And how do people live in Dubai without paying taxes ?
Heres one example.
Under the United Arab Emirates (UAE) Corporate Tax Law (Federal Decree-Law No. 47 of 2022) and international tax principles, a foreign company may have a Permanent Establishment (PE) in the UAE without being liable for Corporate
Income Tax (CIT) if its activities are considered auxiliary or preparatory in nature. Here’s how this could apply:
1.
Definition of Permanent Establishment (PE) in the UAE
A foreign company is deemed to have a PE in the UAE if it has a fixed place of business through which it conducts business, either wholly or partially. This includes a branch, office, or factory, a place of management, or a dependent agent acting on behalf of the foreign company.
However, certain exemptions apply under Article 14 of the
UAE Corporate Tax Law, which aligns with the
OECD Model Tax Convention.
2.
Exemption for Auxiliary or Preparatory Activities
A PE may not trigger UAE corporate
tax liability if its activities are merely auxiliary or preparatory in nature. This means the activities must not form an essential part of the foreign company’s core business operations.
Examples of auxiliary activities that may not create a taxable PE include administrative support (e.g., HR, accounting, IT services), storage or display of goods (if not for sales), procurement of information (market research, data collection), and internal coordination or liaison functions (if not involving contract signing or revenue generation).
3.
Conditions for Tax Exemption
For the PE to avoid UAE corporate tax, the activities must not generate revenue directly in the UAE, the employees must only perform support functions (
not core business activities like sales, contract execution, or service delivery), and the PE must not have authority to conclude contracts on behalf of the foreign company.
4.
UAE Corporate Tax Law & OECD Alignment
The UAE follows the OECD PE principles, meaning that if the PE’s role is purely supportive, it would not be subject to CIT (Article 14(2) of UAE CT Law).
5.
Tax-Free Salaries in the UAE
The UAE does not impose income tax on salaries, meaning employees (even those hired by a foreign PE) receive tax-free remuneration. This is a major advantage for cost efficiency, as the foreign company can pay salaries without UAE payroll taxes or personal income tax deductions.
6.
Estonia’s Corporate Tax System (0% on Retained/Repatriated Profits)
Estonia operates a unique corporate tax model with 0% tax on retained profits (tax applies only upon profit distribution at 22%). The participation exemption means dividends from foreign subsidiaries (including UAE PEs) are tax-exempt if the subsidiary/PE is taxed at a reasonable rate (UAE CIT at 9% qualifies).
7.
Optimal Structure: Estonian Company + UAE Auxiliary PE
An Estonian company with a UAE auxiliary PE achieves no UAE CIT (if activities are auxiliary), tax-free salaries for UAE employees, 0% tax in Estonia until dividends are paid, and no additional tax on repatriated UAE profits (if CIT applicable)
8.
Potential Risks & Compliance Considerations
Potential risks include the PE becoming taxable in UAE (9%) if activities go beyond auxiliary, substance requirements where the UAE PE must have real employees and functions, transfer pricing where salaries and intra-group service fees must be at arm’s length, and Estonian CFC rules where if the UAE PE is deemed a Controlled Foreign Company (CFC), Estonia could tax undistributed profits—but this is unlikely if the PE is low-risk and auxiliary. The core income generating activities could be established for example in Estonia (0% CIT until distribution) or in an Estonian PE in Malta (in case the effective tax rate could be as low as 5%).
9. Estonias benefit for individuals: Combined with UAE residence its possible to remain non-tax resident in Estonia, yet have EU legal residence, which simplifies access to EU banking, and for some also to Schengen. Even as Estonia tax resident, the dividends from Estonia company are tax free, which could mean total effective tax rates from distributed profits to be as low as 0%-9%.
10. Conclusion:
An Estonian company with a UAE auxiliary PE is a highly efficient structure for auxiliary support functions, but must be carefully monitored to ensure compliance with PE and transfer pricing rules.