Permanent Establishment in the Middle East...Permanent Establishment –the basics • Generally, where one entity performs activities within another jurisdiction, subject to the nature

12 January 2017

Permanent Establishment in the Middle East

1© 2017 Deloitte & Touche (M.E.). All rights reserved.

Permanent Establishment Issues – General framework


Permanent Establishment – the basics

• Generally, where one entity performs activities within another jurisdiction, subject to thenature of the activities performed and the duration of presence within the country,there is a risk of that particular entity creating a taxable presence (i.e. a permanentestablishment (“PE”)) within that jurisdiction.

• The definition of a PE as contained within the domestic tax laws varies from jurisdiction tojurisdiction. However, in practice the majority of the tax authorities seek guidance fromthe Organization of Economic and Commercial Development (“OECD”) and/ or the UnitedNations (“UN”) Model Convention:

Purchasing

DeliveryActivities of

an auxiliary

character

Activities of a

preparatory

character

Collecting

information

OECD Model

UN Model

• “…a fixed place of business through which the business of an enterprise is wholly or partly carried on.”

• Under the OECD definition, the term “permanentestablishment” takes three basics forms: (i) a fixed placeof business, (ii) a construction site and (iii) an agencyrelationship.

• The UN Model Convention provides a similar PE definition to the OECD with certain differentiations.

• The UN Model addresses the “services PE”, i.e. the PEdefinition also encompasses the furnishing of services bypersonnel in a Contracting State for a period aggregatingmore than six months within any twelve-month period.

© 2017 Deloitte & Touche (M.E.). All rights reserved.3

BEPS Action 7: Prevent the artificial avoidance of PE statusArticle 5 (4)

• Changes to the ‘specific activity exemptions’ to address situations where the current wording of the Article gives rise to BEPS concerns

• Specific activities currently can include:

Storage Purchasing

Delivery

Display

Activities ofan auxiliary

nature

Activities of a preparatory character

Collecting information

• Proposed override: the specific activities exceptions will only apply where the activity oractivities in question is ‘preparatory or auxiliary’ in relation to the business as awhole


BEPS Action 7: PE (cont’d)Example – storage and delivery of goods

Principal

Warehouse

Local

customers

• Principal maintains stock at a verylarge warehouse in which asignificant number of employeeswork for the main purpose ofstoring and delivering goods.

• Principal sells online tocustomers

or

State R

State S

Principal

Warehouse

Local

customersor

State R

State S

• Principal maintains a bondedwarehouse with special gasfacilities in State S for the solepurpose of storing fruit in acontrolled environment duringthe custom clearance process.

Example A Example B


on 7: PE

Existing New

“…. where a

person…. is acting on

behalf of an

enterprise and has, and habitually

exercises, in a

Contracting State,

an authority to

conclude contracts in the name of the

enterprise,….”

“…. where a person is acting in a

Contracting State on behalf of an

enterprise and, in doing so, habitually

concludes contracts or habitually plays the principal role leading to

the conclusion of contracts that

are routinely concluded without

material modification by the

enterprise, and these contracts are

a) in the name of the enterprise, or

b) for the transfer of the ownership

of, or for the granting of the right

to use, property owned by that enterprise or that the enterprise has

the right to use, or

c) for the provision of services

by that enterprise, …. ”

Targeted

mischief

Marketing services company

(i.e. acting as sales force)

Excludes:

• Routine marketing or promotion activities not

directly leading to

conclusion of contracts

• Companies not acting “on

behalf of” e.g. LRDs

Targeted mischief


BEPS Action 7: PE (cont’d)New Article 5(5)

7

How could a pharmaceutical/ medical business be deemed as creating a PE in

another jurisdiction…

In practice:

Fixed Place of business

Dependent Agent

• Holding negotiations on behalf of the non-resident;

• Entering into contracts on behalf of the non-resident;

• Holding inventory balances of commodities in the country in order to meet the requirements of customers in that country;

• Employees of a non-resident entity carrying out commercial activities in the country on behalf of the non-resident under the sponsorship of the agent;

• The agent operating under the instructions and guidance of the non-resident entity;

• The agent generating materially all revenue from the contract with the non-resident entity.

• Employees of the non – resident being on the ground;

• Employees are performing commercial activities on behalf of the non – resident entity;

• Local sales are performed, with local contracts being materially negotiated or concluded;

• Job title or job description of employees on the ground would indicate activities related to direct revenue generation or sales activities.

• Employees of the non - resident have at their disposal a fixed place of business, in which they have unfettered access;

• Place of business could be hotel rooms, warehouses, distributors’ offices – does not need to owned or leased at the name of the non – resident to create a PE;

Permanent Establishment –country specific rules


Bahrain & UAE

There is no corporate income tax in

Bahrain & the UAE, with the exception of

upstream oil and gas companies.

Therefore, from a tax perspective, for

companies that are not directly

operating in the oil & gas sector in

Bahrain, the concept of PE/tax risk would

not be relevant.

Oman

A fixed place of business through which

a business is wholly or partially carried

on in Oman by a foreign person either

directly or through a dependent agent.

Further, the tax authorities have

introduced a new threshold limit of 90

days in aggregate in any 12 months in

determining a PE of a foreign company

in Oman for rendering services in Oman

either directly or through employees of

that person or other designated by that

person to perform such services.

Jordan

The Jordanian tax legislation does not

contain any definition of the term PE. In

addition, we note that the Jordanian tax

legislation does not follow OECD

principles.

Under the Jordanian tax legislation, any

income generated “in or from” Jordan

should be taxable in Jordan, if any of the

following activities occurs in Jordan:

o Place of signing the contract;

o Place of carrying out the work;

o Place of delivering the work; or

o Place of benefit from the work.

9

Permanent establishment in the GCC

Permanent establishment in the GCC

Saudi Arabia

Permanent establishment (“PE”) is

broadly defined under Saudi tax law as a

permanent or fixed place of business

through which a non-Saudi resident

either fully or partly conducts activity in

Saudi Arabia. This also includes any

activities carried on by a dependent

agent on behalf of the non-resident.

We note that the Saudi tax authorities

are typically quite strict in challenging

foreign entities in respect of PEs and

seeking to tax all the income derived

from Saudi Arabia. There is no de

minimis time limit under Saudi tax law

for the creation of a PE. Accordingly, as

little as one day spent performing

activities in Saudi could, strictly, give

rise to a PE risk.

Principle of force of attraction of

income - all income arising from

activities in KSA, relating to the activity

of the PE, can be attributed to the PE

Kuwait

Kuwait adopts a territorial concept in its

tax legislation. In other words, the

distinction is made between “trading

with” Kuwait (e.g. a supply of goods to

Kuwait); and “trading in” Kuwait, which

involves carrying out activities in Kuwait.

In broad terms, the latter activity is

taxable whilst the former is not.

The term “permanent establishment” is

not defined in the Kuwaiti tax law.

As mentioned, the taxability of an entity

in Kuwait is determined based on

whether it carries on trade or business

in Kuwait and not on whether it has a

permanent establishment in Kuwait.

Recently adopted the “Virtual Service

PE” - the tax authorities look at the

length of the contract under which the

services are provided rather than the

number of days spent in Kuwait to

actually provide the services. A taxable

presence is created in Kuwait, if services

are provided to the customers in Kuwait

under a contract / service agreement for

a period of six months in a year or

longer.

Qatar

A PE is defined as “a fixed place of

business” through which the business of

an enterprise is wholly or partly carried

on, including, for instance, a branch

office, factory, workshop, mine oil or gas

well, quarry, building site, an assembly

project or a place of exploration,

extraction or exploitation of natural

resources”.

PE also includes activity carried on by a

non-resident through a person acting on

behalf of the taxpayer or in his interest,

other than an agent of independent

status.

10

KSA – Introduction of “Virtual Services PE” concept

Existing NewTargeted mischief


• DZIT has issued internal guidance about its interpretation of what constitutes

a PE and introduced the concept of a “Virtual Services PE”. This can result into the denial of Withholding Tax (WHT) refund claims for non resident and can

ultimately result in double taxation.

• Under the guidelines, non residents shall be considered to have created a PE for Saudi tax purposes in all cases where the duration of service exceeds 183

days within a 12 month period, regardless of the place where the service is rendered.

• This is in contrast to the Saudi domestic Income Tax Law, the double tax treaties signed by Saudi and also the guidelines of the OECD and UN Model

Conventions.

12

Permanent Establishment risk in practice

Risk of Detection

Tax implications if a PE is challenged

Mitigation – reduction of risk

• The tax authorities of the region have become more sophisticated in detecting PEs for

foreign entities, e.g. by exchanging information with other government departments –

immigration department etc.

• Also, a PE for a non – resident may be identified through a tax audit on the books of the

local agent/ distributor.

• We have recently seen a more aggressive approach being applied in the region for

challenging PEs for foreign entities.

• Deemed Profits Basis of Assessment – typically taxed at higher profit margins than the

actual profits realized.

• Force of Attraction Rule

• Penalties and additional tax

• No one size fits all approach, but could consider:

o Establishing a legal presence on the ground (subsidiary or a branch) and make tax

filings

o Formal secondment agreement of the employees to the local agent – employees

should act on behalf of the agent.

o Monitoring the activities performed by the employees on the ground and the

duration of presence in each jurisdiction – create clear policies.

o Re-drafting the agency agreement to clearly indicate the independence of the agent.

• We have set out below a list of activities which would typically regarded as ‘safe’ and should not

give rise to a PE risk for a firm sending its employees in another state, together with a list of

activities which should be avoided. Please note that the below is intended to be a guide only.

Permanent establishment definitions vary in each of the ME countries and it is advisable to obtain a formal tax advice:

.

Permanent establishment – practical considerations

Employees can: Employees should not:

Contact clients via phone, e-mail or mail.

Meet and discuss opportunities with prospective

customers.

Pass-out advertising materials and business cards

Distribute samples of contracts that the customer

would be signing if interested in engaging, to the

extent that these contracts were simply indicative

documents (e.g., setting out standard T&C’s etc.)

Discuss and explain terms of contracts that the

customer would be signing. – again to the extent that

these discussions related to standardized documents

Attend social events and market services.

Rent a room in a hotel or private setting for lodging

purposes to stay overnight.

Monitor days spent in country to avoid breaching

thresholds to create a PE exposure in country (e.g. >

90 days in Oman).

– Negotiate contracts or alter any contract terms in the

local country.

– Sign any contracts or documents in-country or

indicate any ability to bind Deloitte.

– Accept funds in the local country.

– To a certain extent carry out our work on the ground

in that country.


This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

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About Deloitte & Touche (M.E.)

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Deloitte is among the region’s leading professional services firms, providing audit, tax, consulting, and financial advisory services through 26 offices in 15 countries with more than 3,000 partners, directors and staff. It is a Tier 1 Tax advisor in the GCC region since 2010 (according to the International Tax Review World Tax Rankings). It has received numerous awards in the last few years which include Best Employer in the Middle East, best consulting firm, and the Middle East Training & Development Excellence Award by the Institute of Chartered Accountants in England and Wales (ICAEW).

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Permanent Establishment in the Middle East...Permanent Establishment –the basics • Generally, where one entity performs activities within another jurisdiction, subject to the nature