[Based on the Public Consultation Document released by the Ministry of Finance, UAE on 28 April 2022.]
The main purpose of the PE concept is to determine if and when a foreign company has established sufficient presence in the UAE to warrant direct taxation of the business profits of that company in the UAE.
The Tax Authority has indicated that it will design the PE concept based on Article 5 of the OECD Model Tax Convention.
However, the outcome based on the local laws should be aligned to the respective jurisdiction’s Tax Treaty.
The UAE Corporate Tax regime proposes to define PE using the following two general tests:
Permanent Establishment as per OECD Article 5, can be broadly categorized as under:
| Fixed Base PE |
| Place of Management Branch Office (including temporary office or employee’s home office) Factory Workshop Mine/ oil or gas well Quarry Farm / Plantation |
| Construction PE |
| Building Site Construction, Installation, Assembly project Connected Supervisory Activity Continues for a certain period of time |
| Service PE |
| Provision of Service Through employees or other personnel For a certain period of time |
| Agency PE |
| Not an Independent agent Habitually concluding the contract and having authority to do so |
Article 5 of the OECD Model Tax Treaty specifically states that the following activities conducted in a country through a fixed place of business shall not constitute PE of a foreign entity:
The Consultation Document has specifically clarified that the UAE Corporate Tax regime shall allow regulated UAE investment managers to provide discretionary investment management services to foreign customers without triggering a UAE PE for the foreign investor or the foreign investment fund. However, this exemption will be subject to the fulfillment of certain conditions.
The corporate Tax Consultation Document also indicates that the same rules for PE will apply if a free zone person earns income from a source on the mainland.
The UAE Corporate Tax regime shall have specific rules and guidelines to determine whether income has a source in the UAE.
In general, income will be considered to be UAE sourced if:-
Once the income of the foreign person is considered to be sourced from the UAE, the same shall be subject to withholding tax as under:
One will have to look out for specific PE regulations once the Corporate Tax Law is out and identify if there is any contrast between the PE definition as per the OECD model tax treaty, bilateral tax treaty, and local law.
Extension of the concept of PE for a freezone to their mainland income is to be looked into and reviewed, especially in connection with income of the freelancer working from home / flexidesk options given by the free zones/employees of freezone person working from home etc. Though we expect further clarity in the final law on such situations, free zone persons working from mainland or working for mainland entities will have to lookout for tax implications on their transactions.
