Non-Resident Persons & Permanent Establishment
Hafiz Waqas Shehzad ACA (ICAP x ICAEW), MS Fin, PWC Certified Tax Exp.
Chartered Accountant | ICAP | ICAEW | MS Finance | Corporate Tax & VAT Expert (PWC) | CFO | Finance Manager | Financial Controller | Fractional CFO | IFRS | SAP | FP&A Expert | Financial Reporting | Audit | Advisory
Non-Resident Person
Natural Person
A Natural Person residing outside UAE is considered to be a non-resident only if he is:
If a person residing outside UAE is conducting business in UAE either directly (through license) or through permanent establishment with a taxable turnover of more than AED 1 million, it is considered to be taxable person under the Corporate Tax Law. It is imperative to note that Non-Resident Natural Person is not required to register and comply with Corporate Tax if he is deriving only state-source income.
For the sake of our discussion, we do not term a natural person (residing outside UAE) as a “Non-Resident” who neither derives state-source income nor conducts any business activity in UAE either directly or through PE in UAE.
Juridical Person
A Non-Resident Juridical Person (Formed and incorporated outside UAE) is subject to corporate tax under UAE Laws in the following cases:
It is interesting to note here that a Non-Resident Juridical Person is not required to register and comply with the CT regulations if it is deriving only state-source income which is not attributable to PE of the said person or any nexus in UAE.
*Nexus here means to own an immovable property located in UAE used to derive income. Let me make it very clear that if a Non-Resident Juridical Person owns an immovable property located in UAE not used for deriving any income, he is not subject to corporate tax and not required to register for corporate tax solely because of ownership related to this property and shall not be considered a “nexus”. For example, Company P in Pakistan own an immovable property in UAE used for the accommodation of its owners or employees for non-business purpose e.g., leisure is not considered to have a nexus in UAE.
Bear in mind, the concept of nexus is only applicable to Non-Resident Juridical Persons.
Example: Wind turbines
Company N (incorporated in and tax resident of Country N) installs a wind turbine which is fixed on the seabed in a location which falls within the territorial waters of the UAE and derives income from the power generated by the turbine. In this case, Company N will be considered to have both a nexus in the UAE and a Permanent Establishment in the UAE as the wind turbine would be considered as an installation to exploit renewable energy. Hence, income derived by Company N that is attributable to its nexus and Permanent Establishment in the UAE would be subject to Corporate Tax.
Permanent Establishment
A Permanent Establishment of a Non-Resident Person can arise in the UAE where:
There are certain essential factors and guiding principles that must be tested to determine whether a Non-Resident Person has a fixed place Permanent Establishment in the UAE, which are as follows:
Typically, a Non-Resident Person will have a fixed place termed as "Permanent Establishment" in the UAE only if its operations satisfy all the above factors and having regard to all relevant facts and circumstances.
It is important to note that legal ownership, formal right to use or exclusivity of control is immaterial and must not be considered while determining the PE of a Non-Resident Person e.g., rented office can be considered a PE if other criteria is satisfied.
Example: Vending machines
Company B, a company that is incorporated in and tax resident in Country B and not established in the UAE, is in the Business of providing vending machines (manufacture and set-up), and is contracted by Company U (a UAE company) to set up vending machines in all the malls owned by Company U in the UAE. After the initial set-up, the vending machines are leased to Company U, who then operates and maintains the machines.
In this case, the vending machines do not constitute a Permanent Establishment for Company B as it does not undertake any Business operations in the UAE beyond the initial set-up of the vending machine. Also, once the machine is under lease, it will no longer be at the disposal of Company B.
Example: ATM machine in the UAE
Company B, a bank not established in the UAE, installs, operates and maintains ATM machines in various malls, hotels and movie theatres in the UAE from which it earns service fees.
In this case, Company B will be considered to have a nexus in the UAE because the ATM is “machinery or equipment which is permanently attached to a building”. Note that a fixed place Permanent Establishment in the UAE is also created in this case because the ATM machines are used by the Non-Resident Person to carry on its Business in the UAE on a regular basis.
Preparatory or Auxiliary Activities
“Preparatory” activities are those activities which precede commencement of core Business Activities and support the core Business Activities.
"Auxiliary" activities are those which aid or support the core Business function, without being part of the essential and significant part of the activity of the enterprise
Preparatory or auxiliary activities cease to be economically viable when separated from the rest of the enterprise. To be considered as auxiliary or preparatory in nature, such activities must represent an insignificant part of the overall business activities of the Non-Resident Person. If such activities are considered as significant part of the business, it would be considered as core business activities for the purpose of Corporate Tax Law e.g., Delivery of goods by a logistic company through its warehouse (Core business) as against the delivery of goods in UAE through a warehouse by a manufacturing company in foreign country (Auxiliary business).
Example: Storage and delivery of spare parts
Company B sells electronic household appliances to customers in the UAE. It maintains a place of Business in the UAE solely for storage and delivery of spare parts to those customers. Such place will not constitute a Permanent Establishment for Company B based on the fact discussed above.
Example: Storage and delivery of spare parts
If Company B maintains the place of Business for storage and delivery of spare parts to its customers and, in addition, maintenance and repair of appliances is offered, then this would constitute a fixed place of Business for Company B as this goes beyond solely being a storage and delivery activity. It will not be considered as preparatory or auxiliary in nature since after-sale services constitute a part of the services that Company B offers to its customers.
Example: Activity representing an important part of the Business
Company A (incorporated in and tax resident of Country A) has a core Business Activity of selling/distributing goods. It maintains in the UAE a very large warehouse in which employees work for the main purpose of storing and delivering goods owned by Company A which Company A sells online to its customers in the UAE.
In this case, the activities of Company A in the UAE will not be preparatory or auxiliary in nature since the storage and delivery activities, which are performed through the warehouse, represent an important or significant part of Company A’s sale/distribution Business and clearly constitute a significant income generating Business Activity for Company A.
It is of prime importance to note here that preparatory or auxiliary activities refers to activities that are carried on by an enterprise solely for itself. Hence, if a Non-Resident Person performs activities which are traditionally of a preparatory or auxiliary nature for another Person (generally as an independent business), the same would constitute a Permanent Establishment for the Non-Resident as it is not "solely" conducting such activities for itself and is considered to be a core business activity even if it constitutes an insignificant part of the overall business.
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?Anti-fragmentation
The Corporate Tax Law Permanent Establishment provisions include an antifragmentation rule. Anti-fragmentation takes a substance approach to guard against potentially abusive practices whereby a cohesive Business Activity is fragmented into a number of small operations in order to argue that each has a preparatory or auxiliary character.
Subcontracting
Where a performance of a contract is subcontracted to third parties by the Non-Resident Person either in part or full, the criteria for determination of PE shall be applicable to the place of business(es) used by the subcontractor(s) for the performance of the subcontract, in the same way it is applicable to the Non-Resident Person.
Splitting of contracts
Artificial splitting of a contract in contracts with periods of less than six months each or by performance through related parties is prohibited to prevent abuse of corporate tax and will be tested by consolidating all such contracts and will be prosecuted under General Anti-Abuse Rule.
Example: Contract split between Related Parties
Contract 1 is executed by Company N and Contract 2 is executed by a sister company, Company M (which has the same parent company as Company N). Based on the fact that the main contract has been split (contract 1 & 2) artificially between two Related Parties for the same project, both Company N and Company M will have a Permanent Establishment in the UAE, even if their individual contracts did not exceed the 6-month threshold.
However, in genuine cases multiple contracts performed by a Non-Resident Person will not be consolidated in determination of PE of the said person.
Example: Non-Resident executes multiple and simultaneous contracts in the UAE
?Company A, a company incorporated in and tax resident of Country A, has been awarded three construction contracts by three different (and unrelated) UAE companies as follows:
All the three contracts were to be executed by Company A at different sites in the UAE. Company A commenced work on all the three contracts simultaneously in 1 January 2024 and completed all the contracts by 30 April 2024 (i.e. within four months).
In this case, Company A did not artificially split the contracts as they were awarded by three different UAE companies for three completely unrelated projects. Since Company A’s presence in the UAE was only for 4 months (i.e. did not exceed 6months), Company A’s construction projects will not constitute a fixed place Permanent Establishment in the UAE even if it executed multiple contracts during its presence in the UAE (i.e. from 1 January to 30 April 2024).
Agency Permanent Establishment
Person A, that is not a Resident Person, will be deemed to have an agency Permanent Establishment in the UAE due to the activities (must be binding) of a Person B (who can be either a natural person or a juridical person and either a resident or non-resident), if these activities are conducted for and on behalf of Person A.
The activities (contracts or negotiations) by such Person, who does not act independently through separate business of advisory or consultancy, must take place on regular basis and not merely in isolated cases, for it to be habitual and thus, constitute a Permanent Establishment for the Non-Resident Person.
Bear in mind that it is immaterial whether the contracts are concluded in the name of the Non-Resident Person or such other Person who is acting on behalf of the Non-Resident Person.
Small Business Relief (SBR)
As SBR is only available to resident persons in UAE, any Non-Resident Person either Natural or Juridical Person is not eligible to benefit from 0% corporate tax relief under SBR.
Transitional Period
Where a place of business meeting the required criteria already exists at the start of the first tax period and terminated / discontinued during that period, the period falling in the tax period only would be considered in determination of PE.
Example: Project starting before 1 June 2023
Company F (a juridical person that is incorporated in and a tax resident of Country F), which has a Financial Year from 1 June to 31 May, starts an installation project in the UAE on 1 March 2023 and completes work on 30 September 2023.
Although the project duration was 7 months, only the 4-month period between 1 June to 30 September 2023 would be counted, and as this is less than 6 months, no fixed place Permanent Establishment would arise.
Other Considerations
As soon as a Person determines that his activities will trigger a Permanent Establishment in the UAE or that he has a nexus in the UAE, he is considered a Non-Resident Person under the Corporate Tax Law and should register with the FTA for Corporate Tax purposes to avoid any compliance delays that may result in administrative penalties.