Jun 10, 2026 
Business
FOREIGN PERMANENT ESTABLISHMENT EXEMPTION
Background
- A Permanent Establishment (“PE”) generally refers to a fixed place of business through which a company conducts its operations in a foreign country. This could include offices, branches, factories, or construction sites.
- Once a PE is established, the host country (source country) typically levies tax on the profits attributable to that PE.
- Further, the company would also be subject to tax on its worldwide income in its country of residence which may result in double taxation.
- For example, if a UAE-based company sets up a branch in Germany which qualifies as a PE in Germany, then the profits attributable to the branch in Germany would be subject to tax in Germany. The UAE company would also be subject to tax in the UAE on its worldwide income (including profits attributable to the German branch), resulting in double taxation.
Foreign PE Exemption
Under Foreign PE Exemption, a Resident Person can elect to exclude the income and associated expenditure of its Foreign PE while determining its Taxable Income in the UAE, subject to fulfilment of the required conditions.
Key Conditions
| Condition | Detailed Explanation |
| Meeting PE conditions under domestic tax laws | Foreign PE must meet the conditions of a PE under the UAE Corporate Tax Law as if the foreign activities were carried on in the UAE (fixed place, agency, or nexus-based PE). |
| Minimum Tax Rate ≥ 9% | Foreign PE must be subject to corporate tax (or similar tax) at a rate not less than 9% under the applicable foreign tax laws (this is to ensure that income is genuinely subject to tax in the other jurisdiction and to prevent profit shifting to low tax jurisdictions) |
| No Prior Utilization of PE’s Tax Losses | If tax losses from the Foreign PE were previously used to offset the Taxable Income in the UAE, this exemption cannot be claimed until that Tax Loss is fully offset by the Taxable Income of that Foreign PE. |
Key Implications
a) Where a Resident Person makes an election for the Foreign PE exemption, it applies to all Foreign PEs that meet the required conditions. Thus, it is not possible to choose different treatments for different PEs.
b) Where Foreign PE exemption applies, the following are not taken into account while determining Taxable Income:
- losses of the Foreign PE,
- income and the associated expenditure of the Foreign PE, and
- Foreign Tax Credits in relation to the Foreign PE
c) Transfer pricing provisions:
- Each Foreign PE is treated as an independent Person, separate from the UAE head office.
- The net income of all Foreign PEs is exempted when determining the Taxable Income of the UAE head office.
- Foreign PE and UAE head office are deemed to be related parties and therefore, any transactions between them (including profit allocation) must be in line with the arm’s length principle.
Illustration:
| Particulars | UAE Head Office | German Branch | Company A (Total) |
| Revenue | 10,000,000 | 2,000,000 | 12,000,000 |
| Other Income | 500,000 | – | 500,000 |
| Total Revenue | 10,500,000 | 2,000,000 | 12,500,000 |
| Less: Expenditure | |||
| Cost of sales | (4,000,000) | (700,000) | (4,700,000) |
| Salary and wages | (1,750,000) | (200,000) | (1,950,000) |
| Depreciation | (750,000) | (150,000) | (900,000) |
| Other expenses | (300,000) | (50,000) | (350,000) |
| Total expenditure | (6,800,000) | (1,100,000) | (7,900,000) |
| Net Profit | 3,700,000 | 900,000 | 4,600,000 |
| Tax paid in Germany | – | 90,000 | 90,000 |
Computation of Taxable Income and Corporate Tax Payable of Company A in UAE assuming Foreign PE Exemption is availed:
| Particulars | Amount |
| Accounting Income | 4,600,000 |
| Less: Foreign PE Exemption | (900,000) |
| Taxable Income | 3,700,000 |
| 0% up to AED 375,000 | – |
| 9% above AED 375,000 | 299,250 |
| Corporate Tax Liability | 299,250 |
| Less: Foreign Tax Credit | – |
| Corporate Tax Payable | 299,250 |
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At Spectrum Auditing, we go beyond just being an auditing firm; we’re your trusted partner in navigating the ever-evolving landscape of UAE regulations. Here’s what sets us apart:
- Unparalleled Expertise: Our team consists of accredited auditors, management accountants, consultants with in-depth knowledge of UAE laws, ensuring your business remains compliant.
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- International Recognition: Be audits or any type of compliance, we adhere to the highest standards (ISA, IAS, IFRS), providing global credibility.
- Personalized Support: We understand every business is unique. We tailor our services to address your specific needs and answer any questions you may have.
Partner with Spectrum Auditing today. Let’s focus on your success, while you focus on what you do best – running your business.
Contact us today for a consultation at +971 4 2699329 or email [email protected] to get all your queries addressed.
