UAE Corporate Tax: Defining Residency & Permanent Establishment

The business community is currently preparing to embrace the introduction of corporate tax in the UAE, which is expected to take effect from June 1st 2023. However, they are advised to consult with corporate tax consultants in Dubai to understand key concepts such as Residency that determines the scope of the tax. Residency is a key factor that determines whether your business profits will come within the scope of the UAE corporate tax.

Inaccurately assessing the Residency status of your business may force you to face the consequences of tax non-compliance in the UAE. It may affect your business reputation and profitability. Corporate tax advisors in Dubai can guide you on such key concepts and save you from non-compliance. Here are some useful guidelines to help you understand concepts like Residency, Non-Residency and Permanent Establishment:

Who is a Resident Person as per the UAE Corporate Tax?

As per the UAE Corporate Tax Public Consultation Documents, a legal person incorporated in the UAE will be automatically deemed as a Resident Person. Not only legal persons but natural persons conducting a business or commercial activity in the UAE (either in their name or through an unincorporated partnership) will also be considered Resident persons.

Will Foreign Companies be Considered Resident Persons?

Foreign companies will be treated as Resident Persons if it is effectively managed and controlled in the UAE. To determine this criterion, the authority will typically examine the location where the directors or other decision makers of the company make the key management and commercial decisions. If it is in the UAE, then the foreign company will be treated as a Resident Person as it meets the criteria of being ‘effectively managed and controlled in the UAE’. Foreign companies can check their Residency status with the help of corporate tax consultants in Dubai.

Taxability of Resident Persons

The companies treated as Resident Persons will be taxable in the UAE on their worldwide income. The taxability of Resident Natural Persons will be limited to the income earned from the business activity carried out in the UAE. However, you must remember that the UAE corporate tax regime has exempted certain income earned from abroad, including the income from foreign branches and qualifying shareholdings.

However, you may have earned income from abroad that is not exempt from corporate tax in the UAE. In such cases, income tax paid in the foreign territory will be treated as a credit against the corporate tax payable in the UAE on the relevant income. This provision will effectively prevent the occurrence of double taxation. Corporate tax advisors in Dubai can provide you with further details on such incomes.

Who is a Non-Resident Person in UAE Corporate Tax?

Legal persons and natural persons that do not fall within the definition of Resident Persons will be treated as Non-Resident Persons for corporate tax in the UAE. Non-Resident Persons will be subject to the UAE corporate tax on the following:

  • Taxable income from their Permanent Establishment in the UAE; and
  • Income sourced in the UAE

What is the Concept of a Permanent Establishment?

The Permanent Establishment concept for the UAE corporate tax is based on Article 5 of the OECD Model Tax Convention. The Permanent Establishment concept has been designed to determine if a company has an adequate presence in a foreign country. Generally, a country can impose taxes on a foreign company’s business profits if it has a Permanent Establishment in that country. The Permanent Establishment of a foreign company in the UAE is determined using the following two tests:

  • Fixed place of business test
  • Dependent agent test

Understanding the Fixed place of Business Test

A foreign company will have a Permanent Establishment in the UAE if it has a fixed place in the UAE through which the foreign company wholly or partially carries out its business. A Fixed Place can be a place of management, a branch, an office including a temporary field office or an employee’s home office, a factory, a workshop, real property, and a building site where activities are carried on for more than six months.

However, a Permanent Establishment will not be triggered if the activities carried through a Fixed Place of Business are preparatory or auxiliary such as limited marketing and promotional activities, market research and attending seminars or conventions. Consult with corporate tax consultants in Dubai to examine whether your business meets the Fixed Place of Business test.

Explaining the Dependent Agent Test

If there is no Fixed Place of Business, the activities of dependent agents could still trigger a Permanent Establishment for the foreign company in the UAE. Foreign companies can meet the Dependent Agent Test “where business travellers or UAE-based persons act on behalf of the foreign company in the UAE and have, and during the business has powers to conclude contracts in the name of the foreign company without material intervention from the non-resident company.” Corporate tax advisors in Dubai can help you to assess whether your company meets the Dependent Agent Test in the absence of a Fixed Place of Business.

Consult with the Best Corporate Tax Consultants in Dubai, UAE

Consulting with corporate tax consultants in Dubai is the best solution available to ensure corporate tax compliance. Corporate tax advisors in Dubai such as Jitendra Chartered Accountants (JCA) can help you by assessing tax implications, tax exemptions, the viability of tax grouping, and restructuring of the group companies including foreign subsidiaries/branches. Our corporate tax services in Dubai include computation of taxable income, filing corporate tax returns, obtaining Tax Registration Number TRN) etc. Talk to our consultants to become fully prepared to comply with UAE corporate tax.