Second quarter net operating income of Dh6 million compared to Dh24 million in Q1 2022 mainly due to lower trading revenues; Net loss attributable to shareholders of Dh170 million in Q2 2022 compared to net income of Dh6 million in Q1 2022
As discussed in our previous article, we have highlighted that with few exceptions, tax residents would be subject to corporate tax (CT) for their worldwide income while non-residents would be subject to CT on the taxable income from their permanent establishment (PE) in the UAE; and income which is sourced in the UAE.
The permanent establishment is a very important concept in the corporate tax world and a key determinant for the application of corporate tax. The PE is usually a fixed place of business, other than a subsidiary in any other country or state, and the income from the PE is usually subject to tax in the same state or jurisdiction from where the income is being sourced.
The original concept of PE can be traced back to Germany. In 1845, the concept was first seen in the Prussian Industrial Code, but it was not used for tax purposes at that time. Later in 1869, Prussia and Saxony (two German states) concluded the first-ever tax treaty, which specified the conditions for taxation as a stehendes Gewerbe (standing operation).
According to the article 2(1) of the treaty signed between two German states, a non-citizen was taxable in a state where an enterprise used a gewerblichen oder Handels-Anlage (business establishment).
The Prussian concept of a standing operation was a general limitation of source-state taxation, and it required two conditions to tax the income in the state.
(i) A fixed location in the other state; and
(ii) The enterprise has an intention to continue performing business activities at that location.
In 1909, the word PE was used in the German double taxation act to stop double tax between the German states, and in 1928, the League of Nations developed a model to tackle cross-border double taxation and to counter tax evasion. Since then, extensive work has been done on the tax treaties under the OECD Model Tax Convention on Income and on Capital (OECD model) and the United Nations Model Double Taxation Convention between Developed and Developing Countries (United Nations model).
The OECD model is by far the most common basis for defining PE internationally and is implemented in nearly 3000 tax treaties.
The UAE, being a member of OECD, has proposed to develop its CT regime based on the OECD Model. Article 5 of the OECD model conventions deals with PE, and the same basis has been proposed to determine PE in the UAE as well. The PE of a foreign company in the UAE would be assessed based on the following two principles as given in the proposed public consultation document.
Fixed place of business test
The proposed documents states that “A foreign company will have a PE in the UAE if it has a “fixed place” in the UAE through which the business of the foreign company is wholly or partly carried on”.
The fixed establishment includes a place of management, branch, office, factory, workshop, real property and building sites where activities would be carried out for more than six months. Installations and structures used in the exploration of natural resources, as well as mines, oil or gas wells, quarries and other places of extraction of natural resources will also be considered PEs.
Generally, preparatory or auxiliary activities like limited marketing and promotional activities, performing market research and attending seminars or conventions etc. do not fall under the definition of PE. The fixed place where the goods of the foreign company are used to store, display and deliver or make them available to another person for processing may not be considered the PE of the foreign company.
Dependent agent test
There is a risk that foreign companies may source their income from any country without setting up fixed establishments there like appointing an agent and processing all transactions through the agent. To counter this risk “Dependent Agent” concept has been introduced.
Where the “fixed place of business” test fails, then PE can be established based on the dependent agent also. It would be assumed that the dependent agent test has met where the business travellers or UAE based person act on behalf of the foreign company in the UAE, and habitually exercise, the authority to conclude contracts in the name of a foreign company. If a person concludes contracts in the UAE on behalf of the foreign company without material intervention of the foreign company, it may constitute a PE in the UAE.
However, if the person is working independently, and carrying out the foreign company business in the UAE like a normal course of business, it would not constitute a PE in the UAE.
The subsidiary by itself will be considered a separate legal entity, however, if the subsidiary is acting as a dependent agent of the parent company, then the subsidiary would become a permanent establishment.If the individual is acting in the UAE on behalf of the foreign company and executing contracts habitually in the name of the foreign company, then individual would constitute a PE of the foreign company in the UAE.
If you have a doubt about the presence of PE in the UAE, you should seek professional advice. Depending upon the circumstances, you would be advised to create a subsidiary or enter a short-term contract to avoid creating an inadvertent PE.
Mahar Afzal is managing partner at Kress Cooper Management Consultants. The above is not an official, but a personal opinion of the writer. For any queries/clarifications, please write to him at compliance@kresscooper.com.
Second quarter net operating income of Dh6 million compared to Dh24 million in Q1 2022 mainly due to lower trading revenues; Net loss attributable to shareholders of Dh170 million in Q2 2022 compared to net income of Dh6 million in Q1 2022
The UAE, the company’s largest market, saw high growth in merchant payments processed from domestic consumers at 20 per cent year on year, and payments from international visitors growing 92 per cent
The company's strong balance sheet will support the company’s growth strategy, including investments in digital and technological infrastructure as well as its active merger and acquisition pipeline
The company’s revenue increased 31 per cent to Dh1.041 billion as compared to Dh792 million in first half of 2021 while its operating costs dropped 16 per cent
Kashkari sticks to his view of 3.9% Fed funds rate at end-2022; Evans sees 3.4% policy rate this year; Both push back on market expectation for rate cuts next year; Inflation, employment data to determine size of Sept rate hike
Approval would save time, money on Asian routes; Q2 net profit $100m versus loss of $81m a year ago; Revenue up sharply, but still below Q2 in 2019
The transaction includes solar power projects in Turkey’s Karapanar and Gaziantep regions and a wind power project in Ankara
The five-year contract was awarded by Adnoc Offshore to Adnoc Logistics and Services (Adnoc L&S) and underpins the world-class capabilities within Adnoc’s group companies