It is paramount that Foreign businesses with permanent establishments (PEs) in the UAE understand the tax implications, mainly corporate Tax. This blog outlines critical information about corporate tax for Foreign Companies with PEs in the UAE.
Corporate Tax: The Tax in the Spotlight
The limelight on corporate Tax remains undiminished. Over the much commotion, it isn’t easy to decipher the precise information one requires from the vast floating dialogues. The hanging question is always, how much of this applies to you? Will Corporate Tax for Foreign Companies affect your company with permanent establishment? The simple answer is yes; the more elaborate answer begins with analysing the concept of permanent establishment.
Permanent Establishment (PE): Concept Demystified
If you are curious about permanent establishment for an enterprise or having a PE in UAE, understanding the rules that bracket an establishment to be a PE in UAE is crucial.
What is a PE?
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A reroute to history:
The OECD Model Tax Convention and the United Nations Model Convention are global models created to stop tax evasion and the issue of double taxation. The OECD model, used in about 3,000 tax treaties, is the most popular for defining a Permanent Establishment (PE) worldwide. The UAE, a member of the OECD, shaped its corporate Tax for foreign companies’ rules based on this model. Article 5 of the OECD conventions, which talks about PE, is also the guideline for deciding if a foreign company in the UAE has a PE.
The UAE law on PE: Homefront Adaptation
Article 14 of the UAE Corporate Tax Law explains the characteristics of Permanent Establishment (PE) in the UAE. It’s similar in some ways to international guidelines from the OECD and the UN but with a few unique twists. The corporate tax for foreign companies will vary on many dependants, one among them is if the establishment has a PE. The decision of a foreign establishment deemed to be a PE is based on two principle tests mentioned in the UAE’s public consultation document.
- Fixed place of business
- Dependent agent
Fixed place of business:
- Fixed place of business is the most straightforward test for determining whether a PE exists. A foreign company with a physical location in the UAE for conducting business will generally have a PE.
- Fixed places include physical locations such as offices, branches, factories, warehouses, and retail outlets.
- The location doesn’t need to be owned by the company but must be available for their exclusive use.
- It’s important to note that even a temporary location can be a fixed place of business if used for a long enough period (typically more than six months).
Dependent agent:
- This test is more complex than physical location. A foreign company can create a Permanent Establishment if it has an agent in the UAE who habitually concludes contracts on its behalf.
- The agent must act in the ordinary course of their business and have the authority to conclude contracts binding on the foreign company.
- The agent can be a person or an entity, such as a local distributor or marketing agent.
- It’s important to note that not all agents will create a PE. For example, if an agent only takes orders or performs preparatory work, it’s unlikely to be considered a PE.
Critical points on PE: What is and What's not
To further understand corporate Tax for foreign companies with permanent establishment, let’s outline components that are and are not PE.
1. Fixed Establishment: PE constitutes physical locations such as offices, factories, and sites used for longer than six months. Structures used in natural resource exploration also qualify as PE.
2. Preparatory or Auxiliary Activities: Activities such as limited marketing or attending seminars, which are more preparatory or auxiliary, only sometimes constitute a permanent establishment.
3. Goods Storage and Processing: Using a location in the UAE solely for storing, displaying, delivering, or processing goods of a foreign company doesn’t usually establish a permanent establishment.
4. Establishing PE through Dependent Agent: A foreign company doesn’t have a fixed place of business in the UAE to establish a PE. A dependent agent (like business travellers or UAE-based individuals) could be PE on behalf of the company, particularly in concluding contracts.
6. Independent Work: If a person operates independently in the UAE and is not acting under the control of a foreign company, this does not create a PE.
7. Subsidiary and Dependent Agent: A subsidiary is a separate legal entity. It can be considered a PE if it acts as a dependent agent of the parent company.
8. Individual as PE: An individual can be a PE for a foreign company if they represent it in the UAE and regularly execute contracts in the company’s name.
Once you have recognised your PE structure and obtained the particular licence, you must register for Corporate Tax for foreign companies with Permanent establishment.
The corporate Tax: revisited
The corporate Tax has one simple rule:
you will be taxed if you run a legally licensed business in the Emirates.
Businesses engaged in local commercial activities are subject to a corporate tax rate of 9% on any taxable income that exceeds AED 375,000 annually. To comply with tax regulations, these entities must register for corporate Tax and are required to file their annual tax returns within 120 days following the end of their financial year.
Hence, the corporate Tax for foreign companies with a permanent establishment in the UAE is 9% on all annual taxable income exceeding AED 375,000.
Accurate Tax Calculation:
To determine corporate Tax accurately, companies must assess their net profits before Tax while factoring in eligible deductions. These deductions, substantiated by proper documentation, can include operational expenses, donations, and tax credits, significantly reducing the corporate tax burden.
PE & Corporate Tax: Implications and exceptions
With the Permanent Establishment, the general corporate tax law is no different. However, corporate Tax for foreign businesses will have implications depending on region, zone, and age.
Outline how different business activities and representations can impact the company’s tax status in the UAE.
- Physical spaces: Offices, branches, factories, warehouses, and even retail outlets.
- Activities exceeding specific thresholds: Construction projects lasting over six months or services performed in the UAE for more than 183 days within a year.
Exemptions and Reliefs:
While PEs generally trigger tax liability, exemptions and reliefs offer mitigating factors:
- Free Zone Companies: Businesses operating within designated free zones are typically exempt from corporate Tax for foreign companies, though specific regulations may apply.
- Foreign Tax Credit Relief: Double taxation can be avoided if the foreign company’s home country has a tax treaty with the UAE.
- Inter-company Transactions: Transfer pricing regulations govern transactions between related entities, ensuring fair profit allocation and preventing tax avoidance.
Nair and Nelliyatt: The tax consultants you need
Recognising the intricacies of corporate Tax for foreign companies is essential for regulatory compliance and financial success for foreign companies planning to establish or have established a permanent establishment in the UAE. This comprehensive understanding will ensure adherence to the legal framework and position businesses for strategic growth in the UAE’s thriving economy. Nair and Nelliyatt CA Company remain committed to offering expert guidance in this complex yet crucial aspect of business in the UAE.
Through this in-depth exploration of corporate Tax for foreign companies with permanent establishment in the UAE, businesses can achieve compliance and strategic advantage. Nair and Nelliyatt CA Company provide expert support in navigating these critical aspects, ensuring your business’s successful integration into the UAE’s dynamic economy. We will guide you through the registration process, ensure compliance with tax regulations, and handle tax filings on your behalf. Seeking professional guidance from a qualified business setups consultant such as Nair and Nelliyatt can significantly simplify the PE establishment process and ensure you fulfil all legal and regulatory requirements.
