UAE Corporate Tax - Permanent Establishment (PE) and Transfer Pricing(TP) Tax Rules
In this blog, we’ll explain the details of UAE corporate tax(introduced June 2023) in terms of its application to Permanent Establishment (PE) and Transfer Pricing(TP) regulations. This is a crucial consideration for companies engaged in transactions with group companies located around the world, such as global enterprises, and for those companies entering the UAE as a representative office.
Additionally, even for non-global enterprises, individuals who own companies in Japan, or sole proprietors whose annual taxable income exceeds the threshold, need to be aware of these points.
After reading this article, you can…
- Understand the unique definition of Permanent Establishment(PE) in UAE
- Understand the overview of Transfer Pricing(TP) taxation and how to prepare for it
- Get tips for how to manage a UAE corporation as a global company from a corporate tax perspective
Chapter 1: Legal form and Corporate Tax risks of global companies
Global companies operate in the UAE as follows: (1) Subsidiary (LLC), (2) Branch or (3) Representative Office.
Supervisory authority that has jurisdiction differs depending on the area(Free Zone or Mainland) where each subsidiary/branch is located is also another characteristic of the UAE market.
Example: Dubai Economy & Tourism (DET, former DED) for the mainland, Each Free Zones Regulatory (DIFC, Dafza, Jafza, etc.)
As stated in the previous blog, the applicable rules for corporate tax differ depending on the area where the company is located, but in principle, PE and TP taxation are matters that need to be confirmed and dealt with regardless of the area.
In particular, if your company has a representative office, it is important to deal with PE , and if it is a local subsidiary or branch, it is important to deal with transfer pricing taxation.
Chapter 2: Definition of PE in UAE
PE stands for “Permanent Establishment” and refers to a fixed location where business activities are carried out. Foreign corporations(Non-Resident) are liable to pay corporate tax on income sourced within the UAE, but once certified as a PE in UAE, they are recognized as a taxable person, and they are required to maintain ongoing compliance, such as annual tax return etc.
Please check below to see what types of PE are defined in the UAE.
| 1. Fixed PE | Having a fixed or permanent place in the UAE through which the business of the foreign corporation or part of it is conducted. |
| 2. Agent PE | A person has and habitually exercises an authority to conduct a business or business activity in the UAE on behalf of the non-resident person. This includes concluding contracts in the name of the non-resident or negotiating contracts that are later concluded without material modification. |
| 3. Other PE | A non-resident person has any other form of nexus in the UAE as specified by a Cabinet decision. |
(In principle, the corporate tax regime in the UAE follows OECD rules, and the basic concept is the same as in other developed countries.)
Those who are already familiar with International Taxation may be well known above definitions, but others will not understand even the meaning.
Applying this to global companies located in the UAE, it can be roughly sorted as follows.
＜Legal Entity and PE Certification＞
| Subsidiary (LLC, FZE, FZCO) | Applies to Fixed PE =Recognized as a taxable person in the UAE |
| Branch | Applies to Fixed PE =Recognized as a taxable person in the UAE |
| Representative Office | Not be Applied to Fixed PE※ =Not be Recognized as a taxable person in the UAE |
From the above information, it seems that there are advantages to having a representative office, but a representative office cannot conduct sales activities (specifically, only marketing and public relations activities are permitted), etc. , there are many restrictions on conducting business.
In addition, although the UAE government has not investigated or pointed out the activities of this representative office so far, it announced the definition of PE with the introduction of corporate tax, and it is assumed that regulations will become stricter in the future.
Therefore, in response to PE, companies with representative offices in particular will need to carefully compare their actual business activities with the definition of a representative office and evaluate their own companies from the perspective of “Is there really no risk of PE?” need to be assessed.
If a representative office holds sales meetings (stores materials) or conducts price negotiations, there is a PE risk in a tax audit that will be conducted later.
Chapter 3: UAE TP(transfer pricing) tax regime
Next, if a subsidiary or branch located in the UAE has transactions with overseas affiliates, including Japan, or dispatches various personnel, it is necessary to pay attention to transfer pricing(TP) taxation.
To begin with, transfer pricing is the transaction price in international transactions within the same corporate group, and is a term that refers to all transaction prices within the corporate group, regardless of tangible asset transactions, intangible asset transactions, and service provision transactions.
Is your transfer price appropriate from the perspective of an arm’s length price (transactions conducted between independent third parties are considered to be economically rational, so the transaction price applied there is called an arm’s length price)? This kind of evaluation is very important in global intergroup transactions.
The purpose of transfer pricing is to prevent the tax revenues of each country from being distorted by setting fixed transfer prices.
So, how should you handle this transfer pricing? It is mandatory to use the arm’s length pricing method to confirm that transactions between your company’s group are within a certain standard value.
We recommend that you use a third party that provides accounting-related services, such as our company, for this evaluation, but the following five methods are mainly prescribed in global (OECD standards).
Furthermore, as the UAE tax system also complies with OECD standards, the following five methods are currently permitted.
＜Transfer pricing valuation method＞
| 1. Comparable Uncontrolled Price Method (CUP) | Comparing Price |
| 2. Resale Price Method (RP) | Comparing gross profit margin to sales |
| 3. Cost Plus Method (CP) | Comparing gross profit margin to cost of goods sold |
| 4. Profit Split Method (PS) | Dividing combined operating profit |
| 5. Transactional Net Margin Method (TNMM) | Comparing with the operating profit margin (operating profit margin on sales, operating profit margin on total expenses) |
Chapter 4: Transfer Pricing Documents
Transfer pricing policies often differ from company to company, and there is not necessarily one optimal solution.
For example, there are cases where a subsidiary manufactures and sells products (purchases raw materials from the parent company and returns them as dividends), and cases where a subsidiary sells products manufactured by the parent company and recognizes a portion of the contract amount as revenue at the subsidiary. The scope and concept of transfer pricing will differ depending on the case.
Therefore, each company is required to maintain documents related to transfer pricing, and in the UAE, the following three types of documents must be maintained. These must be prepared in accordance with the detailed rules of UAE corporate tax, so we recommend that you use a local subsidiary or a local consultant such as our company when preparing them.
| Local File |
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| Master File |
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| Country by Country Reporting (CbCR) |
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※Introduced in the UAE in advance in 2019. It is mandatory if the company is a tax resident.
Chapter 5: Summary
Responding to PE and TP taxation often requires some months, including changing the legal entity and preparing documents. In the case of many global companies, we believe that the application will start from the next accounting period (FY24), but we recommend that you start taking these measures within this fiscal year(FY23).
In addition, it is unlikely that you will end up simply dealing with corporate taxes, and you will need to proceed with consideration of legal compliance, such as consistency with ESR, so we
recommend that you use a third party like us.
We will continue to update case studies and the latest information on global companies, so please keep up with this blog.
If you have any questions, please let us know from following link.
Thank you!