With the new Corporate Tax (CT) regime in the UAE set to become effective in June 2023, it is important for any business established outside the UAE but operating in the UAE or dealing with the UAE to evaluate whether the business established outside of the UAE may be exposed to creating a permanent establishment (PE) in the UAE (for prior coverage, see the article in the May 2022 issue and the article in the February 2022 issue of Corporate Tax News).
Article 14 of the CT Decree-Law released on 9 December 2022 confirms that a nonresident business established outside the UAE can create a PE in the UAE where it has:
The Decree-Law clarifies the concepts of fixed place PE and dependent agent PE.
A fixed place PE can be created by a nonresident business having key decision makers regularly residing in the UAE; having a branch, office, factory, workshop, land, buildings, other real estate, specified installations or structures in the UAE; or having a building site, construction project, place of assessment or installation or supervisory activity where the work will last more than six months in the UAE. The following activities will not trigger a PE: (i) merely storing, displaying or delivering physical goods; (ii) maintaining stock to be used by another person for processing; (iii) purchasing goods or collecting information related to goods; and (iv) conducting any other activity that could qualify as preparatory or auxiliary in nature. Furthermore, the presence of an individual in the UAE may not create fixed place PE if the presence is temporary or exceptional in nature, where the individual’s employer does not have UAE-sourced income.
Some of the activities that can give rise to a PE may require a locally registered branch or an entity to be set up and in such cases, it is likely to be clear that the local presence may be subject to CT. However, the PE risk created by the regular residence of key decision makers may be less obvious—many individuals recently have chosen the UAE as their place of residence and this may expose the overseas business they represent to a PE risk. In the context of the larger GCC region where citizens have free movement and relaxed immigration, this aspect could be easily overlooked. Hence, if decision makers reside in the UAE or are considering UAE residence, it is important to have safeguards and processes in place to identify and address any PE risk.
A dependent agent PE can be created by a person that habitually concludes contracts or habitually negotiates contracts without the need for material modification. A dependent agent does not include a person who is independent and acts on a non-exclusive basis in the normal course of business. As there could very thin line between who qualifies as a dependent agent and who does not, contractual arrangements and factual circumstances are critical. In our experience, the tax authorities usually adopt a subjective, case-by-case approach when investigating agency aspects.
If a foreign business has a PE in the UAE, it will be required to draw-up separate audited financial statements for the UAE operations, conduct an audit of those operations and comply with the provisions in the CT Decree-Law. Correspondingly, depending on the country where the business is established, there may be relaxations from discharging CT liabilities in those jurisdictions.
Subject to business considerations and the fact that the UAE may not initially levy withholding taxes, it may be worthwhile considering the implementation of safeguards to monitor PE risk and where possible, steer businesses established outside the UAE away from exposing themselves from creating a PE in the UAE.