A Permanent Establishment (PE) is a fundamental concept in international taxation that determines when a taxable person has a taxable presence in another country. It ensures that businesses are taxed where they generate income, regardless of their incorporation or tax residency status. This prevents Base Erosion and Profit Shifting (BEPS) and promotes fair tax distribution across jurisdictions.
The PE framework is governed by Article 5 of the OECD Model Tax Convention, BEPS Action 7, Article 14 of the UAE Corporate Tax Law, and Double Taxation Agreements (DTAs). A PE can arise through either a fixed place of business or a dependent agent. Beyond corporate tax liability, PE status may also impact withholding taxes, VAT obligations, and compliance requirements for businesses operating across borders.
With the rise of the digital economy, many jurisdictions are broadening PE rules to include economic nexus and digital presence PE (as outlined in BEPS Action 1). This ensures that businesses providing remote services or generating revenue from foreign markets contribute taxes where value is created.
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Key Tests to Determine a Physical Permanent Establishment (PE) in the UAE:
The UAE follows the OECD Model Tax Convention principles to determine whether a non-resident person has a Physical Permanent Establishment (PE) in the country. The following key tests are applied:
- Place of Business Test – Is there a fixed or permanent place of business in the UAE?
A non-resident person has a PE if they have a fixed, physical location in the UAE where business activities are conducted. Article 14 (P2) of the UAE Corporate Tax Law provides illustrative but non-exhaustive examples, including branches, offices, factories, and places of management, among others.
- Permanence Test – Does the business have ongoing operations in the UAE?
The UAE Corporate Tax Law does not specify a fixed time threshold for a place of business to qualify as a PE, except for construction and building projects. Therefore, each case is assessed based on all relevant factors to determine if the business presence is continuous. However, based on the Non-Resident Person Guide, an aggregate presence of more than 6 months within a 12-month period (even if not continuous) will typically indicate permanence.
- Disposal Test – Does the non-resident have effective control over the business location?
To constitute a PE, the non-resident must have effective control or rights over the location where business activities take place. Mere physical presence does not create a PE unless the business has control over the premises.
- Business Activity Test – Does the non-resident conduct core business operations there?
For a fixed place of business to be a PE, the non-resident must engage in core income-generating activities at the location. Preparatory or auxiliary activities do not qualify.
A non-resident person will generally be considered to have a Fixed Place PE in the UAE only if all these tests are met, based on an evaluation of all facts and circumstances. This framework aligns with OECD PE principles.
Read more: Small Business Relief Tax Framework in the UAE
Agency Permanent Establishment (PE) in the UAE:
A Non-Resident Person may have a PE in the UAE through an agent, depending on the agent’s role and dependence on the Non-Resident Person.
- Dependent Agent PE:
A Dependent Agent can create a PE for a Non-Resident Person in the UAE, even if the non-resident has no physical presence or business location in the country. A PE arises when the agent habitually negotiates or concludes contracts on behalf of the Non-Resident Person, and those contracts are finalized substantially in the agreed form, with little to no changes by the non-resident. The key factor is the agent’s ability to legally bind the Non-Resident Person in business dealings, regardless of who formally signs the contracts.
- Independent Agent Exception:
An agent does not create a PE for the Non-Resident Person if they act independently and operate in the ordinary course of business for multiple clients. However, they will be considered a Dependent Agent (and create a PE) if they act exclusively or almost exclusively for a Non-Resident Person or if they are legally or economically related to them.
Activities That Do Not Constitute a Permanent Establishment (PE) in the UAE:
A fixed or permanent place in the UAE used exclusively for preparatory or auxiliary activities, as defined under Article 14(3) of the UAE Corporate Tax Law, does not create a PE for a Non-Resident Person. Preparatory or auxiliary activities refer to support functions that do not directly contribute to generating business income, such as marketing, promotional activities, market research, storage, or administrative support.
However, this exception does not apply if a Non-Resident Person or its related party carries out business in the UAE in a manner that meets any of the following conditions:
- The same or another location already constitutes a PE for the Non-Resident Person or its related party.
- The combined activities of the Non-Resident Person and its related party across one or multiple locations go beyond preparatory or auxiliary activities and, if considered together, form a cohesive business operation rather than separate functions.
In such cases, the fixed or permanent place in the UAE will be deemed a PE due to the anti-fragmentation rule, as outlined in BEPS Action 7 and UAE Corporate Tax Law.
Does the concept of Permanent Establishment apply to a natural person in the same way as it does to a juridical person?
Yes, a non-resident natural person engaging in business or business activities in the UAE can have a PE, provided they meet the applicable physical or agency PE conditions. However, the natural person will be liable for corporate tax only if the turnover attributable to their PE in the UAE exceeds AED 1,000,000 within a Gregorian calendar year.
Does the mere presence of a natural person related to a non-resident person automatically create a Permanent Establishment (PE) for the non-resident person?
No, the presence of a natural person in the UAE does not automatically create a PE for a non-resident person if:
- Their stay in the UAE is due to an unforeseen, temporary, and exceptional situation beyond their control, without an intention to establish a business presence.
- They are an employee of the non-resident person and do not engage in core income-generating activities for the non-resident or its related parties, and no income is generated from UAE-based business activities (State-Sourced Income).
Read more: Guide to Corporate Tax in UAE
Impact of Double Taxation Agreements on Non-Resident Taxable Persons:
Double Taxation Agreements (DTAs) are treaties between two countries designed to prevent taxable persons from being taxed twice on the same income. DTA provides tax relief through exemptions, credits, and reduced withholding tax rates, among other tax benefits, while also helping determine PE status and tax residency.
To determine the existence of a PE in the UAE, the Corporate Tax Law should be interpreted alongside an applicable DTA, as this helps define taxation rights between the UAE and the treaty partner. If there is a conflict between the domestic Corporate Tax Law of the UAE and a DTA, the provisions of the DTA will prevail as per Article 66 of the Corporate Tax Law, which prioritizes international agreements.
Permanent Establishment Registration Requirements:
- Non-Resident Juridical Persons prior 1 March 2024:
A person that has a PE in the UAE: The deadline for submitting a tax registration application shall be 9 months from the date of existence of the PE.
- Non-Resident Juridical Persons on or After 1 March 2024:
A person that has a PE in the UAE: The deadline for submitting a tax registration application shall be 6 months from the date of existence of the PE.
Note: The date of existence of a PE is when it is recognized for UAE Corporate Tax purposes. However, if a DTA allows a longer recognition period, the DTA will take precedence over domestic law.
- A non-resident natural person conducting business activities in the UAE must register for corporate tax within 3 months after exceeding an annual turnover of AED 1,000,000 in a Gregorian calendar year (2024 onwards).
Determining Taxable Income of a Permanent Establishment (PE):
A Permanent Establishment (PE) in the UAE is treated as a separate legal entity from its Non-Resident parent company for tax purposes. This means that income and expenses attributable to the PE must be determined based on internationally accepted tax principles, including the arm’s length principle and transfer pricing rules, ensuring fair and accurate income allocation.
Since the PE and its parent company are considered Related Parties, their transactions must be conducted as if they were between independent entities. For example, if a PE provides services to its Non-Resident parent company, it must charge an arm’s length price, in line with UAE transfer pricing regulations and OECD standards.
This approach prevents tax manipulation, ensures transparency, and aligns with global tax standards. Non-compliance with these principles may lead to tax penalties, audits, or income adjustments by tax authorities. Therefore, businesses must maintain proper transfer pricing documentation and accurately allocate income and expenses to ensure compliance with UAE Corporate Tax Law.
Can a Non-Resident Person Be Subject to UAE Corporate Tax Without a Permanent Establishment (PE)?
Yes, a Non-Resident Person can be subject to UAE Corporate Tax even without a PE if they have a nexus in the UAE or derive state-sourced income.
1. Nexus:
A Non-Resident Juridical Person is subject to UAE Corporate Tax if they establish a nexus by earning income from immovable property within the UAE. This includes income from the sale, lease, or use of land, buildings, or structures. If a nexus exists, the Non-Resident Juridical Person must register for Corporate Tax. However, the nexus concept does not apply to natural persons, even if they earn income from UAE-based immovable property.
2. State-Sourced Income:
A Non-Resident Person receiving State-Sourced Income, as defined under Article 13 of UAE Corporate Tax Law, is subject to Withholding Tax, which is currently set at 0%. This means that no actual Corporate Tax liability arises unless the income is linked to a UAE PE or nexus. If the State-Sourced Income is not linked to a PE or Nexus, the Non-Resident Person is not required to register for Corporate Tax.
State-sourced income applies to both natural and juridical persons and includes income derived from:
- UAE Resident Persons or Non-Residents with a PE in the UAE.
- UAE-based business activities, assets, capital, rights, or services.
Article 13(2) of the UAE Corporate Tax Law provides examples of State-Sourced Income, outlining various types of income derived from UAE-based sources.
Read more: Unincorporated Partnerships in UAE Taxation
Can a Qualifying Free Zone Person (QFZP) in the UAE have a Domestic Permanent Establishment (DPE)?
Yes, a Domestic Permanent Establishment (DPE) refers to the taxable presence of a QFZP outside the Free Zone but within the UAE, and its existence is determined under Article 14 of the UAE Corporate Tax Law.
A DPE is treated as a separate and independent entity from the QFZP (Transfer Pricing Rules shall apply), and income attributable to it is subject to a 9% Corporate Tax rate (unless exempt). Additionally, DPE income does not contribute to the de minimis threshold, meaning it does not affect a QFZP’s eligibility for the Free Zone tax regime. These rules ensure that business activities outside the Free Zone are taxed fairly, like other taxable persons in the UAE, while maintaining tax incentives for Qualifying Free Zone operations.
Can UAE Resident Persons Have a Foreign Permanent Establishment (FPE) Outside the UAE?
Yes, UAE Resident Persons operating in foreign jurisdictions may have a Foreign Permanent Establishment (FPE), which is subject to the host country’s domestic tax laws and any applicable tax treaties with the UAE.
Under Article 24 of the UAE Corporate Tax Law, UAE Resident Persons can make an irrevocable election to exempt income from all qualifying FPEs from UAE Corporate Tax, provided that the FPE is subject to a corporate tax or an equivalent tax of at least 9% on net income in the foreign jurisdiction. If the election is made, it applies uniformly to all FPEs, and both income and expenses from these FPEs are excluded from UAE taxable income.
If a UAE Resident Person does not elect the exemption, they may claim Foreign Tax Credits (FTC) to offset UAE Corporate Tax on foreign-source income, provided that the foreign tax paid meets UAE eligibility criteria.
Additionally, transactions between an FPE and its UAE head office or related parties must comply with the arm’s length principle, ensuring the FPE is treated as a separate entity for tax purposes. To claim the FPE exemption, businesses must maintain proper documentation, including proof of taxation in the foreign jurisdiction.
Conclusion:
Understanding the Permanent Establishment (PE) framework under the UAE Corporate Tax Law is essential for non-resident businesses to ensure compliance and avoid unexpected tax liabilities. Beyond PE status, factors like state-sourced income and nexus rules can also trigger tax obligations, making it crucial to assess all relevant criteria. By staying informed about tax treaties, registration requirements, and compliance obligations, businesses can mitigate risks and optimize their tax position. As the UAE tax landscape evolves, proactive tax planning and proper documentation will be key to maintaining compliance and efficiency.
