UAE Corporate Tax Impact on Foreign Firms

Effects of UAE Corporate Tax Regulations on Foreign Companies’ Operations

The UAE has implemented a Corporate Tax regime starting from June 1st, 2023.

In this article, we provide a brief overview of how this new law affects Foreign Companies operating in the UAE. We focus on key aspects, particularly the concept of a Permanent Establishment (PE), commonly outlined in Double Taxation Avoidance Agreements between the UAE and many other nations (“Tax Treaties”). This concept serves as the basis for taxing such companies in the UAE.

Under the Corporate Tax system, Foreign Companies with:

  • A Permanent Establishment (PE) in the UAE,
  • Their Place of Effective Management in the UAE, or
  • Income sourced from the UAE,

will be liable to pay UAE Corporate Tax at a rate of 9% on annual taxable income exceeding AED 375,000 derived from UAE business operations and activities.

Foreign Companies are subject to the same 9% tax rate as domestic companies, unless they are part of a multinational enterprise with consolidated global revenue surpassing EUR 750 million. In such cases, a higher effective tax rate of 15% may apply once the UAE adopts the Global Minimum Tax regime.

Permanent Establishment (‘PE’) – Meaning and Key Aspects

The concept of Permanent Establishment (PE) is a crucial aspect outlined in many tax treaties and domestic laws globally. Its main purpose is to determine a source country’s right to tax the profits of a Foreign Company.

For instance, the tax obligations of a company based in Country A are exempted in the source Country B as long as the operations conducted by the Country A company do not establish a Permanent Establishment (PE) in Country B.

The UAE Corporate Tax incorporates the PE concept through two commonly adopted tests:

  • The Fixed Place of Business Test
  • The Dependent Agent Test.

Fixed Place of Business Test:

A fixed place usually refers to a management office, branch, factory, workshop, etc. However, no fixed place PE arises if the company’s activities in the UAE (Country B in the example) are preparatory or ancillary, or if the fixed place is solely used for storing, displaying, delivering, or stocking goods for processing.

Generally, to establish a fixed place PE in the source country (Country B), all of the following conditions should be met:

  • Existence of a place of business.
  • The place of business must be under the control of the Foreign Company.
  • The place of business must be fixed, meaning it’s established in a specific location with some permanence.
  • The Foreign Company’s business must be conducted through the fixed place of business. It should not fall under the exceptions mentioned above.

However, with the evolving global business landscape, a taxable presence may not necessarily require a permanent office or physical presence. Factors like frequent overseas travel, nationals with easier visa rules, appointment of dependent agents, or employees working remotely could pose potential PE exposure.

Dependent Agent Test:

A dependent agent PE occurs when a Foreign Company (Country A) operates in the UAE (Country B) through an agent who habitually negotiates and concludes contracts on its behalf without significant intervention from the Foreign Company.

An exception to this test is an agent who is not solely devoted to the Foreign Company and is legally and economically independent. Typically, to demonstrate independence, the agent should:

  • Act in the ordinary course of business.
  • Not predominantly work on behalf of the Foreign Company.
  • Engage in transactions with the Foreign Company at arm’s length.

Thus, even an independent agent exclusively representing a Foreign Company and economically dependent on it could pose a PE risk in the UAE, necessitating a thorough review in line with PE rules and Tax Treaty provisions.

Determining Preparatory and Auxiliary Activities within the UAE Corporate Tax Regime

Identifying what qualifies as preparatory or auxiliary activities within the context of the UAE’s Corporate Tax regime involves understanding the general principles outlined. These activities typically involve tasks that support or prepare for more substantial business operations. Examples include limited marketing efforts, conducting market research, and participating in seminars or conventions. However, it’s important to note that there isn’t a fixed formula for determining these activities.

While isolated preparatory or auxiliary activities might not trigger a fixed place Permanent Establishment (PE) exception, when considered collectively, they could contribute to the overall business operation of a foreign company. Therefore, a thorough examination of all activities conducted by the UAE office is necessary to ascertain their nature.

This analysis should encompass various perspectives, including:

  1. Roles and Responsibilities: Understanding the involvement of UAE office employees in negotiating and finalizing contracts.
  2. Proportion of Activities: Assessing the significance and proportion of activities performed in the UAE compared to the foreign company’s overall operations.
  3. Nature of Expenses: Examining the nature of expenses incurred by the UAE office.
  4. Sales Incentives: Reviewing any sales incentive schemes provided to UAE office employees based on sales targets achieved in the UAE.
  5. Customer Interaction: Evaluating the role of the UAE office as a point of contact for customers in the UAE.

Assessing the Status of Representative or Liaison Offices Regarding PE

Representative or Liaison Offices typically refrain from conducting business activities in the country of establishment. Instead, they serve as a bridge between the company and customers in another country, primarily engaging in information exchange. As such, they commonly fall within the scope of preparatory or auxiliary activities.

However, it’s prudent to scrutinize whether the activities of a representative or liaison office genuinely align with the preparatory or auxiliary category. This evaluation involves conducting the fact-finding analysis outlined in point 1 above.

Attributing Profits to a PE in the UAE

When a Permanent Establishment (PE) exists in the UAE, the Foreign Company must conduct an analysis to determine the profits attributable to this entity in the source country. Generally, these profits are calculated based on what the PE would have earned if it operated as a distinct and independent enterprise, conducting similar activities under similar conditions. This assessment considers the functions performed, assets utilized, and risks assumed by the PE. Additionally, internationally accepted policies and OECD guidelines can offer valuable guidance in this determination.

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