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Foreign permanent establishment exemption

Applies
FY2024 onwards
Reviewed
Rule
UAE-CT-FPE-2024.1
By

Can a UAE company exempt the income of its foreign branches?

Yes, by election, for every foreign permanent establishment taxed at not less than 9% abroad. It cannot choose among them, and their losses are left out too.

Per Federal Decree-Law No. 47 of 2022, Article 24, Foreign Permanent Establishment Exemption

A Resident Person may elect not to take into account the income and associated expenditure of its Foreign Permanent Establishments. The election applies to every Foreign Permanent Establishment that is subject to Corporate Tax or a tax of a similar character at a rate not less than 9% in its jurisdiction — the Resident cannot choose among them — and where it applies, their losses and any Foreign Tax Credit on their income are left out too.

Where the exemption applies, the qualifying establishments' profits and losses are left out of Taxable Income, and no Foreign Tax Credit is available for tax on them. It is a relief against double taxation, and because it covers every qualifying establishment, the losses of a loss-making qualifying branch are given up along with the profits of a profitable one. An establishment taxed below 9% stays in the computation, with relief under Article 47.

How the exemption works

The election — 24(1) and 24(6)

  • Made by the Resident Person
  • Applies to ALL of its Foreign Permanent Establishments that meet the Clause 7 condition — not a selected one, and not those that fail it

The condition — 24(7)

  • The establishment is subject to Corporate Tax or a tax of a similar character under the law of its jurisdiction at a rate not less than 9% (the Article 3(1)(b) rate)
  • Tested establishment by establishment; one low-taxed branch does not defeat the election for the rest

The effect — 24(2) to 24(5)

  • Losses, and positive income with associated expenditure, of the qualifying establishments are left out — computed as if each were a Resident Person, and aggregated by jurisdiction
  • No Foreign Tax Credit is available on that income
  • The Resident and each establishment are treated as separate and independent Persons, and transfers between them take place at Market Value

Past losses come back first — MD 302 of 2024, Article 14

  • Where Tax Losses of Qualifying Foreign Permanent Establishments have been taken into account, they must be fully offset by those establishments' later Taxable Income before the election can apply from the subsequent Tax Period
  • Where a branch's assets and liabilities are transferred to a subsidiary, the participation exemption on that subsidiary is reduced by the branch losses not yet recaptured

Order of testing

  1. 1

    Inputs requiring your determination

    Any input a person must decide and has not decided stops the computation. An undecided input is never read as a no.

  2. 2

    Foreign Permanent Establishment

    Where the Resident Person has no Foreign Permanent Establishment, there is nothing to exempt.

  3. 3

    Election

    The exemption applies only where the election has been made. Without it, the establishments' income and losses stay in the computation, with relief for foreign tax.

  4. 4

    Recapture of prior Foreign Permanent Establishment losses

    Qualifying establishments' losses taken into account earlier must be fully offset before the election applies (MD 302 of 2024, Article 14(1)).

  5. 5

    Subject-to-tax condition

    The exemption covers each establishment taxed at a rate not less than 9%. Where none is, nothing is exempt; where some are, those are exempt and the rest stay in.

  6. 6

    Election and subject-to-tax condition

    With the election made and every establishment qualifying, all of their income and losses are left out of the computation.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Elected, adequately taxed abroad

A UAE company with branches in two countries, each taxed there at 20% or more, that elects to exempt its Foreign Permanent Establishments.

Computed

Exempt as computed: the election is made and every Foreign Permanent Establishment is subject to a tax of a similar character at a rate not less than 9%, so their income, associated expenditure and losses are left out of the computation, and no Foreign Tax Credit is available on that income (Article 24(2)(c)), based on the determinations you supplied.

Decided by the election and subject-to-tax condition

Elected, with one low-taxed branch

The same company, but one branch sits in a jurisdiction with no corporate income tax. The election still covers the other branch; the low-taxed one stays in the computation.

Computed

Partly exempt as computed: the election applies to every Foreign Permanent Establishment that is subject to a tax of a similar character at a rate not less than 9% (Article 24(6) and (7)), so their income, associated expenditure and losses — and any Foreign Tax Credit on that income — are left out of the computation. The establishments that do not meet the condition remain in it, with relief under Article 47. Based on the determinations you supplied.

Decided by the subject-to-tax condition

Elected, but past branch losses not yet recaptured

A company that used a qualifying branch's start-up losses against UAE profits and now wants to elect before the branch has earned them back.

Computed

Not yet exempt as computed: Tax Losses of qualifying Foreign Permanent Establishments taken into account in earlier periods have not been fully offset by their later Taxable Income, and Article 14(1) of Ministerial Decision No. 302 of 2024 requires that before the election can apply from the subsequent Tax Period. Based on the determination you supplied.

Decided by the recapture of prior foreign permanent establishment losses

No election

A UAE company with a foreign branch that has not made the election.

Computed

Not exempt as computed: no election under Article 24(1) has been made, so the income and losses of the Foreign Permanent Establishments remain in the computation, with relief for foreign tax under Article 47, based on the determination you supplied.

Decided by the election

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Does the Resident Person have one or more Foreign Permanent Establishments?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader