A business resident in the UAE may conduct activities overseas through a branch, office or another form of Permanent Establishment. Because a UAE Resident Person is generally subject to UAE Corporate Tax on income earned inside and outside the UAE, profits attributable to a foreign Permanent Establishment may initially form part of its UAE Taxable Income.

Article 24 of the UAE Corporate Tax Law allows a Resident Person to elect to exclude the income and associated expenditure of eligible foreign Permanent Establishments from its UAE Taxable Income. This treatment is known as the Foreign Permanent Establishment exemption.

The exemption is elective and subject to specific conditions. It should not be applied automatically merely because a UAE business has a branch or other presence outside the UAE.

What is a Foreign Permanent Establishment?

A Foreign Permanent Establishment is a place of Business or another form of presence outside the UAE belonging to a UAE Resident Person. Its existence is assessed by applying the Permanent Establishment principles in Article 14 of the Corporate Tax Law in the relevant foreign context.

Depending on the circumstances, it may include:

• a foreign branch or office;
• a fixed place through which the UAE business conducts activities overseas;
• a factory, workshop or other fixed business location;
• a sufficiently long construction or installation project; or
• a person who habitually concludes, or plays the principal role in concluding, contracts for the UAE business overseas.

Merely earning income from foreign customers does not necessarily create a Foreign Permanent Establishment. The facts, applicable foreign legislation and any relevant Double Taxation Agreement should be reviewed.

Who may elect for the exemption?

The Foreign Permanent Establishment exemption is available to a UAE Resident Person that has one or more eligible Permanent Establishments outside the UAE. A foreign branch remains part of the UAE head office and is not a separate legal entity.

Conditions for the Foreign PE exemption

1. A Foreign Permanent Establishment must exist

The overseas activities must constitute a Permanent Establishment when the Article 14 principles are applied in the foreign context. A limited presence or activities that are only preparatory or auxiliary may not meet this requirement.

2. The foreign PE must be subject to qualifying foreign tax

The Foreign Permanent Establishment must be subject to Corporate Tax, or a tax of a similar character, in the foreign jurisdiction at a rate of at least 9%, subject to the detailed rules for determining whether this requirement is met.

Businesses should not rely only on the headline tax rate. The applicable foreign tax legislation, available exemptions and the actual treatment of the PE should be examined.

3. The election applies consistently

A Resident Person cannot normally select the exemption for one eligible Foreign Permanent Establishment while choosing a different treatment for another eligible Foreign Permanent Establishment. The election applies to all Foreign Permanent Establishments that satisfy the relevant conditions.

What is excluded from UAE Taxable Income?

When a valid election is made, the UAE Resident Person excludes the following in relation to eligible Foreign Permanent Establishments:

• income attributable to the eligible Foreign Permanent Establishments;
• associated expenditure; and
• eligible Foreign Permanent Establishment Tax Losses.

Income, expenses and losses must be determined by treating the UAE head office and each Foreign Permanent Establishment as separate and independent businesses. Transactions between them should be recognised at Market Value using appropriate profit-attribution and transfer-pricing principles.

Treatment of earlier Foreign PE losses

Special rules apply where a Tax Loss incurred by a Foreign Permanent Establishment was previously used to reduce other Taxable Income of the UAE Resident Person.

Before the exemption can take effect, the previously utilised losses must generally be fully offset by subsequent Taxable Income attributable to eligible Foreign Permanent Establishments. Businesses should review prior Tax Returns and maintain a schedule of Foreign PE income and losses before making the election.

Foreign PE exemption versus Foreign Tax Credit

The exemption and the Foreign Tax Credit are alternative methods of relieving international double taxation.

Foreign PE exemption

• Eligible Foreign PE income and associated expenditure are excluded from UAE Taxable Income.
• Eligible Foreign PE losses are also excluded.
• No Foreign Tax Credit is available in the UAE for foreign tax paid on the exempt income.

Foreign Tax Credit

If no exemption election is made, or a Foreign Permanent Establishment is not eligible, its income generally remains included in UAE Taxable Income. Qualifying foreign Corporate Tax paid on that income may be claimed as a Foreign Tax Credit, subject to the applicable limit and documentation requirements.

The better treatment depends on the foreign tax rate, profitability, available losses, the nature of the overseas operations and the UAE tax attributable to the income. The decision should be supported by a calculation rather than based only on the headline foreign tax rate.

How is the election reported?

The election is made through the UAE Corporate Tax Return. The relevant Foreign Permanent Establishment schedule requires information about eligible and ineligible Foreign Permanent Establishments, their income and losses, and any losses utilised in earlier Tax Periods.

Records businesses should maintain

• evidence that a Foreign Permanent Establishment exists;
• foreign tax registrations and Tax Returns;
• proof of the applicable foreign tax treatment and rate;
• financial information for each Foreign Permanent Establishment;
• income and expense allocation calculations;
• details of transactions with the UAE head office;
• transfer-pricing and profit-attribution support;
• evidence of foreign tax paid; and
• schedules of Foreign PE losses used in current or previous Tax Periods.

Practical review before making the election

1. Identify each overseas branch, office or other business presence.
2. Determine whether it constitutes a Foreign Permanent Establishment.
3. Confirm whether the foreign tax condition is satisfied.
4. Calculate income, expenditure and losses separately for each PE.
5. Review whether earlier Foreign PE losses were used in the UAE.
6. Compare the exemption with the available Foreign Tax Credit.
7. Confirm the effect on every eligible Foreign Permanent Establishment.
8. Complete the relevant election and schedules in the Corporate Tax Return.

How Business Catalyst Consulting can help

Business Catalyst Consulting assists UAE businesses with assessing overseas operations, reviewing Foreign Permanent Establishment status, evaluating the exemption conditions and comparing the exemption with Foreign Tax Credit treatment.

We can also support Foreign PE income and loss schedules, profit-attribution calculations, Corporate Tax Return disclosures and supporting documentation. Learn more about our UAE Corporate Tax services or contact us at saadia.ali@businesscatalyst.ae.

Official references

• FTA Corporate Tax Guide – Taxation of Foreign Source Income
• FTA Corporate Tax Guide – Tax Returns
• FTA Corporate Tax FAQs

This guide provides general information and should not be treated as advice for a particular taxpayer. The applicable facts, foreign legislation, Double Taxation Agreement and current UAE Corporate Tax rules should be reviewed before making an election.