In the dynamic world of international business, understanding the concept of a Permanent Establishment (PE) is crucial when it comes to taxation. Particularly in the United Arab Emirates (UAE), clarity on what constitutes a PE is essential for the application of corporate income tax rules. In this article, we will look into the key aspects of Permanent Establishments in the UAE’s corporate tax law.
Defining Permanent Establishment
A Permanent Establishment (PE) is a significant concept in international tax law that determines when a non-resident entity conducting business in a foreign country becomes subject to taxation in that country. The definition of PE in the UAE’s Corporate Tax Law aligns with principles outlined in Article 5 of the OECD Model Tax Convention on Income and Capital. Non-resident entities can consider these principles, along with bilateral tax agreements between their home country and the UAE, to assess whether they have established a PE in the UAE.
Criteria for a Permanent Establishment
The UAE’s Corporate Tax Law outlines three primary criteria for determining the existence of a Permanent Establishment:
Fixed or Permanent Place:
A non-resident entity has a PE in the UAE if it has a fixed or permanent place within the country through which it conducts all or part of its business. This place should have some degree of permanency, but no specific size or time requirements exist. Examples of such places are a branch, an office, a factory, land and building, construction sites or a place of management where management- and commercial decisions that are necessary for conducting business are made.
Business Activity:
For a fixed place to qualify as a PE, the non-resident entity must conduct its business wholly or partly through that location. Generally, business activities are conducted by employees and individuals receiving instructions from the non-resident entity, but the nature of the business can influence this assessment.
Authority of Representatives:
In the absence of a physical location, a PE exists if a person has and habitually exercises authority to conduct business or business activities on behalf of the non-resident entity in the UAE. This covers situations where individuals, employees, or other representatives act on behalf of the non-resident entity and conclude contracts or legal obligations in the UAE, regardless of whether the contracts are signed in the name of the entity or its agent.
Additional Criteria and Flexibility
A PE can also be determined by the Cabinet based on other economic or business links as defined by a Cabinet Decision. This flexibility empowers the Cabinet to determine when a person can have a PE in the UAE due to various economic ties.
Exemptions and Conditions
Yet, not all fixed places are considered Permanent Establishments. There are situations where a fixed place in the UAE is not deemed a PE, particularly when the activities conducted are of preparatory or auxiliary nature. These are activities that support more substantive business activities and do not form an essential part of the entity’s overall business.
Agent Independence
In circumstances where an agent is considered independent from the non-resident entity, thus exempting it from being classified as a PE. Independence is determined by the agent’s legal- and economic separation from the entity (e.g. investment managers and brokers who provide discretionary investment management services and to enter into transactions on behalf of foreign customers).
Temporary Presence
Finally, the temporary- and exceptional presence of an individual in the UAE does not constitute a permanent establishment under certain conditions. Such temporary- and exceptional presence can be assumed if the individual did not express the intention to remain in the State at the time of the occurrence of the unforeseen exceptional circumstances (public or private).
Combining Activities
If the same non-resident entity or a related party conducts business through separate PEs in the UAE, the activities may be combined to determine whether they constitute a cohesive business.
How TME Legal Consultants can support your business.
Understanding the criteria of Permanent Establishments is vital for businesses operating across borders, as it has significant implications for tax liabilities in the country where the business is conducted. Businesses should carefully assess their activities in the UAE and consider these rules to ensure compliance with the UAE’s corporate income tax regulations. Attention is to be given to foreign entities conducting their business in the UAE through distributors/ agents or where offices are shared or employees hired through a third party with a physical presence in the UAE.
TME Legal Consultants is a team of 45 professionals in the field of legal-, tax-, accounting and compliance with over 18 years of experience. We advised a significant number of SMEs in the context of the implementation of the tax framework in the UAE and KSA over the last decade to make sure that our clients are well oriented in the new and fast evolving tax landscape and to reduce the legal liability of managers which may arise in connection with non-compliance.
