With the new corporate tax in UAE, which will apply from the next starting year of business modules from June 1, 2023, most foreign companies doing business in the country have started speculating how this new corporate tax law will impact their business models to ensure a smooth flow.
Here, we will provide insight into the impact of this new corporate tax on foreign companies operating in the UAE. Here we will give you the key aspects of the permanent establishment PE which will be the corporate tax base for foreign companies.
Under this corporate tax regime, foreign companies in the UAE which have their PE, their place of effective management or income source will have to pay 9% corporate tax annually on income supreme to AED 375,000.1
Permanent Establishment
The PE concept is used in the bigger tax treaties and is found in many countries’ laws. The main purpose of this concept is to determine the tax right of the country in which the foreign company is operating its businesses.
This corporate tax in UAE introduces the PE concept in the country’s domestic law on these two tests:
- Fixed Place of The Business Test
- Dependent Agent Test
Fixed Place of Business Test
A fixed location is typically one’s place of work or office, branch or factory, workshop and so on. However, no fixed place PE presence if
- The business activities that are located in Country R are carried out by the location fixed within the UAE and are auxiliary or preparatory in nature.
- The place fixed is only used as a storage space, display area, or to even deliver the items to be processed.
In order to create a fixed place PE in the source country, the following conditions have to be fulfilled:
- A place of business
- The business place must be allotted to the foreign company
- The business location must be determined
- All the businesses of the foreign company should be carried through this fixed place of business.
Further, the advancement in business models is coming at a pace never seen before. With these changes in the business models, the presence of tax does not mean a permanent office or physical business.
Overseas travelers, people coming from countries where e-visa or easy visa services are available, working from home facilities, temporary offices and overseas dependent agents all could be the reasons for the disclosure of permanent establishment PE.
Dependent Agent Test
When a foreign company does business in the UAE through a dependent agent, a dependent agent PE is then created. Such an agent then uses the authority to initiate and conclude contracts on behalf of the foreign company, and the foreign company has no intervention in it through any means.
A possible exception to this test is an agent not exclusively employed by an international company and legally and economically distinct from the foreign corporation. There are some conditions that determine an agent as an independent agent:
- The agent should be performing the normal course of business.
- The person’s activities shouldn’t be completely or entirely to the foreign company to whom the person is working as an agent.
- Transactions between foreign companies and agents must be conducted without any difference.
Therefore it is possible that an agent who is independent who is working for an international company that is economically and legally dependent upon the overseas business can result in the PE risk of the foreign company operating in the UAE. This arrangement will require an exhaustive review within the context of PE and tax treaty rules.
To get more details about corporate tax in UAE and about the Permanent Establishment Taxes, get tax advisory services from the Tax Consultant Dubai at Farahat and co.
The Key Features In The Circumstances Of PE
If Liaison Offices and Representatives Are PE
The Liaison or Representative Offices are typically prohibited from carrying out any business in the nation where they have their headquarters. They serve as an intermediary between the company and customers from the country and perform the exchange of information. They typically get included in the preparatory or secondary set of tasks.
If The PE Existed in The UAE, How The Profit Will Be Credited To PE
The foreign company will have to conduct an analysis to determine the profits due to the permanently established establishment within the country of origin. In general, the profits that are attributed to the PE will be the profits the PE could have expected to earn if it were an independent and distinct entity performing similar actions under similar or identical circumstances, taking into consideration the functions that are performed, as well as the assets employed and the risk assumed. In this regard, guidance can also be derived from internationally recognized guidelines and OECD guidelines.
