Introduction
The UAE Corporate Tax regime does not only affect companies that are established and resident in the country. Foreign businesses, investors and individuals operating from abroad can also fall within the scope of UAE Corporate Tax where they have sufficient presence or economic connection to the state. This is particularly relevant in an increasingly globalised economy where commercial activities frequently cross borders without the need for a physical presence.
The Corporate Tax treatment of Non-Resident Persons is shaped by three key concepts: Permanent Establishment, nexus and State Sourced Income. Each of these operates differently, but all share a common purpose: to ensure that foreign businesses with meaningful economic activity in the UAE contribute fairly to the tax base while preventing overreach that could discourage investment. Understanding these concepts is essential for any Non-Resident Person engaging with the UAE market, whether through contracts, assets or local agents.
Legal Framework
The legislative basis for taxing Non-Resident Persons is set out in several key instruments that must be read together to understand their combined effect:
- Federal Decree Law No. 47 of 2022 on the Taxation of Corporations and Businesses – Articles 13, 14 and 15 define when a Non-Resident Person is subject to Corporate Tax, outline the concept of Permanent Establishment, and explain the treatment of State Sourced Income.
- Cabinet Decision No. 35 of 2025 – Expands and clarifies the definition of nexus, including circumstances in which real estate ownership, investment structures and digital activity create taxable presence.
- Cabinet Decision No. 85 of 2022 and Ministerial Decision No. 27 of 2023 – Address tax residence and related issues.
- FTA Decision No. 3 of 2024 – Sets out registration obligations and deadlines for Non-Resident Persons that are Taxable Persons.
These instruments operate in concert to establish when a foreign person is considered to have a taxable presence in the UAE and how their income will be assessed.
Permanent Establishment
A cornerstone of international tax law, the concept of permanent establishment determines when a foreign enterprise has sufficient presence in a jurisdiction to justify taxation on its business profits. Article 14 of the Corporate Tax Law recognises two main types of Permanent Establishment.
Fixed Place Permanent Establishment
A fixed place Permanent Establishment exists where a foreign business maintains a degree of physical presence in the UAE that enables it to conduct its business wholly or partly from that location. This may include an office, branch, factory, workshop or a construction site that continues for more than six months. The presence must be both fixed and at the disposal of the business.
Dependent Agent Permanent Establishment
Even where no physical presence exists, a foreign company may still have a Permanent Establishment if it operates through a dependent agent in the UAE. This occurs when a person habitually concludes contracts on behalf of the foreign company or plays a principal role leading to the conclusion of contracts. An independent agent acting in the ordinary course of their business will not create a Permanent Establishment.
Preparatory and Auxiliary Activities
Certain activities, such as market research, advertising or information gathering, are excluded if they are preparatory or auxiliary in nature. However, this exception is narrowly interpreted. Businesses should carefully review the scope of their UAE operations to avoid inadvertently creating a Permanent Establishment.
Nexus Based Taxation
Nexus extends the scope of Corporate Tax to certain situations where a Non-Resident Person has an economic connection with the UAE even without a physical presence or agent. This reflects a broader international shift towards taxing value where it is created.
A nexus may arise in situations such as:
- Ownership or exploitation of Immovable Property in the UAE.
- Participation in a UAE based investment fund or partnership.
Once a nexus is established, the foreign person is treated as a Taxable Person with respect to the income attributable to that nexus. Businesses must therefore assess not only their physical operations but also their investment structures and digital strategies.
State Sourced Income
Even where a Non-Resident Person has no Permanent Establishment or nexus, they may still be a Taxable Person due to State Sourced Income under Article 13 of the Corporate Tax Law. However, the current Withholding Tax rate is 0%.
Registration and Compliance
Non-Resident Persons that have a Permanent Establishment or nexus must register with the FTA. Those only deriving State Sourced Income do not need to register. Non-compliance can lead to penalties and loss of reliefs.
Once registered, Non-Resident Persons are required to maintain accounting records, file Tax Returns and pay Corporate Tax within the prescribed timelines. Where Double Taxation Agreements apply, foreign taxpayers may also need to submit additional documentation to support treaty relief claims.
Strategic Considerations
Treaty Relief and Structuring
Double Taxation Agreements can mitigate the risk of double taxation and provide clarity on the allocation of taxing rights. Non-Resident Persons should review relevant treaties and ensure that their business structures are aligned with treaty provisions, particularly in relation to permanent establishment thresholds and profit attribution.
Risk Management
Businesses must monitor the evolution of their UAE activities. A simple agency arrangement that initially falls outside the scope of Permanent Establishment could later cross the threshold as commercial activity increases. Regular reviews of operations, contracts and business models are essential.
Compliance and Governance
Given the increased focus on substance and nexus, governance and documentation are critical. Clear records of decision making, contractual authority and functional profiles can significantly reduce the potential for error and unforeseen liabilities.
Conclusion
The UAE Corporate Tax regime adopts a balanced approach to the taxation of Non-Resident Persons. While it aims to tax profits that are genuinely connected to the UAE economy, it also provides clear thresholds and exemptions to support cross border trade and investment. The interplay between Permanent Establishment and nexus creates a framework that is sophisticated but requires careful navigation.
Foreign businesses cannot assume that an absence of legal presence in the UAE means they are outside the scope of Corporate Tax. Economic connection, presence and income source can all give rise to tax exposure. Proactive structuring, robust compliance and ongoing legal review are essential to ensure that cross border activities are managed efficiently and in line with the law.
Seek Legal Counsel
Our expertise in tax law and regulations allows us to provide clients with effective and accurate tax advice, taking into consideration their unique circumstances and needs.
Our tax and financial crimes team, led by our Head of Tax and Financial Crimes, Mohamed El Baghdady, has successfully advised and represented clients across various industries, including, but not limited to, consumer goods and retail, services, real estate, oil & gas and banking and finance, before the Government authorities, tax tribunals and courts. Our clients have been successful in multiple tax disputes before the committees and courts.
For further information, please contact, Mohamed El Baghdady, Partner, Head of Tax and Financial Crimes, on mohamed.elbaghdady@habibalmulla.com.
Disclaimer
The content provided in this article is intended for informational purposes only and does not constitute legal advice. While every effort has been made to ensure the accuracy and completeness of this information, the article does not offer a guarantee or warranty regarding its content. The matters discussed in this article are subject to interpretation, and legal outcomes may vary based on specific facts and circumstances. We recommend that readers seek individual legal counsel before making any decisions based on the information provided. If you require specific legal advice, please contact us directly.