The UAE’s introduction of a Corporate Tax regime starting from June 1st, 2023, has significant implications, particularly for Foreign Companies operating within its borders. In this blog post, we aim to shed light on how this new legislation impacts such entities, focusing on key elements such as the concept of Permanent Establishment (PE) and its application under tax treaties.
Under this 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, are now subject to a 9% tax rate on annual taxable income exceeding AED 375,000 derived from UAE business operations and activities.
One crucial aspect for Foreign Companies to understand is the concept of Permanent Establishment (PE), which serves as the basis for determining a source country’s right to tax a company’s profits. The UAE Corporate Tax incorporates this concept through tests like the Fixed Place of Business Test and the Dependent Agent Test.
The Fixed Place of Business Test
The Fixed Place of Business Test evaluates whether a Foreign Company has a physical presence in the UAE significant enough to establish a taxable presence. This includes conditions such as the
- Existence of a place of business
- Control by the Foreign Company
- Conduct of business activities
Dependent Agent Test
It considers whether a Foreign Company operates in the UAE through an agent who habitually negotiates and concludes contracts on its behalf. Even independent agents could pose a PE risk if they exclusively represent a Foreign Company and economically depend on it.
In summary, the dependent agent test includes:
- Role of agents
- Habitual negotiation and conclusion of contracts
- Risk of economic dependence
Determining what qualifies as preparatory or auxiliary activities within the UAE’s Corporate Tax regime is also crucial. While isolated activities may not trigger a PE, a comprehensive examination of all activities conducted by the UAE office is necessary to understand their collective impact on the company’s operations.
Representative or Liaison Offices, which primarily engage in information exchange and fall within the scope of preparatory or auxiliary activities, require scrutiny to ensure alignment with these categories.
When a PE exists in the UAE, Foreign Companies must attribute profits to this entity based on its functions, assets, and risks, considering internationally accepted policies and OECD guidelines.
To navigate these complexities and ensure compliance with UAE Corporate Tax regulations, collaboration with experienced Corporate Tax Consultants like Elevate is invaluable. From registration to representation before tax authorities, Elevate offers comprehensive services to assist businesses in adapting to this new tax landscape seamlessly.
KLOUDAC Accounting Firm Dubai, UAE
As businesses strive to thrive in this era of transparency and compliance, staying connected with reputable audit firms and consultants such as, KLOUDAC, is crucial for success in the evolving realm of UAE Corporate