Insights

Corporate Tax

Implications of UAE Corporate Tax on Foreign Companies Businesses

February 06, 2024

The UAE has entered into Corporate Tax regime effective from 1st June 2023.

In this article, we have provided a brief insight on the implications of the newly enforced Corporate Tax law on the Foreign Companies having their business operations in the UAE and highlighted key aspects from the perspective of a permanent establishment which concept is commonly found in Double Taxation Avoidance Agreements between UAE and many other countries (“Tax Treaties”) and will be the premise for taxation of such companies in the UAE. Under the Corporate Tax regime, Foreign Companies which have in the UAE

  1. Their Permanent Establishment (‘PE’) ; or
  2. Their Place of Effective Management ; or
  3. Their source of income

will be subject to UAE Corporate Tax at the rate of 9% on annual taxable income exceeding AED 375,000 attributable to UAE business operations and activities.

The Foreign Companies are at par with the domestic companies for the applicable tax rate of 9%, unless these foreign companies are constituents of a multinational national enterprise having consolidated global revenue in excess of EUR 750 million, in which case, a higher effective tax rate of 15% may become applicable after UAE adopts Global Minimum Tax regime.

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

The concept of PE is stated in widely used tax treaties and also appears in the domestic laws of many countries. The primary use of this concept is to determine the right of a source country to tax the profits of a Foreign Company. For example, the business operations of company resident in Country R are protected from taxation in the source Country S as long as activities of company resident in Country R do not create a PE in the source Country S.

The UAE Corporate Tax has introduced the concept of PE by using the following two generally adopted tests: i. Fixed place of business test; and ii. Dependent agent test.

(a) Fixed Place of Business Test:

A fixed place is generally a place of management, branch, office, factory, workshop, etc. However, no fixed place PE comes into existence if activities of the Company in Country R in the above example if:

  1. the activities carried out through the fixed place in the UAE (say Country S in the above example) are preparatory or auxiliary in nature; or
  2. the fixed place is used only to store, display or deliver, keep stock of goods for processing.

Typically, in order to constitute a fixed place PE in the source Country (say Country S in the above example) all of the following conditions listed below should be satisfied:

  1. Existence of place of business;
  2. The place of business must be at the disposal of the Foreign Company;
  3. The place of business must be fixed, i.e., established in a distinct place with a certain degree of permanence;
  4. The business of the Foreign Company must be carried on through the fixed place of business; and
  5. It should not be covered by the exceptions indicated aforesaid.

Further, business landscape across the globe is evolving at a pace never seen before. In light of the changes in the ways of doing businesses, a taxable presence need not necessarily need a permanent office or a physical place of business. Frequent travels overseas, Nationals coming from countries where easier visa rules apply in the form of e-visa, visa on arrivals or no visa at all apply, appointment of a dependent agent overseas, employees working from their home office or even a temporary field office could lead to potential PE exposure.

(a) Dependent Agent Test:

A dependent agent PE is created when a Foreign Company (say Country R in the above example) operates in the UAE (say Country S in the above example) through a dependent agent and such agent habitually exercises the authority to negotiate and conclude contracts on behalf of the Foreign Company without any material intervention from the Foreign Company.

An exception to this test is an agent that does not work exclusively for Foreign Company and is truly legally and economically independent from the Foreign Company. Typically, the conditions required to be satisfied in order to demonstrate that an agent is an independent agent are as follows:

  1. He should be acting in the ordinary course of his business;
  2. His activities should not be devoted wholly or almost wholly on behalf of the Foreign Company for whom he is acting as agent; and
  3. The transactions between the Foreign Company and the agent should be at arm's length.

Hence, even an independent agent working exclusively for a Foreign Company and who is legally and economically dependent on the Foreign Company, could lead to a PE risk for the Foreign Company in the UAE. Such arrangement would require a thorough review in the backdrop of PE rules and Tax Treaty provisions.

Key aspects in the context of PE

1. What constitutes preparatory and auxiliary in nature?

The UAE Corporate Tax regime provides general guidance to determine which activities undertaken by a Foreign Company in the UAE would have a preparatory or auxiliary character. It indicates that activities performed in preparation or in support of more substantive business activities of Foreign Company are covered under preparatory and auxiliary. It also provides illustrative list of activities such as limited marketing and promotional activities, performing market research and attending seminars or conventions to be covered under preparatory and auxiliary nature of activities.

While the UAE Corporate Tax regime provides the aforesaid guidance on what constitutes preparatory or auxiliary, it can be seen that there is no standard formula.

Further, preparatory and auxiliary activities viewed in isolation may be covered in the exceptions of fixed place PE but when combined together they may form part of cohesive business operation of the Foreign Company and therefore crucial for determining if there is any PE exposure.

Thus, a detailed fact finding analysis of all the activities of the UAE office for the Foreign Company should be undertaken, inter-alia, from the following perspectives to determine if the activities are in fact preparatory or auxiliary in nature:

  1. Roles and responsibilities of the employees of the UAE office in contract negotiation and finalization;
  2. Significance and proportion of the activities performed in UAE vis-à-vis the overall business of the Foreign Company;
  3. Nature of expenses incurred by the UAE office;
  4. Any sales incentive plans provided to the employees of the UAE office by the Foreign Company based on achievement of targets of sales in the UAE;
  5. Point of contact for the customers in UAE.

2. Whether Representative or Liaison offices constitute PE?

Representative or Liaison Offices are generally not allowed to carry on any business in the country where they are established. They merely act as a point of contact between the company and the customers in the other country and carry out activities of exchange of information, and therefore, generally and in ordinary course get covered within the ambit of preparatory or auxiliary set of activities.

However, in case of representative or liaison office, it is advisable to evaluate if the activities are in fact preparatory or auxiliary by undertaking the fact finding analysis as indicated in point 1 above.

3. In case of existence of PE in UAE, how will the profits be attributed to such PE?

The Foreign Company will be required to undertake analysis to determine the profits attributable to the permanent establishment in the source country. Typically, the profits attributed to the PE will be those profits the PE would have expected to generate if it were a separate and independent enterprise carrying out the same or similar activities in the same or similar conditions, taking into account functions performed, assets used and risks assumed. For this purpose, guidance may also be drawn from internationally accepted policies and OECD guidelines.

Way forward

It is therefore imperative that the Foreign Companies conducting their activities and operations in the UAE, through any form of presence, inter-alia, should evaluate their existing business models, long term agreements / contracts, intra group and cross-border transactions etc. to assess the impact from a PE risk perspective, their potential tax exposure and compliances under UAE Corporate Tax.

Disclaimer

The information contained in this document is for general information purposes only. We make no representation or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the document or the information provided therein, we reserve copyright of this document and hence, do not allow anyone to sell, re-publish or re-distribute the document or derivatives thereof. This document should not be relied upon for making individual or business decisions.


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