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Exemption for Foreign Permanent Establishment Under Corporate Tax UAE

A Foreign Permanent Establishment refers to a branch, representation, or any business operations carried out by a Resident Person in a foreign jurisdiction, meeting the criteria specified in Article 14 of the UAE Corporate Tax Law. The exemption related to Foreign Permanent Establishments is elaborated as per Article 24 of the Corporate Tax Law which explains the conditions for Resident Persons to avail exemption from Corporate Tax on the income generated through permanent establishments. Essentially, the foreign jurisdiction must acknowledge the entity as a Permanent Establishment for corporate tax purposes. Thus, it is advisable for Foreign Permanent Establishments to avail of the services of Tax Consultants in UAE to effectively establish their taxability in compliance with the corporate tax law.   

Exemption from Corporate Tax for Associated Expenditure

In addition to income, the exemption also applies to the associated expenditure of Foreign Permanent Establishments. It further specifies that all expenses linked to the Resident Person in respect of foreign jurisdiction permanent establishment will not be taken into account while determining the taxable income. This further reduces the Corporate Tax burden for Resident Persons engaging in business activities abroad.

Exclusion of Profits and Losses

Clause 2 of Article 24 clarifies the treatment of profits and losses for Foreign Permanent Establishments. Both profit and loss will not be taken into account if the resident person chose to apply for an exemption for foreign establishments. In other words, the Resident Person's Taxable Income calculation excludes the income or losses of the Foreign Permanent Establishments.

Read More: Will an Individual’s Salary Income Be Subject to UAE Corporate Tax?

No Tax Credit for Foreign Permanent Establishments

In case the resident person elects exemption for Foreign Permanent Establishments, no tax credit benefits will be available. This provision ensures that the Resident Person does not benefit from double taxation relief in addition to the exemption.

Independence and Separation of Foreign Permanent Establishment and Associated Businesses

When resolving the issues related to income this approach guarantees that all transactions between the Resident Person and its Foreign Permanent Establishments, as well as transactions involving Related Parties, adhere to the arm's length principle outlined in Article 34.

Liabilities/Asset transfers and applicability of the Principle of Arm's Length 

While transferring the liabilities and assets between a Foreign Permanent Establishment and a Resident Person, the principle of arm's length will also apply. This prevents any potential tax avoidance through inappropriate asset transfers. These transfers are to be assessed based on Market Value at the time of the transaction while computing the Resident Person's Taxable Income. This measure effectively safeguards against potential tax evasion stemming from inappropriate asset transfers.

Taxation in the Foreign Jurisdiction

The exemption applies only to Foreign Permanent Establishments subject to a sufficient level of corporate tax or its equivalent under the applicable legislation in the foreign jurisdiction. In other words, for the exemption to be valid, the foreign jurisdiction must acknowledge the Foreign Permanent Establishment as being within the scope of corporate tax or a similar tax.

Objective and Compliance Procedure

This exemption not only encourages cross-border business activities but also simplifies the tax compliance process for Resident Persons operating in foreign jurisdictions. With clear guidelines and conditions outlined in the Corporate Tax Law, businesses can confidently navigate the taxation landscape and strategically plan their global operations. Foreign Permanent Establishment Exemption is a valuable provision that reflects the UAE's commitment to supporting businesses' growth and facilitating international trade. As businesses continue to expand their reach across borders, this exemption stands as a testament to the UAE's progressive approach towards taxation, promoting economic growth and prosperity for both Resident Persons and the nation as a whole.

Seek the Services of Tax Consultants in UAE

The Foreign Permanent Establishment Exemption provided under Article 24 of the Corporate Tax Law is a pivotal measure in supporting businesses' international expansion and promoting investment in the UAE. By granting Resident Persons the option to claim an exemption for income derived through their Foreign Permanent Establishments, the UAE government demonstrates its commitment to fostering a business-friendly environment and reducing the risk of international double taxation. Thus, it is advisable for Foreign Permanent Establishments to avail of the services of Tax Consultants in UAE to effectively establish their taxability in compliance with the corporate tax law.   

Read More: What is the Corporate Tax Law for Freezone in UAE?

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.