubai: Legality and Structuring
Indian residents may retain earnings in the Dubai bank account of their foreign company if:
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The services or goods are delivered from UAE
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The Dubai entity signs and executes contracts outside India
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The POEM of the Dubai entity remains outside India
There is no mandatory requirement under FEMA to repatriate such foreign income to India unless specific ECB conditions or guarantees apply.
The income can be reinvested in business operations or held as reserve without triggering any contravention, as long as all RBI reporting norms have been fulfilled.
Repatriation, Remuneration, and Tax in India
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Dividends distributed from the Dubai company to an Indian shareholder are taxable under Section 115BBD or as income from other sources based on shareholding.
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Salary paid to an Indian resident by the Dubai entity is taxable in India under Section 15.
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Director’s fees or royalties are also taxable in India for residents.
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If the shares of the Dubai entity are sold, capital gains are taxable in India under Section 45 for residents, subject to DTAA benefits.
Tax impact on repatriation may be minimized by timing distributions in years of lower income or available carried-forward losses in India.
Indian Income Tax Return Disclosures
For individuals, the following disclosures are mandatory:
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Schedule FA for declaring foreign shareholding and bank accounts
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Schedule FSI for foreign income if taxable in India
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Form 67 and Tax Residency Certificate to claim foreign tax credit if UAE tax is paid
Non-disclosure attracts penal provisions under the Black Money Act, which includes a flat penalty of ten lakh rupees per year for failure to report foreign assets.
Indian companies must maintain records of foreign subsidiaries, prepare consolidated financials where Ind AS applies, and comply with transfer pricing documentation under Section 92.
Example of a Compliant Dubai Structure
An Indian-resident tech entrepreneur sets up a Free Zone Entity in Dubai using pooled funds of USD one million from self, spouse, and adult children under LRS.
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Contracts are signed and executed from Dubai
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UAE staff and office are established
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Invoicing is done to EU clients who pay into the UAE bank
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Nine percent corporate tax is paid on net profits
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Income is retained in UAE for reinvestment
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Indian ITR discloses ownership and income as required
No Indian tax is triggered unless POEM is found or income is remitted voluntarily.
Caution Points and Lawful Tax Planning Ideas
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Ensure effective control of Dubai entity is outside India to avoid POEM
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Avoid back-to-back routing of funds to prevent round-tripping allegations
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File all RBI and FEMA forms in advance and on time
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Structure inter-company agreements at arm’s length prices to meet transfer pricing rules
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Repatriate income during years when Indian business incurs losses to reduce net tax liability
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Avoid using offshore entities with no operations or staff
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Maintain a status tracker of the Indian promoter’s residential status and foreign assets
Essential Documentation Checklist
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Certificate of Incorporation and MOA of the Dubai entity
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UIN letter and RBI ODI filing acknowledgment
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Office lease agreement and utility bills in UAE
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Employment letters and payroll in Dubai
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Board minutes showing meetings in UAE
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Tax payment proof and UAE bank statements
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Form 67, TRC, and Schedule FA in Indian ITR
Conclusion
It is entirely lawful and strategically advantageous for Indian residents and companies to hold foreign income through a Dubai-based entity—provided that the structure is real, the business is bona fide, and all required disclosures and compliance measures are followed.
Control must lie outside India. Substantive presence in Dubai is the key. Once the entity demonstrates independent operations, tax planning within the boundaries of law is not only defensible but advisable.
