With the implementation of the UAE Corporate Tax regime under Federal Decree-Law No. 47 of 2022, multinational enterprises operating in the UAE through branches or subsidiaries must reassess their tax positions and compliance strategies. This reform marks a significant shift in the UAE’s business environment, as previously many foreign entities benefited from a tax-free operating structure. Now, understanding how corporate tax applies differently to branches and subsidiaries is critical to remaining compliant and optimizing tax exposure.
Understanding the Structural Difference: Branch vs. Subsidiary
A branch is an extension of a foreign company, not a separate legal entity. It is fully owned and controlled by the parent company. Meanwhile, a subsidiary is a separate legal entity incorporated in the UAE, either as a Limited Liability Company (LLC) or other recognized business structure, even if owned 100% by a foreign parent.
This distinction plays a major role in how each is treated under the UAE’s Corporate Tax framework, particularly in terms of legal liability, profit attribution, and tax filing obligations.
Corporate Tax Applicability for Foreign Branches
Foreign branches are generally subject to UAE Corporate Tax on the income earned from UAE-based activities. However, the treatment may vary depending on the country of incorporation of the parent entity:
- If the foreign company is from a jurisdiction with a Double Taxation Agreement (DTA) with the UAE, it may be eligible for certain exemptions.
- If the income of the UAE branch is also taxed in the foreign parent’s jurisdiction, foreign tax credit relief may be available.
- Foreign-source income attributable to the branch may be exempt if not connected to UAE operations.
Each branch must register with the Federal Tax Authority (FTA), obtain a Tax Registration Number (TRN), and file corporate tax returns in respect of UAE-sourced income.
Corporate Tax Applicability for Subsidiaries
Unlike branches, subsidiaries are regarded as separate taxpayers and are subject to UAE Corporate Tax on their global income if they are resident in the UAE.
- Taxable income above AED 375,000 is taxed at the standard 9% rate.
- Income sourced from both UAE and international markets is considered unless a permanent establishment exists elsewhere.
- Subsidiaries must comply with Transfer Pricing regulations when dealing with parent companies or other related entities.
As independent legal entities, subsidiaries may also benefit from Free Zone exemptions if they meet qualifying criteria, such as generating qualifying income and maintaining adequate economic substance in the UAE.
Key Compliance Requirements for Both Structures
Whether a branch or a subsidiary, foreign companies must fulfill the following corporate tax compliance obligations in the UAE:
- Register with the FTA for Corporate Tax purposes
- File tax returns annually, within 9 months of the financial year-end
- Prepare and maintain audited financial statements
- Submit Transfer Pricing documentation and Disclosure Forms (if applicable)
- Maintain appropriate books and records for 7 years
It is crucial to determine the residency status, permanent establishment risk, and related-party transactions for a robust compliance framework.
Transfer Pricing Considerations
For subsidiaries, Transfer Pricing regulations play a critical role. Intercompany transactions with the parent company must be priced at arm’s length. This includes service agreements, loans, intellectual property usage, and shared costs. Proper documentation such as Master File and Local File may be required depending on thresholds and group structure.
Branches may also be subject to Transfer Pricing rules if they transact with related UAE entities or their foreign parent in a way that resembles intercompany transactions.
When Can Foreign Entities Be Exempt?
Corporate Tax exemptions may apply in certain cases:
- Income earned by foreign companies from operating a branch in the UAE may be exempt under DTAs.
- Foreign entities earning only foreign-sourced income, with no UAE permanent establishment, may not be subject to UAE Corporate Tax.
- Some Free Zone entities with a specific license and business model may benefit from a 0% tax rate on qualifying income.
However, these exemptions are subject to strict substance and reporting requirements and must be carefully assessed for eligibility.
Role of PEAK Business Consultancy Services
At PEAK Business Consultancy Services, we specialize in Corporate Tax and VAT advisory for international businesses operating in the UAE. Whether you’re a foreign bank operating a branch or a multinational with several subsidiaries, our team can:
- Advise on the optimal legal structure for tax efficiency
- Assess eligibility for Free Zone or DTA-based exemptions
- Register branches and subsidiaries with the FTA
- Prepare and file Corporate Tax returns
- Prepare Transfer Pricing documentation
- Ensure full compliance with UAE tax laws and reporting obligations
Partner with us to make your UAE operations tax compliant and strategically sound. Learn more at https://www.peakbcs.com/.
Risks of Non-Compliance
Failure to understand and comply with UAE Corporate Tax requirements can lead to significant consequences, including:
- Administrative penalties for late or incorrect filings
- Loss of Free Zone or DTA tax benefits
- Transfer Pricing adjustments and interest limitations
- Reputational risk and increased scrutiny from tax authorities
Foreign businesses are encouraged to engage qualified tax consultants to navigate these risks effectively.
Conclusion
The Corporate Tax treatment of branches and subsidiaries in the UAE is not a one-size-fits-all scenario. The nature of your legal presence, business model, and source of income all influence your tax exposure and compliance obligations. Foreign companies must stay informed and act proactively to align with the UAE’s new tax environment.
Let PEAK Business Consultancy Services help you understand your position, build tax compliance strategies, and ensure peace of mind in every financial year. Visit us at https://www.peakbcs.com/ for a free initial consultation.
