Permanent establishment – Fixed place business PE - Join our UAE Corporate Tax Course

Summary

This script provides an in-depth explanation of the concept of 'permanent establishment' (PE) in the context of UAE tax law, exploring various scenarios where foreign companies might establish a PE in the UAE. It discusses different types of fixed places of business, such as offices, branches, factories, and even temporary setups like field offices. The script also touches on exceptions like preparatory or auxiliary activities that do not trigger PE. Additionally, it examines case studies related to consultancy services, free zone branches, and offshore business activities, highlighting their tax implications under UAE law.

Takeaways

• 😀 A fixed place of business includes a location from where a business is managed, such as a branch office, factory, or workshop.
• 😀 A branch of a foreign company in the UAE is automatically considered a permanent establishment (PE) for tax purposes.
• 😀 A place of management, even if rented, can qualify as a fixed place of business and thus constitute a PE.
• 😀 Installations and structures used in the exploration of natural resources may also be considered a PE, even if the exploration company itself is exempt from corporate tax.
• 😀 The concept of PE is relevant for service providers and contractors involved in natural resource extraction, whose profits may be taxable even if the exploration company is exempt.
• 😀 Preparatory or auxiliary activities, such as marketing or attending seminars, generally do not lead to the creation of a PE.
• 😀 Storing, displaying, or delivering goods in the UAE, or keeping stock for processing, does not constitute a PE, provided no further business activities occur.
• 😀 If a foreign company’s branch in the UAE is involved in both business and limited marketing activities, the overall activities could still constitute a PE and be taxed.
• 😀 Free zone branches may be eligible for zero percent corporate tax on activities related to transactions outside the UAE, depending on specific provisions.
• 😀 The income from a PE derived from services provided within the UAE is generally subject to UAE tax, unless exemptions or special treaty provisions apply.

Q & A

What constitutes a fixed place of business according to international tax treaties?

A fixed place of business typically includes a place of management, a branch, an office, a factory, or any location used for conducting business activities. These can be outlined in international tax treaties, including the UAE's existing treaties.

Can a rented property qualify as a fixed place of business?

Yes, even a rented property used for managing or conducting business activities can constitute a fixed place of business, as ownership of the location is not a requirement.

Is a foreign company’s branch office in the UAE considered a permanent establishment (PE)?

Yes, a foreign company's branch office in the UAE is automatically considered a fixed place of business and therefore constitutes a permanent establishment.

Do preparatory or auxiliary activities qualify as a permanent establishment?

No, preparatory or auxiliary activities do not constitute a permanent establishment. These activities may include limited marketing, promotional efforts, market research, or attending seminars or conventions.

What happens if a foreign company stores goods in the UAE for processing or delivery?

If a foreign company stores goods in the UAE solely for purposes such as processing by another company or for delivery, this does not result in a permanent establishment, and the profits earned would not be liable to tax in the UAE.

How does the OECD Model relate to permanent establishment concepts?

The OECD Model provides a framework for understanding the concept of permanent establishments, including clauses that help define which business activities may or may not constitute a PE, depending on their nature.

Is a foreign company providing services through a branch office in the UAE subject to corporate tax?

Yes, if a foreign company operates a branch office in the UAE that provides services, the profits earned by the branch office will be subject to corporate tax in the UAE.

How does the UAE tax regime treat foreign companies with a permanent establishment that is engaged in the exploration of natural resources?

While income from the exploration of natural resources is exempt from corporate tax at the emirate level, service providers or contractors involved in providing installations, structures, or equipment for these activities may still have a permanent establishment and be subject to tax on their profits.

Does a foreign company’s branch in a UAE free zone offering services outside the UAE qualify for tax exemption?

Yes, a foreign company’s branch in a UAE free zone that provides services related to transactions outside the UAE is typically eligible for a zero percent corporate tax rate, provided the conditions for such exemptions are met.

What distinguishes a branch office offering coordination services for goods trading outside the UAE from other branch offices in terms of taxation?

A branch office in a free zone providing coordination services for goods trading outside the UAE is generally subject to a zero percent corporate tax rate on those transactions, unlike mainland branches where different rules might apply.