Permanent Establishment in the context of UAE Corporate Tax

Permanent Establishment

Permanent Establishment (PE) is an important concept in international taxation because it determines whether a foreign company or individual is liable to pay tax in a particular country. It is a taxable presence that a foreign entity has in a country other than its own.

PE is important because it allows countries to tax the profits of foreign entities that conduct business within their borders. Without PE rules, foreign entities could easily avoid paying taxes in a country by not having a physical presence there.

The concept of PE is defined by each country's tax laws and also by tax treaties between countries. The definition of PE varies from country to country, but it generally refers to a fixed place of business through which a foreign entity carries on business in another country. It can also include activities performed by employees or agents of a foreign entity in another country, even if there is no fixed place of business.

In the next section, we will dive deeper into the definition of PE and discuss the different types of activities that can create a PE.
Let us understand What is PE

A Non-Resident Person has a Permanent Establishment in the State in any of the following instances:
a) Where it has a fixed or permanent place in the State through which the Business of the Non-Resident Person, or any part thereof, is conducted.
b) Where a Person has and habitually exercises an authority to conduct a Business or Business Activity in the State on behalf of the Non-Resident Person.
c) Where it has any other form of nexus in the State as specified in a decision issued by the Cabinet at the suggestion of the Minister.

A fixed or permanent place in the State includes:

a) A place of management where management and commercial decisions that are necessary for the conduct of the Business are, in substance, made.
b) A branch.
c) An office.
d) A factory.
e) A workshop.
f) Land, buildings and other real property.
g) An installation or structure for the exploration of renewable or non-renewable natural resources.
h) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including vessels and structures used for the extraction of such resources.
i) A building site, a construction project, or place of assembly or installation, or supervisory activities in connection therewith, but only if such site, project or activities, whether separately or together with other sites, projects or activities, last more than (6) six months, including connected activities that are conducted at the site or project by one or more Related Parties of the Non-Resident Person.

Examples of Fixed or Permanent Places of Business for Permanent Establishment

a) A place of management where management and commercial decisions that are necessary for the conduct of the Business are, in substance, made.
A Non-Resident Person may have a permanent establishment in a country if they have a place of management in that country. For example, if a foreign company has a CEO or senior executives who regularly make decisions about the company's operations in a particular country, and they have an office or other location in that country where they conduct those activities, then that office could be considered a permanent establishment.
b) A branch.
A branch is a separate division of a company that operates in a different location than the company's headquarters. If a Non-Resident Person has a branch in a country that carries out business activities there, then that branch could be considered a permanent establishment. For example, if a foreign bank has a branch in a particular country that accepts deposits, makes loans, and conducts other banking activities, then that branch could be considered a permanent establishment.
c) An office.
An office is a physical location where a company conducts its business activities. If a Non-Resident Person has an office in a country where they carry out business activities, then that office could be considered a permanent establishment. For example, if a foreign company has an office in a particular country where they sell their products or provide services, then that office could be considered a permanent establishment.
d) A factory.
A factory is a facility where products are manufactured or assembled. If a Non-Resident Person has a factory in a country where they manufacture or assemble products, then that factory could be considered a permanent establishment. For example, if a foreign company has a factory in a particular country where they produce goods, then that factory could be considered a permanent establishment.
e) A workshop.
A workshop is a place where skilled workers use tools and machinery to produce goods or provide services. If a Non-Resident Person has a workshop in a country where they provide services or manufacture goods, then that workshop could be considered a permanent establishment. For example, if a foreign company has a workshop in a particular country where they repair and maintain machinery, then that workshop could be considered a permanent establishment.
f) Land, buildings and other real property.
If a Non-Resident Person owns or leases land, buildings, or other real property in a country where they carry out business activities, then that property could be considered a permanent establishment.
g) An installation or structure for the exploration of renewable or non-renewable natural resources.
If a Non-Resident Person has an installation or structure in a country where they explore and extract natural resources, then that installation or structure could be considered a permanent establishment. For example, if a foreign oil company has an oil rig in a particular country where they extract oil, then that oil rig could be considered a permanent establishment.
h) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources, including vessels and structures used for the extraction of such resources.
If a Non-Resident Person has a mine, oil or gas well, quarry, or any other place where they extract natural resources in a country, then that place could be considered a permanent establishment. For example, if a foreign mining company has a mine in a particular country where they extract copper, then that mine could be considered a permanent establishment.
i) A building site, a construction project, or place of assembly or installation, or supervisory activities in connection therewith, but only if such site, project or activities, whether separately or together with other sites, projects or activities, last more than (6) six months, including connected activities that are conducted at the site or project by one or more Related Parties of the Non-Resident Person.

This criterion applies when a non-resident person is engaged in a construction or installation project that lasts for more than six months in the State. The place where the project is carried out is considered a permanent establishment of the non-resident person.

For example, if a foreign company is contracted to construct a new building in the State and the project is expected to last for more than six months, the company will be deemed to have a permanent establishment in the State, even if it does not have any other physical presence there.

Similarly, if a non-resident company sends its employees to supervise a construction project that lasts for more than six months in the State, and the employees are present in the State for more than 183 days in a calendar year, the company will also be deemed to have a permanent establishment in the State.

We have understood fixed or permanent place of business for permanent establishment, but a fixed or permanent place in the State shall not be considered a Permanent Establishment of a Non-Resident Person if it is used solely for any of the following purposes:
a. Storing, displaying or delivering of goods or merchandise belonging to that Person.
b. Keeping a stock of goods or merchandise belonging to that Person for the sole purpose of processing by another Person.
c. Purchasing goods or merchandise or collecting information for the Non-Resident Person.
d. Conducting any other activity of a preparatory or auxiliary nature for the Non-Resident Person.
e. Conducting any combination of activities mentioned in paragraphs (a), (b), (c) and (d) above, provided that the overall activity is of a preparatory or auxiliary nature.
In other words, if a fixed or permanent place in the State is used only for the purposes listed above, it will not be considered a Permanent Establishment for the Non-Resident Person. These purposes are essentially preparatory or auxiliary in nature and do not constitute core business activities of the Non-Resident Person.

The above exemptions shall not apply to a fixed or permanent place in the State that is used or maintained by a Non-Resident Person if the same Non-Resident Person or its Related Party carries on a Business or Business Activity at the same place or at another place in the State where all of the following conditions are met:

a) Where the same place or the other place constitutes a Permanent Establishment of the Non-Resident Person or its Related Party:
This condition means that if a Non-Resident Person or its Related Party has a fixed or permanent place in the State that constitutes a Permanent Establishment, then the exemptions mentioned in the previous point shall not apply to that place. In other words, if the Non-Resident Person or its Related Party is conducting a Business or Business Activity at a place that is considered a Permanent Establishment, then the exemptions for a fixed or permanent place used solely for preparatory or auxiliary activities will not apply.

b) The overall activity resulting from the combination of the activities carried out by the Non-Resident Person and its Related Party at the same place or at the two places is not of a preparatory or auxiliary nature and together would form a cohesive Business operation, had the activities not been fragmented:

This condition means that if the activities carried out by the Non-Resident Person and its Related Party at the same place or at two different places in the State are not of a preparatory or auxiliary nature, then the exemptions mentioned in the previous point shall not apply. In other words, if the activities carried out at the two places form a cohesive Business operation and are not fragmented, then the exemptions for a fixed or permanent place used solely for preparatory or auxiliary activities will not apply.

For example, if a Non-Resident Person has a fixed place in a State that is used solely for storing its goods and merchandise, then this place will not be considered a Permanent Establishment. However, if the same Non-Resident Person or its Related Party carries out a Business or Business Activity at the same place or at another place in the State that constitutes a Permanent Establishment, and the overall activity resulting from the combination of the activities carried out at the two places is not of a preparatory or auxiliary nature, then the exemption for the fixed place used solely for storing goods or merchandise will not apply.

Habitually exercising an authority to conduct a Business or Business Activity in the State - Explained

When a person, whether an individual or a legal entity, habitually exercises authority to conduct business or business activity on behalf of a non-resident person in a state, it is considered a permanent establishment (PE) of the non-resident person.
The conditions under which a person is considered to have and habitually exercise the authority to conduct business or business activity in the state on behalf of a non-resident person are as follows:

a) Habitual Conclusion of Contracts: A person who habitually concludes contracts on behalf of a non-resident person is considered to have and habitually exercise the authority to conduct business or business activity in the state on behalf of the non-resident person. The term "habitually" means that the person regularly or repeatedly performs this activity, and it is not a one-time occurrence. This condition is met when the person has the power to bind the non-resident person in a legal agreement with a third party.
For example, suppose a foreign company hires a local agent to promote and sell its products in a particular state. The local agent regularly concludes contracts with customers on behalf of the foreign company. In this case, the local agent is considered to have and habitually exercise the authority to conduct business or business activity in the state on behalf of the foreign company, and it is considered a permanent establishment of the foreign company.

b) Habitual Negotiation of Contracts: A person who habitually negotiates contracts that are concluded by the non-resident person without the need for material modification by the non-resident person is also considered to have and habitually exercise the authority to conduct business or business activity in the state on behalf of the non-resident person. The term "habitually" means that the person regularly or repeatedly performs this activity, and it is not a one-time occurrence.

For example, a foreign company may appoint a local agent to negotiate contracts with customers in a particular state. If the local agent habitually negotiates contracts on behalf of the foreign company, and the non-resident person does not need to make any significant changes to the agreements negotiated by the local agent, then the local agent is considered to have and habitually exercise the authority to conduct business or business activity in the state on behalf of the foreign company, and it is considered a permanent establishment of the foreign company.

In summary, when a person habitually concludes or negotiates contracts on behalf of a non-resident person in a state, it is considered a permanent establishment of the non-resident person.

If a person in the state conducts business on behalf of a non-resident person as an independent agent and acts in the ordinary course of that business or activity, then the criteria mentioned in the previous points (habitually concluding or negotiating contracts) would not apply. This is because the person is acting independently and not exclusively or almost exclusively for the non-resident person.

However, if the person acts exclusively or almost exclusively for the non-resident person, then the criteria mentioned in the previous points would apply, and the person may be considered to have a permanent establishment in the state on behalf of the non-resident person.

Moreover, if the person cannot be considered legally or economically independent from the non-resident person, then the criteria mentioned in the previous points would also apply. This means that if the non-resident person exercises a significant level of control over the actions and decisions of the person conducting business on its behalf, then that person may be considered to have a permanent establishment in the state on behalf of the non-resident person.

Example:

Let's say a Non-Resident Person (NRP) is a manufacturer of high-tech medical equipment and wants to sell their products in a foreign country. To do so, they hire a local Person (LP) to promote their products and find potential buyers in the foreign country.
The LP meets with various hospitals and clinics, showcases the NRP's products, and negotiates contracts on behalf of the NRP. The LP is not an employee of the NRP and is not exclusively working for them. The LP is a local distributor who has several other medical equipment manufacturers' products in their portfolio.
In this case, the LP is acting as an independent agent and is not considered to have a Permanent Establishment for the NRP in the foreign country. This is because the LP is not exclusively working for the NRP and is acting in the ordinary course of their business.
However, if the LP was working exclusively for the NRP and did not have any other products in their portfolio, or if the LP was legally or economically dependent on the NRP, then they would be considered to have a Permanent Establishment for the NRP in the foreign country.

Mere presence of a natural person in the State does not create a Permanent Establishment for a Non-Resident Person

Mere presence of a natural person in the state does not create a Permanent Establishment for a Non-Resident Person. The Federal Decree law specifies that the Minister may prescribe the conditions for such instances.
Under this clause, there are two instances where the mere presence of a natural person in the state does not create a Permanent Establishment for a Non-Resident Person. Firstly, if the presence is a consequence of a temporary and exceptional situation. Secondly, if the natural person is employed by the Non-Resident Person, and the activities being conducted by the natural person in the state are not part of the core income-generating activities of the Non-Resident Person or its Related Parties, and the Non-Resident Person does not derive state-sourced income.

In simple terms, if a natural person is present in the state temporarily or if they are employed by a Non-Resident Person but are not involved in core income-generating activities and the Non-Resident Person does not derive state-sourced income, the presence of that person does not create a Permanent Establishment for the Non-Resident Person.


Disclaimer: The information provided in this article is for general educational purposes and is not intended to serve as professional advice, whether financial, legal, tax-related, or any other field. Laws and regulations can change, and individual circumstances can vary widely. Relying solely on the information in this article for making important decisions is not recommended, and we disclaim any liability for actions taken without seeking appropriate professional consultation.