Corporate Tax Dubai: Foreign and Domestic Permanent Establishments for Free Zone Under UAE

Corporate Tax Dubai

Permanent establishment (PE) is crucial for companies operating across numerous jurisdictions. It doesn’t matter if it’s local or foreign PEs; their tax implications differ depending on the kind. This guideline from the UAE Corporate Tax Guide to Free Zone Persons, published by the Federal Tax Authority (FTA) in May 2024, guides the tax implications for eligible free Zone Persons. According to the Corporate Tax Guide for Freezone individuals, companies operating in free zones must adhere to essential tax regulations, including Permanent Establishment legal guidelines, which could impact the tax treatment of these entities. This article will provide knowledge regarding Foreign Permanent Establishment and Domestic Permanent Establishment laws and how tax advisors for corporations located in Dubai can help navigate the complex tax issues for corporate entities in free zones. 

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  1. Foreign Permanent Establishment (FPE) 

The term “Foreign Permanent Establishment” refers to a Foreign Permanent Establishment refers to an established business location that a foreign company could establish in another country. It can be an office branch, branch subsidiary, subsidiary or any other physical presence in the country. (Article .no 14 of Corporate Tax Law.) Suppose a foreign-owned business has a PE in a specific region. In that case, that area will be subjected to corporate tax imposed by the jurisdiction area on the profits earned from the activities performed in the PE. 


Tax Implications of Foreign Permanent Establishment 

According to the Tax on Corporate Income Guide, which is accessible to all Free Zone Persons published by the Federal Tax Authority in May 2024, the term “Foreign Permanent Establishment” refers to a Foreign Permanent Establishment (FPE) that is a qualified Freezone person (QFZP) is in the tax bracket of the Corporate Tax Rate, which will be 9% on its profits. 

The guide states that if a QFZP operates through a Permanent Establishment in a foreign country, the profits that the Permanent Establishment earns will be subject to the Corporate Tax rate of 9 per cent. Rate. This means that earnings earned from this FPE will be taxed compatible with the average rate of 9% instead of the zero-rate applicable to income that qualifies as Qualifying within The Free Zone. 

In essence, the tax consequences of a foreign permanent establishment for an eligible person who is an eligible Free Zone individual are that they are subject to the standard corporate tax rate on earnings instead of being tax-free for earnings that qualify as qualifying within the Free Zone. 

  1. Domestic Permanent Establishment (DPE) 

The phrase “District Permanent Establishment” refers to a Domestic Permanent Establishment; on the contrary, it refers to an established location of business which a business can establish in its country. It could include offices, factories, branches, and other physical locations where businesses are out. While DPEs are considered corporate entities within the country they are located, their tax implications are generally less complicated than FPEs. 

A QFZP is the basis for”DPE,” also known as “DPE” or Domestic Permanent Establishment (DPE). If one or more of these conditions is met: 

  • QFZP is headquartered in the Free Zone and has a branch outside of it, which is classified as the DPE. 
  • QFZP is situated in the Free Zone and has a branch within it. The head office is the DPE. 

Tax Implications of Domestic Permanent Establishment 

Earnings generated through DPE can be taxed at the Corporate Tax rate of 9%. DPE could be subject to the corporate tax rate of 9% per cent (unless exempted earnings) but isn’t considered when determining the minimum requirements for obtaining QFZP Status (see section 7.3). 

The guide gives examples of these situations. 

Scenario 1: Head Office in a Free Zone and a Branch Outside the Free Zone 

QFZP is headquartered in its headquarters in the Free Zone and a branch outside of the Free Zone. The branch is regarded as a DPE. The earnings generated by this DPE are taxed at a corporation tax rate of 9 per cent. Ratio (see Section 

Scenario 2: Head Office Outside a Free Zone and a Branch in the Free Zone 

QFZP is a member of the DPE, which is headquartered outside the Free Zone and has a branch within the Free Zone. The main office is the DPE. The revenue generated by DPE will be taxed at the corporate tax rate. 

Scenario 3. Make money off Commercial Property 

Commercial property within the Free Zone can be taxed at 9% if it comes from transactions with people outside the Free Zone. If it comes from interactions that involve non-Free Zone individuals, it’s considered Qualifying Income and taxed at a rate of zero per cent. 

Scenario 4 Earnings from Non-commercial property  

Revenue from property not commercially owned and located within the Free Zone is taxed at 9 per cent, whether the transaction involves an official Free Zone Person or a non-Free Zone Individual. 

Scenario 5: De Minimis Rule 

Non-Qualifying Income of a QFZP must be at most the lesser of 5% of their total revenue to be eligible for QFZP’s qualifications. Certain types of income are not counted in total revenue or non-qualifying calculations. 

Role of Corporate Tax Consultants in FPE and DPE for Free Zone Persons 

ebs Chartered Accountants from Dubai play an essential role in providing advice and assistance to Free Zone Persons (FZPs) in better understanding the complexities surrounding foreign permanent establishments (FPEs) and Domestic Permanent Establishments (DPEs) within the UAE Corporate Tax regime. 

Corporate tax experts have many obligations. Consultants: 

  • They are accepting the reality of FPEs as well as DPEs. Consultants gain FZPs and decide if their activities out of their activities within the Free Zone create an FPE or DPE in compliance with the requirements set out in the Tax Guide for Corporates. Guide. 
  • Tax-deductible revenue experts benefit from determining the income due to an FPE and DPE and calculating an effective tax rate, which is 9 per cent of the tax on corporate income. 
  • Consulting consultants aid FZPs in meeting their compliance obligations, which include the registration process for corporate tax, filing tax returns, and keeping the correct records. 
  • Improved tax structures Tax experts provide suggestions for FZPs on how they can arrange their businesses to lessen the tax burden of corporates within FPEs and DPEs while also ensuring necessary tax compliance. 
  • For claims for relief from tax, if the FPE is subject to double taxation, consultants can benefit FZPs by claiming tax relief according to tax relief provisions by the Corporate Tax Law or applicable treaties regarding double taxation. 
  • They are offering guidance on the necessities for substance consultants and providing information to FZPs to ensure that their substance is suitable in the Free Zone so that they can benefit from the tax-free corporate rate on incomes that qualify for tax exemption. 
  • They stay up to date with the most current regulations. Consultants ensure that FZPs are updated regarding any changes or revisions to corporate tax regulations and the consequences for DPEs or FPEs. 

Employing the benefit of knowledgeable tax professionals such as ebs chartered accountants and free Zone Persons can manage the complex issues associated with the FPEs or DPEs. They must ensure compliance with UAE corporate tax law, raise their tax status, and gain the benefits of operating within the free zones. 

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