Willow Club Willow Academy
Articles

UAE VAT Fixed Establishment: Has VATP046 set a lower threshold than for Corporate Tax?

The FTA has issued VAT Public Clarification VATP046 on the recent amendments to the UAE VAT Law. One relatively short example in the Clarification may have significant implications for foreign businesses whose employees work in the UAE.

The point concerns the definition of a “Non-Resident”. The VAT Law was amended with effect from 30 October 2024 to clarify that a person is not a Non-Resident where it has a Place of Establishment or Fixed Establishment in the UAE, irrespective of whether it owns that place. VATP046 goes further and illustrates how this rule should operate in practice.

According to the FTA, a VAT Fixed Establishment may arise where, “for example, … a foreign Business’ employees regularly work from its client’s premises in the UAE. In such case, even though the foreign Business does not own the premises, the presence of the Business’ employees in the UAE, and the technology resources (e.g. mobile phone or computer) they use in the UAE, would create a Fixed Establishment. Hence, in such instances, the foreign Business would not be regarded as a Non-Resident for VAT purposes”. This is noteworthy because the approach appears wider than the test applied for UAE Corporate Tax purposes.

The Corporate Tax position is different

For Corporate Tax, the fact that employees regularly perform the foreign company’s business from a particular location is not, by itself, sufficient to create a fixed-place Permanent Establishment.

Section 7.2.1 of the FTA’s Corporate Tax Guide No. CTGNRP1 expressly states that “the place of Business must be at the disposal of the Non-Resident Person. The mere presence at a particular location does not necessarily mean that the location is at its “disposal”. The Non-Resident Person must have the right or effective power to use such place of Business (hereinafter referred to as the “disposal test”)”. Mere presence at a location does not satisfy this requirement. The foreign business must have a right or effective power to use the place. At the same time, Section 7.2.2 specifies that “the following (illustrative) factors” that “would typically be immaterial, i.e. should not influence the evaluation”:

  • Ownership of the Non-Resident’s place of Business is immaterial. Even rented premises can constitute a Permanent Establishment.
  • The formal legal right to use a particular place is not required if the Non-Resident Person has effective control over such location i.e. it is at its disposal to conduct its Business Activities. For example, a Permanent Establishment can exist where a Non-Resident Person illegally occupies a certain location to conduct its Business Activities.
  • An exclusive right over a place is immaterial. A Non-Resident Person can have a Permanent Establishment even in cases where it conducts its Business through a specific location that belongs to another Person or that is used by several other Persons to perform their own Business Activities at the common location”.

Hence, effective access and use may be sufficient.

The Guide then considers an example which is remarkably close to the example now used in VATP046. In the table on page 23, the FTA asks: “Whether client’s premises can be at the disposal of a Non-Resident Person?”. It illustrates the answer by the following example:

  • Company B (a juridical person that is incorporated in and a tax resident of Country B) has been awarded a 2-year contract by a government owned company (client) in the UAE for rendering business consulting services to enhance the production of goods. The project requires employees of Company B to perform its activities from the client’s office.
  • Employees of Company B would have to seek specific permission to enter the client’s premises on each occasion. They may be given temporary access cards, desks, access to training or meeting rooms for performance of contracted services only. In the event where, in substance, these restrictions do not establish, for Company B, any effective control or free right to use the client’s premises, they are unlikely to be at Company B’s disposal such that no Permanent Establishment in the UAE arises (even if other tests i.e. place of Business, permanence and Business Activity are satisfied, due to the presence of the employees in the UAE).
  • However, where Company B’s employees had relatively free access such as long-term access cards, desk assignment, etc. over such an extended period, it is likely that in substance the disposal test would be satisfied and as such Company B would have a fixed place Permanent Establishment in the UAE (since the other tests i.e. place of Business, permanence and Business Activity are also satisfied, due to the presence of the employees)”.

The effective vs. non-effective distinction is therefore not between premises which the foreign business owns and premises which it does not own. It is between premises which are effectively available to the foreign business for carrying on its business and premises which merely belong to a customer at which its employees are permitted to perform particular tasks.

Comparison with the OECD Commentary

The UAE Corporate Tax approach closely follows the OECD Commentary on Article 5 of the OECD Model.[1] In para 14 of the Commentary on Article 5,  the OECD gives the example “of a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer’s premises are not at the disposal of the enterprise for which the salesman is working and therefore do not constitute a place of business through which the business of that enterprise is carried on”. “A possible dependent agent PE is, of course, a separate question.  

The OECD contrasts this with “an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g. a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company will constitute a permanent establishment of his employer, provided that the office is at his disposal for a sufficiently long period of time so as to constitute a “fixed place of business” (see paragraphs 28 to 34) and that the activities that are performed there”.

The OECD’s 2025 update[2] does not alter the basic principle that an employee’s use of a location does not automatically make that location a place of business of the employer. Paragraph 44.6 of the new cross-border working guidance expressly states that “the mere fact that a place is used by an individual (e.g. an employee) to carry out activities related to the business of an enterprise should not lead to the automatic conclusion that that place is a place of business of that enterprise”.

Interestingly, the new OECD rules for home and remote working deliberately distinguish such arrangements from work performed at the premises of a customer, supplier or associated enterprise. Customer-premises cases therefore continue to be governed by the established Article 5 principles, including the question whether the premises are in substance available to the foreign enterprise.

Is VAT Fixed Establishment now a wider concept?

VATP046 does not condition the example on sufficiently permanent access to the client’s premises or on the premises being effectively available to the foreign business. It refers simply to employees regularly working from the client’s premises and treats the presence of those employees together with the technological resources used by them as sufficient to create the Fixed Establishment.

That formulation is difficult to reconcile with the Corporate Tax example if the two concepts are assumed to have the same threshold. Under the CT Guide, regular work at the client’s premises may still fail the disposal test. Under VATP046, on its face, essentially the same factual circumstances appear capable of creating a Fixed Establishment.

There is, however, an important qualification. The legislative amendment itself was remarkably limited. Federal Decree-Law No. 16 of 2024 replaced the word “own” with “have” in the definition of a “Non-Resident” in Article 1 of the VAT Law. Previously, a Non-Resident was defined as a person who did not “own” a Place of Establishment or Fixed Establishment in the UAE. The amended definition refers instead to a person who does not “have” such an establishment: “Any Person who does not own have a Place of Establishment or Fixed Establishment in the State and usually does not reside in the State”.

The definition of a Fixed Establishment itself was not amended. What VATP046 now does is explain the significance which the FTA attributes to this apparently minor change: a foreign business does not need to own the premises from which its UAE Fixed Establishment operates. VATP046 does not expressly state that all other requirements inherent in the definition of Fixed Establishment have been removed. Article 1 of the VAT Law still requires a “fixed place of Business…, in which the Person conducts his Business regularly or permanently and where sufficient human and technology resources exist to enable the Person to supply or acquire Goods or Services…”.

It is therefore possible to read the example more narrowly: the FTA may simply have assumed that employees who “regularly work” from the client’s premises have sufficiently stable access to those premises. On that interpretation, VATP046 establishes that ownership is irrelevant, but does not necessarily establish that the foreign business requires no meaningful connection with, or ability to use, the premises.

The difficulty is that this is not what the Clarification actually says. Unlike the Corporate Tax Guide, it contains no disposal test and no reference to access rights, assigned workspace or effective control.

The practical consequence

Foreign businesses should therefore avoid assuming that absence of a Corporate Tax PE means absence of a VAT Fixed Establishment. A foreign consultancy, engineering company, IT provider or other service business may have personnel working regularly at a UAE customer’s premises without those premises being sufficiently at its disposal to constitute a Corporate Tax fixed-place PE. Following VATP046, the FTA may nevertheless regard the same personnel, together with their laptops, mobile phones and other technological resources, as constituting a VAT Fixed Establishment. In other words, the same physical presence may potentially produce a VAT establishment without producing a Corporate Tax Permanent Establishment.

Whether the FTA ultimately intends VAT Fixed Establishment to have such a materially wider scope remains to be seen. VATP046, however, gives businesses a reason to analyse the two concepts separately rather than treating the Corporate Tax PE analysis as determinative for VAT purposes.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

This study has not been commissioned, authorised, or endorsed by the Ministry of Justice, the Federal Supreme Court, or any other judicial authority in the UAE. It is not intended to convey, and should not be understood as conveying, any official position of those authorities. Nor does it purport to suggest that the interpretations, conclusions, or proposals set out in it are binding on the courts or must necessarily be adopted in judicial practice.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.

[1] OECD (2019), Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing. http://dx.doi.org/10.1787/g2g972ee-en

[2] OECD (2025), The 2025 Update to the OECD Model Tax Convention, OECD Publishing, Paris, https://doi.org/10.1787/5798080fen.