Understanding Foreign and Domestic Permanent Establishments

A permanent establishment is a fixed place of business where a firm carries on its work. Tax law splits the term in two. A foreign permanent establishment sits outside the home country. A domestic one sits inside it. The split decides which country may tax the profit, so it matters before a return is filed.

General

A permanent establishment (PE) is a fixed place of business where a firm carries on all or part of its work. The next step is to fix where that place sits. A PE outside the home country is foreign. A PE inside it is domestic. Each is taxed under its own rules, so the label decides who taxes the profit.

Foreign Permanent Establishment

A foreign PE exists when a firm works outside its home country. Growth abroad is the usual cause. The host country then taxes the income of that place under its own law.

To count as a foreign PE, the firm needs a fixed place of work there. The usual cases are:

- A place of management

- A branch

- An office

- A factory

- A workshop

- A mine, oil, or gas well, quarry, or any other place of extraction of natural resources

A foreign PE brings tax with it: the host country taxes the income under its own law. A double taxation agreement then sets how the home country treats the same income, so the profit is not taxed twice.

Domestic Permanent Establishment

A domestic permanent establishment is a fixed place of work in the home country. For a Free Zone Person this is a live point: a place of work on the mainland may be a domestic PE. The profit that belongs to that place can then fall outside the free zone regime, and the 0% rate follows the facts of each case, not the licence.

Fixed or Permanent Place

The place must be fixed or permanent to be a domestic PE. The usual cases are:

- An office

- A factory

- A workshop

- A warehouse

A fixed place shows the work is done on a steady footing. That brings the place inside the domestic tax rules.

Cases not considered a fixed or permanent place

Not every act of business creates a domestic PE. Work that is only preparatory or auxiliary does not make a fixed place of work. The usual cases are:

- Storage of goods solely for the purpose of storage, display, or delivery

- Maintenance of a stock of goods for storage, display, or delivery

- Maintenance of a fixed place of business solely for purchasing goods or collecting information

None of these is a real business effort, so none creates a PE on its own.

Preparatory and Auxiliary Activities

Preparatory and auxiliary work supports the main business but is not large enough to form a PE. The usual cases are:

- Advertising

- Marketing

- Data collection

- Conducting research

Such work is not a real business effort, so it fails the PE test.

Conducting a Business outside a Free Zone in the UAE for a QFZP

A Qualifying Free Zone Person (QFZP) that runs real work outside the free zone takes a risk. A place of work on the mainland may be a domestic PE, and the profit it earns can fall outside the 0% rate. The law also asks for substance in the free zone. So the free zone must hold the people, assets and spend the work needs, and the mainland place must be tested on its own facts. A group should map every place where staff work and test each one against the QFZP requirements.

Conclusion

The label decides which country taxes the profit. Get it right and the group knows what it owes, and where. Get it wrong and a place of work nobody flagged can pull income into the domestic net. Where a group holds QFZP status, each place of work should be tested on these rules before the structure is signed. The next note turns to immovable property, and to how a Free Zone Person treats commercial and mixed-use property inside and outside a free zone.