UAE Fixed Establishment risk for non-residents

Have you considered your residency status for UAE tax purposes?

UAE non-residents often carry out business activities in the UAE through third-party service providers or locally based dedicated staff. Where this arrangement constitutes a Fixed Establishment for UAE VAT purposes, the non-resident may already be exposed to UAE VAT obligations without realizing it.

Authors:

Mark Junkin

Kate Bacon

George German

UAE Fixed Establishment risk for non-residents

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Overview

The Federal Tax Authority (FTA) is closely reviewing staffing arrangements where overseas businesses rely on locally employed individuals to carry out specific business functions in the UAE. Regardless of who formally signs the employment contracts, the FTA may classify the overseas entity as having a Fixed Establishment in the UAE. There have been instances where the FTA has viewed an overseas entity as having a UAE establishment for VAT purposes even where it has no direct employees, premises or assets of its own in the UAE.

Why this matters

Supplies may become subject to UAE VAT. Where an overseas entity is deemed to have a Fixed Establishment in the UAE, supplies made through that establishment are treated as UAE supplies and are subject to VAT at the standard rate of 5%. Registration obligations would arise from the date UAE supplies first started, potentially years before any FTA inquiry, with VAT liabilities and potential penalties applying from that time.The non-resident falls in scope of UAE e-invoicing. An entity with a Fixed Establishment is no longer considered non-resident, which can change its e-invoicing obligations and require changes to internal systems and processes.Zero-rating positions may no longer hold. Where a recipient has a UAE Fixed Establishment that effectively receives the benefit of services, zero-rating is denied and the supply becomes subject to 5% VAT.

The potential exposure

How a UAE Fixed Establishment, PE or POEM determination can affect a non resident business.

5%

Standard UAE VAT rate applied to supplies made through a Fixed Establishment, potentially from the date UAE supplies first started.

9%

Statutory Corporate Tax rate on profits attributable to a UAE PE.

Worldwide income

Brought into the scope of UAE Corporate Tax where a POEM determination applies.

From a UAE VAT perspective

Do any individuals based in the UAE carry out functions that primarily serve or benefit an overseas entity in your group or supply chain? If so, who exercises real control over them day to day?
Has the VAT treatment of your cross-border supplies been reviewed in light of the FTA's current focus on substance over contractual form?
Are any zero-rating positions applied by UAE entities in your supply chain contingent on a recipient's non-residency status that has not been recently tested?

Could a retrospective FTA assessment create a material exposure where a non-resident entity in the group is considered to have a Fixed Establishment?

From a UAE Corporate Tax perspective

PE assessment: Has the business conducted a functional analysis to determine if local staff activities, such as negotiating or concluding contracts, create a taxable PE?
POEM exposure: Are key strategic, operational and commercial decisions for any non-resident person being made by personnel or directors while in the UAE?
TP compliance: Are arrangements and recharges between the non-resident person and its UAE presence at arm's length and supported by proper TP documentation?
Registration and audit exposure: Is the non-resident person prepared for potential retrospective assessments and penalties if a PE is deemed to have existed historically?

Yes

No

UAE Fixed Establishment risk for non-residents