The permanent establishment concept evaluates a person's taxability; it refers to a fixed workplace in a foreign country which imposes tax obligation upon the taxable person. Hence, it is essential for organizations to determine whether they have a permanent establishment in the UAE to stay compliant with the corporate tax statute and obligation.
Dependent agent test under UAE corporate tax
The dependent agent test was introduced in the UAE to prevent businesses operating in other countries from earning any income from the UAE without creating a permanent establishment. This idea is mostly used to analyze a source state's ability to levy the revenues of a global corporation. For instance, commercial operations with a residence in Country X are exempt from tax in Country Y as long as those operations do not result in the creation of a permanent establishment there. The corporate tax in UAE suggests adopting the two basic tests listed below to incorporate permanent establishment into its domestic legislation:
- Dependent agent test
- Fixed place business test
An agent who does not primarily represent a foreign corporation and is lawfully and financially free from the foreign entity is an exemption from this criterion. Typically, the following requirements must be met to prove that an agent is an independent agent;
- The purchases between the foreign corporation and the agent should be conducted at arm's length.
- He or she should be functioning in the usual course of his or her company;
- Almost all of his or her actions should not be focused on the behest of the foreign corporation for which he or she is portraying as an agent.
Therefore, even an independent agent who works only for a foreign firm and is reliant on that company financially and constitutionally could result in a permanent establishment risk for that foreign enterprise in the UAE. Only those persons are considered independent agents that work in the UAE without any dependency on any foreign firm. A full examination is essential in light of the permanent establishment regulations and tax treaty clauses.
What is a fixed-place business test?
The characteristics given below must be met regarding a fixed place permanent establishment in the source country (let's say, Country S in the example above) to qualify as a fixed place permanent establishment:
- A company location exists;
- The foreign corporation must have access to the commercial location;
- The site of the company must be fixed, that is, located in a certain area and have some extent of permanence;
- The overseas corporation must conduct its business via a fixed location and must not be exempt from the aforementioned restrictions.
A taxable footprint might not always entail a fixed office or a physical location of the business given recent developments in the methods by which businesses are conducted. Frequent international commutes, citizens from nations with simpler visa policies, the designation of a dependent agent abroad, staff members operating from their home offices, or even a transitory regional office, could all result in a risk of Permanent Establishment exposure.
Read more: Who is Exempt from the UAE Corporate Tax?
How are corporate tax advisory services helpful?
Conforming to the newly implemented federal corporate income tax statute can be a complex task for UAE entities, thus, it is essential to avail the services of a trusted and reputable Corporate Tax Accountant to seamlessly combat any tax intricacies and to enforce compliance with the Federal Tax Authority’s regulations and standards. So, contact us today and we shall be happy to assist you.
Abrar Ahmad holds a Master’s as well as an MPhil in Finance and has an extensive experience of 10+ years in managing all aspects of Taxation, VAT Consulting and Accounting. He also carries with him a working knowledge of corporate tax and has helped drive value and growth to the businesses of numerous clients.