Branch vs Representative Office in UAE: Understanding Corporate Tax Implications

Do you have a branch or representative office in UAE for your foreign company or are you planning to establish the presence of your foreign company in UAE through a branch or rep office? Are you keeping thinking about the Corporate Tax in the UAE and how the branch of the Rep Office shall comply with the Corporate Tax law in the UAE? Let us read together.

Before analyzing the Corporate Tax applicability, let us understand what the differences are between the branch and representative office of a foreign company in the UAE.

As the UAE is a global hub, foreign companies are always keen to have a presence in the UAE due to various factors like high living standards, infrastructure, tax benefits, etc. At the time of taking the decision to have a presence in the UAE, it is very important to understand which structure shall be followed. Means, to set up a branch or representative office for the foreign company?

Similarities Between Branches and Representative Offices

There are a few similarities between the Branch and the Representative Office; also, there is a main difference between the Branch and the Representative Office. A few similarities are as follows:

• The legal type of both the branch and rep office of a foreign company is “branch of a foreign company.”.
• Both Branch and Representative Office shall follow the Memorandum of Association/Article of Association of the parent entity.
• Both Branch and Rep Office shall have similar activities of the parent entity in their UAE license. Example: If the parent entity’s activity is real estate development, the branch of the representative office cannot have management consultancy in their UAE license.
• Both branch and rep offices can have physical offices, employees, and bank accounts in the UAE.

Key Difference: Branch Vs Representative Office

The main difference between a branch and the rep office of a foreign company is that branches can conduct business inside the country and receive income from clients inside the UAE, whereas representative offices are not allowed to conduct any business activity or book income under the rep office. A foreign company, through setting up a representative office, can have their back office operations, marketing for the parent company, etc. more like a liaison office.

Now, let us look into the implications of Corporate Tax in the UAE with relevant regulations and some examples.

Corporate Tax in the UAE is applicable for both residents and non-residents. In simple words, residents are as below:

• A company Corporated in the UAE
• A foreign company controlled and managed by the UAE
• A natural person who is conducting business or business activity

Resident needs to report their worldwide income in the UAE for Corporate Tax purposes.

Non-residents for UAE Corporate Tax are;

• A foreign company with a permanent establishment in UAE.
• A foreign company that has an income source in the UAE.
• A foreign company that has a nexus in the UAE. Currently, the nexus is defined as only real estate assets in the UAE owned by a foreign company.

Unlike residents, non-residents are subject to UAE corporate tax for their income generated from the UAE either through a permanent establishment or source or nexus.

The Concept of Permanent Establishment (PE):

A branch/representative office of a foreign company registered in the UAE is considered a permanent establishment (PE) in the UAE.

The concept of PE is highly subjective. For Example: If a foreign company does not have any offices in the UAE. However, their sales team is located in the UAE and works from home in the UAE; this may constitute PE. As per Article 14 of UAE Corporate Tax Law, a branch of a foreign company is considered a PE of a foreign company in the UAE. The same concept of the branch may be applicable to the Rep Office also.

While determining the status of a permanent establishment of a branch or representative office in the UAE for Corporate Tax purposes, certain things are not considered permanent establishments in the UAE. Example: If the branch or rep office of a foreign company is formed in the UAE for the purpose of displaying the goods or the activity of a branch or rep office conducted in the UAE is of an auxiliary or preparatory nature, then those are not considered PE.

A question arises here. As we already discussed in this article, unlike a branch of a foreign company, a representative office cannot generate income directly from the UAE. If there is no income for the rep office, what is the relevance of complying with UAE Corporate Tax, like registration and obtaining a Corporate tax number, doing annual filings, etc.? In this context, many people have interpreted that the representative office of a foreign company does not require registering for Corporate Tax. Here, certain factors need to be considered, like;

• What are the operations carried out by the Representative Office?
• What is the number of employees present in the UAE through the Rep Office against the total number of employees at the group level?
• Who is working in the Rep Office in the UAE and the designation of the employee?

Example: If a UK company opened a representative office in the UAE. The total number of employees in the organization (UK parent company and UAE Rep Office) is 40, out of which 30 people are present in the UAE through the Rep Office. This gave the UAE Rep office a high chance to constitute a permanent establishment in the UAE.

There is a detailed guide published by FTA that explains in detail the Corporate tax for a non-resident person. Corporate Tax Guide | CTGNRP1.

Registration and Compliance Obligations:

If the foreign company has a permanent establishment in the UAE through a branch or rep office, what is their obligation under UAE Corporate Tax? The first step is to get registered, but when? FTA has published a public clarification (CTP001) for FTA Decision No. 3 of 2024, through which FTA has clarified the deadline for registration for a branch/representative office of a foreign company.

As per the Public Clarification, a non-resident who has a permanent establishment in the UAE shall register for Corporate tax within 9 months from the existence of a permanent establishment in the UAE. So, here arises another question: when is a branch or representative office considered to have the existence of a permanent establishment in the UAE? At the time of issuance of a trade license by the authority or any other timeframe specified?

A foreign company, generally, constitutes a permanent establishment in the UAE when they have a presence in the country for more than 6 months. Let us understand this through an example.

ABC LLC, a US entity, formed a branch in the UAE on 01/01/2024. ABC LLC follows the calendar year as the financial year. When will ABC LLC (Br) register for Corporate tax?

ABC LLC (Br) has setup their license on 01/01/2024. On 01/07/2024, the branch has been in existence for more than 6 months in the UAE and is considered a permanent establishment for UAE Corporate tax. Thus, ABC LLC (Br) has to apply for a Corporate tax number before April 1,  2025 (within 9 months from the existence of a permanent establishment in the UAE).

After registration of Corporate Tax, the branch or rep office of a foreign company in the UAE shall comply with the tax regulations, which means maintaining a standalone financial statement for the branch/rep office, submitting Corporate Tax return filing, maintaining all the records relating to the UAE Corporate Tax, etc.

As a footnote, before making any judgment on non-resident Corporate Tax in the UAE, always check whether the UAE has signed any double tax treaty with the country where the parent entity is located. If yes, are the conditions specified in the Double Taxation Treaty contradictory with the provision of UAE Corporate Tax Law? The importance of verifying the conditions in the Double Taxation Treaty is that, as per Article 66 of the UAE Corporate Tax Law, if any conditions in the international agreements signed by the UAE are contradictory to the Corporate Tax Law, the Tax Treaty provisions are considered valid.

To learn more about Corporate Tax for Branch and Representative Offices, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.