What Are the Two Tests for UAE Corporate Tax Permanent Establishment?

The proposed UAE corporate tax regime will follow the Permanent Establishment (PE) concept to determine the taxability of persons. PE is a critical international tax concept that refers to a fixed place of business in another country, triggering a tax liability in that country. The proposed UAE corporate tax regime will use this concept to tax foreign companies conducting trade or business in the UAE through a PE.

Businesses need to assess whether they have a PE in the UAE through relevant provisions before the corporate tax becomes effective on June 1st 2023. Corporate tax consultants in Dubai can help businesses to determine if they have a PE in the country. The UAE corporate tax regime proposes two tests to determine whether a company has a PE in the UAE: the Fixed Place Test and the Dependent Agent Test. In this article, we will discuss what those tests are.

However, businesses are advised to wait for the release of the UAE Corporate Tax Law to make any tax-related decision. Till then you can follow the Public Consultation Document for UAE corporate tax preparation). Read ahead to know further:

What is a Permanent Establishment?

The PE concept is used to determine if a company has constituted sufficient presence in a foreign jurisdiction, which would trigger direct taxation of business profits of the company in that country. Generally, a country is allowed to tax the business profits of a foreign company only if that company has a PE in that country.

The PE concept will be used to determine the UAE-sourced income. The PE rules and principles will be used to determine if a free zone has a PE in the UAE mainland. Corporate tax consultants in the UAE can offer further insights into the importance of the PE concept.

What is a ‘Fixed Place of Business’ Test?

A foreign company will have a PE in the UAE if it has a fixed place in the UAE through which it carries out its business wholly or partly. As per the UAE corporate tax regime, a fixed place of business will include 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 over six months. Pes can also include installations and structures used in the exploration of natural resources, mines, oil or gas wells, quarries and other places of extraction of natural resources.

A PE will not trigger if the activities conducted through a fixed place are preparatory or auxiliary in nature. Examples of preparatory and auxiliary activities include limited marketing and promotional activities, performing market research and attending seminars or conventions. A fixed place will not amount to a PE if it is used only to store, display or deliver the foreign company’s goods or keep a stock of goods with the sole purpose of making them available to another person for processing.

What is a ‘Dependent Agent’ Test?

Even if there is no fixed place in the UAE, a foreign company can still have a PE through the activities of a so-called “dependent agent” in the UAE. The “dependent agent test” will be met when “business travellers or UAE-based persons act on behalf of the foreign company in the UAE and have, and habitually exercise, the authority to conclude contracts in the name of the foreign company without material intervention from the non-resident company.”

However, a PE will not trigger if a person carries on the foreign company’s business in the UAE in the normal course of their own business. Such an exception applies only if the independent agent does not work exclusively for the foreign company and is truly, legally and economically independent from the foreign company. Providers of corporate tax consulting services in Dubai can help you further with the dependent agent test.

Consult with the Best Corporate Tax Consultants in Dubai, UAE

Foreign companies need to understand and apply the PE concept to determine their tax obligations under the proposed UAE corporate tax. The two tests used to determine the PE can be complex for foreign businesses but corporate tax consultants in Dubai such as Jitendra Chartered Accountants (JCA) can help them. JCA is one of the top providers of corporate tax consulting services in Dubai with years of experience in the industry.

Being one of the top FTA-registered tax agents in Dubai, JCA can offer authentic and reliable tax solutions for your business. Our services at JCA as Corporate Tax Consultants include Corporate tax Assessment & Advisory Services (one-time or retainer basis), Corporate tax Compliance Services and Corporate tax Agent Services to represent you to the FTA in case of any notices served by the tax authority.