Most free zone owners think about permanent establishment the wrong way round. They picture a foreign parent accidentally creating a taxable presence in Dubai. The rule that costs them money runs the other way: their own free zone company creating one on the mainland. Under the UAE permanent establishment rules in Federal Decree-Law No. 47 of 2022, a mainland branch, a mainland office or a salesperson who habitually closes deals outside the zone creates a Domestic Permanent Establishment. That does not destroy your 0% status. What it does change is the tax on that slice of profit, and the paperwork behind it.
Six Months on a Building Site Is Enough, and That Is Half the OECD Threshold
Article 14 sets out when a Non-Resident Person has a Permanent Establishment (PE) in the UAE. It broadly tracks the OECD Model, but it is stricter in three places worth knowing.
The first limb is a fixed place of business – a fixed or permanent place through which the business is wholly or partly conducted. The listed places include a place of management, meaning where the management and commercial decisions necessary for the conduct of the business are, in substance, made. That points at day-to-day decision-making, not at where the board minutes say control sits. The list also covers a branch, an office, a factory and a workshop, then adds land, buildings and other real property – language absent from the OECD Model.
The second stricter point is the construction threshold. A building site, an assembly project, or supervisory activity connected to one creates a PE where it runs for more than 6 months. The OECD Model allows 12. The UAE uses 6, matching the UN Model, and connected projects – including those run by related parties – are looked at together. Splitting a nine-month installation into two four-month contracts between affiliates does not solve the problem.
The third is Article 14(1)(c), an open-ended limb covering any other form of nexus the Cabinet specifies – which is how the UAE permanent establishment rules can widen without the Law being amended.
The UAE permanent establishment rules do carry real carve-outs. Article 14(3) says a place used solely for preparatory or auxiliary activities is not a PE. Ministerial Decision No. 83 of 2023, issued on 10 April 2023, covers a person stuck in the country: presence caused by exceptional circumstances of a public or private nature does not create a PE, provided those circumstances could not reasonably have been predicted, the person expressed no intention to stay once they end, the Non-Resident had no UAE PE beforehand, and did not treat that person as creating a PE or earning UAE income under another country’s tax rules. Article 15 adds the Investment Manager Exemption: a regulated UAE investment manager providing brokerage or investment management services can be treated as an independent agent, so it creates no PE for the non-resident investor it acts for.
The second limb is the dependent agent test in Article 14(5): a person in the UAE who habitually concludes contracts in the name of the Non-Resident, or habitually negotiates contracts concluded without material modification. The agent does not have to sign anything. Where the pen touches paper is not the test.
| Trigger | What the law looks at | Where firms slip |
|---|---|---|
| Fixed place of business | An office, branch, factory, workshop, place of management, or land and buildings used to conduct the business | Assuming a short mainland lease or a hot desk is too small to count |
| Building site or assembly project | Duration of more than 6 months, with connected projects of related parties counted together | Slicing one long contract into shorter ones across affiliated entities |
| Dependent agent | Habitually concluding contracts, or habitually negotiating terms accepted without material modification | Believing an offshore signature cures a negotiation that happened in the UAE |
Nexus is a separate concept, easily conflated with PE. Cabinet Decision No. 56 of 2023 gave a non-resident juridical person a nexus where it earned income from UAE immovable property, held in a business or for investment, taxed on a net-income basis and requiring registration. It applies to tax periods beginning before 1 January 2025 and was replaced by Cabinet Decision No. 35 of 2025. A landlord with no office and no agent is still a taxpayer.
A Mainland Branch Creates a Domestic PE Without Costing You QFZP Status
A Qualifying Free Zone Person (QFZP) pays 0% on Qualifying Income and 9% on Taxable Income that is not Qualifying Income, under Article 3(2). A Domestic Permanent Establishment is a place of business or other form of presence the Free Zone Person has in the UAE but outside the free zone. A mainland branch is the textbook case.
Cabinet Decision No. 100 of 2023 treats income attributable to a Domestic PE, or a Foreign PE, as Taxable Income at 9%. Two consequences follow. Owners usually get the first right and the second wrong.
First, there is no AED 375,000 shelter. That nil-rate band is the general rule for ordinary taxable persons. It does not apply to a QFZP’s non-qualifying income or to its Domestic PE profit, taxed at 9% from the first dirham. Anyone who tells you a free zone company gets the first AED 375,000 free is quoting the mainland rule at you – read it alongside the wider QFZP rules before modelling anything.
Second, and this is the part that surprises people: the Domestic PE cannot push you over the de minimis line, because its revenue is not in the calculation at all. Revenue attributable to a Domestic PE, a Foreign PE, or immovable property already taxed at 9% is excluded from both the non-qualifying revenue figure and the total revenue figure. That income already sits outside the 0% regime, so counting it again would be double-punishment.
The de minimis requirement itself is that non-qualifying revenue must not exceed the lower of 5% of total revenue or AED 5,000,000. Fail it, or fail any other QFZP condition, and you cease to be a QFZP from the start of that tax period and for the following four tax periods – five in total – taxed at standard rates throughout. That is the penalty a Domestic PE does not trigger.
| Revenue stream | Rate applied | Treatment in the de minimis test |
|---|---|---|
| Qualifying Income of the QFZP | 0% | Sits in the total revenue figure only |
| Income attributable to a Domestic PE | 9%, from the first dirham | Excluded from both the non-qualifying figure and the total |
| Income attributable to a Foreign PE | Taxed under the standard rules, not at 0% | Excluded from both the non-qualifying figure and the total |
| Non-qualifying revenue earned outside any PE | 9%, from the first dirham | Counted in the non-qualifying figure and in the total |
The Arithmetic Is Where the Exclusion Earns Its Keep
Take an illustrative free zone company with AED 12,000,000 of revenue in a tax period. AED 10,000,000 is qualifying income from distribution to overseas customers. The other AED 2,000,000 comes from a registered mainland branch serving mainland customers – a Domestic PE. The figures show the mechanics; they are not benchmarks.
Run it the way most owners assume it works and the company is finished: AED 2,000,000 against AED 12,000,000 is 16.67% of revenue, far past the 5% cap, so QFZP status goes for five tax periods.
Now run it the way the UAE permanent establishment rules actually work. The AED 2,000,000 leaves the test entirely – out of the numerator and out of the denominator. What remains is AED 10,000,000 of qualifying revenue and nothing non-qualifying, so the ratio is 0% and the test is passed comfortably. The AED 10,000,000 keeps its 0%; the branch profit is taxed at 9% with no nil-rate band underneath it. Status intact, mainland profit taxed, no cliff edge.
Attributing Profit to the PE Is a Transfer Pricing Exercise, Not a Bookkeeping One
Separating the revenue is the easy half. The profit attributed to a Domestic or Foreign PE must be computed as if the establishment were a separate and independent person dealing at arm’s length with the rest of the company. You cannot load costs into the 9% branch to shrink its profit, nor park income there to dodge an activity question. Every internal charge – management fees, shared overhead, goods transferred, intellectual property – needs a defensible price and the transfer pricing documentation to stand behind it.
The Federal Tax Authority’s Free Zone Persons Corporate Tax Guide, CTGFZP1, released on 26 May 2024, is the interpretive guidance on this ground. A QFZP must also maintain audited financial statements for tax periods commencing on or after 1 June 2023, and those statements have to show branch and head office distinctly rather than merged. On the activity side, Ministerial Decision No. 265 of 2023 has been repealed and replaced by Ministerial Decision No. 229 of 2025, issued on 28 August 2025 alongside Ministerial Decision No. 230 of 2025, both effective retroactively from 1 June 2023.
One more layer applies to large groups. A 15% Domestic Minimum Top-up Tax applies for financial years starting on or after 1 January 2025 to multinational groups with consolidated global revenue of EUR 750 million or more in at least two of the four preceding financial years. A 0% QFZP rate does not shield a group of that size. Neither does it excuse the filing obligations that sit underneath it, starting with corporate tax registration.
Run This Check Before the Tax Period Closes, Not After
The UAE permanent establishment rules turn on what a business actually did, not on what it registered. Work through this while the year is still open:
- List every space your company uses outside the zone – leased offices, shared desks, storage, client sites – and ask whether any is a fixed place through which business is conducted.
- Read the job description of anyone mainland-based who negotiates or closes deals, and check whether those contracts are accepted without material modification.
- Add up every construction, installation or supervisory engagement, including connected work run by related parties, against the 6-month threshold.
- Confirm revenue attributable to any Domestic or Foreign PE is out of both sides of the de minimis calculation, not just the numerator.
- Confirm that non-qualifying revenue earned outside any PE is still under the lower of 5% of total revenue or AED 5,000,000.
- Check that no one has applied the AED 375,000 nil-rate band to Domestic PE profit or to non-qualifying income.
- Keep branch and head office results separately identifiable in the audited financial statements, with arm’s length internal charges documented.
Frequently Asked Questions
Does opening a mainland branch cost me my free zone tax status?
No. A mainland branch is a Domestic Permanent Establishment, and under Cabinet Decision No. 100 of 2023 the income attributable to it is taxed at 9%. Your Qualifying Income keeps its 0% rate provided every other QFZP condition still holds. The branch is taxed separately and does not contaminate the rest of the company.
Does the AED 375,000 nil-rate band apply to a Domestic PE of a free zone company?
No, and this is the single most common error. The AED 375,000 band is the general rule for ordinary taxable persons. A Qualifying Free Zone Person is taxed at 9% under Article 3(2) on non-qualifying income and on Domestic PE profit from the very first dirham. There is no small-profits buffer inside the free zone regime.
When does a construction project create a permanent establishment in the UAE?
When a building site, construction or assembly project, or connected supervisory activity lasts more than 6 months. That is half the 12 months in the OECD Model and matches the UN Model. Connected projects, including those run by related parties, are assessed together, so contract-splitting between affiliates will not keep you under the threshold.
Does Domestic PE revenue count toward the 5% de minimis limit?
No. Revenue attributable to a Domestic PE, a Foreign PE, or immovable property already taxed at 9% is excluded from the de minimis calculation on both sides – it leaves the non-qualifying revenue figure and the total revenue figure alike. That is why a large mainland branch cannot on its own push a Qualifying Free Zone Person past the threshold.
What happens if I fail the de minimis test?
You cease to be a Qualifying Free Zone Person from the start of that tax period and for the following four tax periods – five in total – with standard corporate tax rates applying throughout. Breaching any other QFZP condition has the same consequence, which is why the test belongs in a year-end review, not at filing.
Can a foreign company create a UAE PE through one employee working here?
It can. Ministerial Decision No. 83 of 2023 protects presence caused by unpredictable exceptional circumstances, subject to conditions, but it does not cover a deliberate arrangement. Under the UAE permanent establishment rules an employee who habitually negotiates or concludes contracts here, or runs the business from a fixed local place, creates a PE for the foreign employer.
This article is general guidance on UAE tax rules and is not tax advice. Legislation, cabinet decisions and guidance change; confirm your position against the FTA’s published material for the relevant tax period before filing.
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