Permanent Establishment

PERMANENT ESTABLISHMENT – Upcoming in UAE but already a tangled issue worldwide.

Following the expected release of much awaited final corporate tax law in UAE, it has become imperative not only for companies and legal persons incorporated in UAE, but also for Multinationals and large foreign companies which have a Permanent Establishment (PE) in UAE, to gear up for the upcoming law.

In line with the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention, UAE law proposes to introduce an inclusive definition of PE as under:

Fixed place PE

This triggers where a foreign company has a “fixed place” in the UAE through which its business is wholly or partly carried on and includes branch, office, factory, workshop, real property, building site etc. In a typical fixed place PE scenario, all the following conditions needs to be satisfied:

• Existence of place of business
• Have a fixed place of business i.e., a distinct place with a certain degree of permanence (The fixed place can be owned, rented,leased, etc.) and at disposal as well.
• The business must be carried out wholly or partially through such fixed place.

No PE may arise if activities carried out through “fixed place” in the UAE are preparatory or auxiliary in nature i.e. they support the main business activities of foreign company.

Agency PE

This triggers where a person acting on behalf of the foreign company in UAE has and habitually exercises the authority to conclude contracts or negotiates/concludes contracts without any material intervention by foreign company.

Interplay with Double Taxation Avoidance Agreement

UAE has more than 100 bi-lateral agreements in place with other countries to avoid double taxation. Principles of PE are largely similar across all tax treaties, in line with OECD model framework, however the way in which they are worded, may have different interpretation and related impact.

Attribution of profits in case PE is established

Attribution of profits to PE is probably one of the most complex subjects of the international tax space. Once it is concluded that PE is established then foreign company would be required to allocate appropriate profits to PE.

MNCs having operations in UAE should pro-actively assess risk of PE before applicability of corporate tax and undertake necessary measures to mitigate / minimise any potential PE risk. Further, it would be also important to take into consideration transfer pricing implications upon establishment of PE.