Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses
There are two types of Taxable Persons defined under the UAE Corporate Tax Laws.
Resident Person
Companies and other juridical persons that are incorporated or otherwise formed or recognized under the laws of the UAE will automatically be considered a Resident Person for CT purpose. This covers juridical persons incorporated in the UAE under either mainland legislation or applicable Free Zone regulations.
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.
Non-Resident Person
Non-Resident Persons are juridical persons who are not Resident Persons and:
- Have a Permanent Establishment in the UAE; or
- Derives state sourced income.
- Has a nexus in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.
Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses derives definition of “Permanent Establishment” from “Article 5 of “The OECD Model Tax Convention”.
Also, Article 14 of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses has a detailed explanation on “Permanent Establishment”
In this article we will understand Definition and Importance of “Permanent Establishment” under UAE Corporate Tax.
Permanent Establishment (PE) is a crucial concept in corporate tax planning in the United Arab Emirates (UAE). The concept of PE is relevant in determining the tax liabilities of foreign companies / Non-Resident Person operating in the UAE. Understanding the concept of PE is crucial for businesses to determine whether they are subject to corporate tax (CT) in the UAE.
Under UAE tax laws, a Non-Resident Person is considered to have a PE if it has a fixed place of business through which it carries out its business activities in the UAE. This can include an office, a branch, a factory, a workshop, a warehouse or any other fixed place of business.
A company can also have a PE in the UAE if it has an agent or a UAE person in the country who has the authority to conclude contracts or that person has and habitually exercises an authority to conduct a Business or Business Activity in the State on behalf of the Non-Resident Person.
The concept of PE is significant because foreign companies that have a PE in the UAE are subject to CT on the profits, they earn from their business activities “in the country”. The tax rate for CT is currently 9% in the UAE.
To illustrate, let us consider a foreign company that has a “Auto Dealership” in the UAE. The dealership has an office / business premise and carries out its business activities in the UAE (This dealership has not setup any company or License in the UAE).
That dealership generates AED 1,000,000 in profits from its business activities in the UAE. The foreign company is considered to have a PE in the UAE and is subject to CT at a rate of 9% on total net profits earned by such PE. Exemption up to AED 375,000 is not available for Non-Resident Person.
As the guidelines and further Cabinet Decisions are yet to come, Scope and Taxability on PE may change as per the said decisions. There’s nothing to worry about, we’ll keep you updated.
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