UAE Key Provisions : Fixed Place Permanent Establishment wrt Taxation of Non Resident Persons

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The FTA published (Oct’23) a comprehensive guide on Taxation of Non-resident Persons under the Corporate Tax Law (Guidelines). In this write-up, we have summarized the key provisions relating to fixed place permanent establishment.

Background

A non-resident juridical person (NR) is subject to tax in UAE under domestic Corporate Tax Law (CT Law) if it has a permanent establishment (PE) in the UAE. The PE concept is essentially a threshold set for a foreign entity for levy of tax in a source country. The rationale of PE concept is that if NR has long-term presence in the source country for the purposes of its business, its income to the extent attributable to the presence will be taxable in source jurisdiction.

Fixed Place PE

If NR has a fixed or permanent place available at its disposal in the UAE and it carries on its business through such place, then fixed place PE can exist. The following important tests of fixed place PE need to be satisfied –

- the NR must have a place of business such as office or factory or workshop, etc. Such physical place need not be owned by NR;

- the place of business must have some permanence for a period of time, example, an aggregate period of 6 months in the relevant 12 months;

- the NR must have access, control and authority over such place at all times;

- the NR should perform core business activities from such place (and not preparatory or auxiliary activities).

The Guidelines provide illustrative examples of fixed place PE. For instance, an employee of a NR company working from his UAE residence may not constitute a fixed place PE as the employee’s home is not at the disposal of the employer, however, an employee working from a hotel may constitute a PE. It must be noted that the above examples do not ipso facto make them fixed place PE. The tests specified above for qualification of PE ought to be applied to these specified inclusions for apt conclusion.

Anti-avoidance provisions

Often, a NR may artificially split the contracts into various sites or projects, each spanning for less than 6 months, in order to avoid creation of a PE. The Guidelines provide that the duration of all sites of a cohesive project (consisting of related activities or related projects) should be combined together to test the time threshold. The above provision also applies in case a NR outsources the contract to a related party, to avoid constituting a PE. In such a case, the related party will be disregarded and contract/project duration will be considered as if it is performed by NR (as a single taxpayer) only.

Exclusion

If NR performs preparatory or auxiliary activities (as listed below) from a place of business in the UAE, it will not constitute a PE:

- storing, displaying or delivering goods to customers;

- keeping stock of goods for sole purpose of processing by others; and

- purchasing goods or merchandise or collecting information for the NR.

Whether an activity qualifies as preparatory and auxiliary requires context-based study and evaluation in line with core business activity of the enterprise as a whole. For instance, a warehouse / storage facility in the UAE of a NR online trading company may not be considered as preparatory or auxiliary, since the storage and delivery activities are performed through the warehouse.

Conclusion

Although comprehensive, the Guidelines do not discuss the online or digital business models which challenge the traditional concepts of a PE. NR entities, especially those conducting digital businesses in the UAE or having UAE customers, must evaluate their fixed place PE exposure.

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