What constitues Permanent Establishment or PE under the UAE Corporate Tax?

The concept of Permanent Establishment is an important principle of international tax law used in corporate tax regimes across the world. The main purpose of the Permanent Establishment concept in the UAE Corporate Tax Law is to determine if and when a foreign person has established sufficient presence in the Country to warrant the business profits of that foreign person to be subject to Corporate Tax.

International Definition - The definition of Permanent Establishment in the Corporate Tax Law has been designed on the basis of the definition provided in Article 5 of the OECD Model Tax Convention on Income and Capital and the position adopted by the UAE under the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.

This allows foreign persons to use the relevant Commentary of Article 5 of the OECD Model Tax Convention when assessing whether they have a Permanent Establishment or not in the UAE. This assessment should consider the provisions of any bilateral tax agreement between the country of residence of the Non-Resident Person and the UAE. 

In line with the tax regimes of most countries, the Corporate Tax Law taxes income on both a residence and source basis. The applicable basis of taxation depends on the classification of the Taxable Person.

• A “Resident Person” is taxed on income derived from both domestic and foreign sources (i.e. a residence basis).

• A “Non-Resident Person” will be taxed only on income derived from sources within the UAE (i.e. a source basis).

Residence for Corporate Tax purposes is not determined by where a person resides or is domiciled but instead by specific factors that are set out in the Corporate Tax Law.  If a Person does not satisfy the conditions for being either a Resident or a Non-Resident person then they will not be a Taxable Person and will not therefore be subject to Corporate Tax.

Resident Persons and Non - Resident Persons:

At the outset, it is required to understand what would constitute as Permanent Establishment for Resident Persons and Non - Resident Persons.

• Resident Person:

1. Companies and other juridical persons that are incorporated or otherwise formed or recognised under the laws of the UAE will automatically be considered a Resident Person for Corporate Tax purposes.

2. This covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations, and would also include juridical persons created by a specific statute (e.g. by a special decree). 

3. Foreign companies and other juridical persons may also be treated as Resident Persons for Corporate Tax purposes where they are effectively managed and controlled in the UAE. This shall be determined with regard to the specific circumstances of the entity and its activities, with a determining factor being where key management and commercial decisions are in substance made. 

4. Natural persons will be subject to Corporate Tax as a “Resident Person” on income from both domestic and foreign sources, but only insofar as such income is derived from a Business or Business Activity conducted by the natural person in the UAE. Any other income earned by a natural person would not be within the scope of Corporate Tax.

PE as such will be created for Resident Persons as defined above and hence are subject to Corporate Tax.

• Non-Resident Person:

Non-Resident Persons are juridical persons who are not Resident Persons and:

-Have a Permanent Establishment in the UAE; or

-Derive State Sourced Income.

1. Non-Resident Persons will be subject to Corporate Tax on Taxable Income that is attributable to their Permanent Establishment.

2. Certain UAE sourced income of a Non-Resident Person that is not attributable to a Permanent Establishment in the UAE will be subject to Withholding Tax at the rate of 0%.

Permanent Establishment for Non - Residents:

Now let’s understand what would constitute Permanent Establishment for Non- Residents.

In terms of the UAE CT law, a non-resident person would generally be considered to have a PE in the United Arab Emirates where they have:

A. PE created by a Fixed/Permanent Place:

1. Fixed or permanent place in the UAE through which the non-resident person wholly or partly conducts business.

2. Place of Management/ Branch/ Office/ Factory, Building site.

3. Exclusion to the above - A fixed or permanent place in the United Arab Emirates will not be considered a PE if it is used solely for conducting activities of a preparatory or auxiliary nature (eg. delivery and storage of goods or collection of information)

4. Other Exclusions - The mere presence of a natural person in the United Arab Emirates will not create a PE for a non-resident person in the following instances:

• Such a presence is a consequence of a temporary and exceptional situation.

• The natural person is employed by the non-resident person and its activities in the United Arab Emirates are not part of the core income-generating activities of the non-resident person or its related parties.

B. PE created by a Dependent Agent:

1. The Agent habitually concludes contracts on behalf of the non- resident.

2. The Agent habitually negotiates contracts which are concluded by the non-resident without material modification.

3. Excludes an independent agent acting in the ordinary course of business.

4. The agent is not considered independent if:

• Acts exclusively or almost exclusively for the non- resident.

• Is not legally or economically independent from the non- resident.