10 October 2026 · Variant
How to Split a Domestic PE
The Federal Tax Authority's Free Zone Persons guide treats a domestic permanent establishment as a separate tax component for the QFZP analysis. The working papers should identify the outside-free-zone activity, trace its revenue and costs, and reconcile the resulting split to the financial statements before the return is prepared.
Exiloz Management & Tax Consultant · Dubai-based FTA-focused advisory · VAT, corporate tax & accounting
An outside operation can be the domestic PE
Cabinet Decision No. 100 of 2023 defines a Domestic Permanent Establishment as a place of Business or another form of taxable presence of a QFZP outside the Free Zone in the UAE. The FTA's Free Zone Persons guide applies that concept to the juridical person as a whole. A QFZP can therefore have a Free Zone parent and an outside office, branch or other operating presence that needs its own profit bridge.
The common structure runs in either direction. A company may keep its head office in a Free Zone and operate an outside branch, or keep its head office outside the zone and register a Free Zone branch. In the FTA guide's example, the Free Zone branch can receive 0% treatment on its Qualifying Income if the conditions are met, while the head office is the Domestic Permanent Establishment.
We recommend beginning with an entity diagram, not a tax rate. Mark every office, warehouse, workshop, employee base, contract-signing location and customer-facing operation. Then connect each place to the ledger. The result should show what happens in the Free Zone, what happens outside it and why the chosen activity is part of one component rather than another.
A place or an agent can create the exposure
For a fixed place, the FTA guide looks for an identifiable location such as an office, factory, workshop or real property, at the disposal of the QFZP, through which the business is wholly or partly conducted. A place is typically fixed or permanent when it is at the entity's disposal for an aggregate period of at least six months in the relevant 12 consecutive months. Preparatory and auxiliary activity can be an exception, but it must be tested as the actual activity carried on there.
A Domestic Permanent Establishment can also arise where a person outside the Free Zone habitually exercises authority on behalf of the QFZP. The guide focuses on concluding contracts or negotiating contracts that the QFZP accepts without material modification. The independent-agent exception is fact-specific. Keep powers of attorney, correspondence, approval records and signed contracts so the conclusion can be checked.
The mistake we see most is calling every outside location storage or sales support without asking what work is really done there. A warehouse that only stores goods may need a different analysis from a site where staff alter products, negotiate sales or run the operating function. The working paper should describe conduct, not repeat the label used on a lease.
| Fact to test | What it can establish | Records to gather |
|---|---|---|
| Fixed premises | A place is at the QFZP's disposal | Lease, access records and operating evidence |
| Duration | At least six months in the relevant 12 months may support permanence | Occupancy, project and site records |
| Business conducted | The outside place performs part of the business | Orders, staff logs, invoices and service records |
| Contract authority | A person may be a dependent agent | Powers, correspondence and signed contracts |
The domestic PE sits outside the 0% component
The FTA guide states that income attributable to a Domestic Permanent Establishment is subject to the 9% Corporate Tax rate, unless it is Exempt Income, and is disregarded when applying the de minimis requirements. It also says the 0% rate on Taxable Income up to AED 375,000 does not apply to the domestic PE in the illustrated structure. Do not leave the outside operation inside the Free Zone parent's Qualifying Income by default.
The FTA guide gives a worked example. A Free Zone Person manufactures goods in the zone and transfers them to its Domestic Permanent Establishment. The PE sells them for AED 100,000, while the arm's-length transfer price is AED 70,000. The guide attributes AED 30,000 to the PE. The working paper should show AED 100,000 less AED 70,000 = AED 30,000, with the pricing basis attached.
That calculation is not a licence exercise. It needs the sales invoice, transfer entry, product cost, functions performed by each side and a pricing analysis under the arm's-length principle. If the Free Zone parent transfers goods or services at a convenient internal price, the return can place profit in the wrong component and weaken both the rate calculation and the related-party file.
Allocate costs after the activity map
Once the location is identified, build the domestic PE profit from the same ledger used for the financial statements. Assign direct payroll, premises, travel, inventory and service costs to the activity they support. Shared costs need a method tied to use or benefit. Revenue can be relevant in some cases, but it is not a default answer for every overhead line.
The FTA guide gives another useful example. Where a Domestic Permanent Establishment performs routine administration for the whole entity, an arm's-length service value of AED 100,000 is treated as revenue attributable to that PE. The amount is disregarded for the de minimis calculation and included when determining the PE's Taxable Income. The file should connect the service description to the value and ledger entry.
In practice, the weak file allocates all head-office costs to the Free Zone parent and leaves the outside operation with revenue but no support costs. That inflates the 0% component and makes the domestic result look artificial. Write the allocation key beside each shared schedule, reconcile it to the trial balance and have management approve the facts behind the method.
Resolve the location question before filing
Work through the split in four passes. First, draw the legal and operating structure. Second, test fixed places and contract authority against the FTA guide. Third, map revenue and costs to the Free Zone parent or Domestic Permanent Establishment using arm's-length support. Fourth, reconcile both components to the financial statements and the Corporate Tax computation. Do not wait for the return screen to reveal a missing branch.
The preparatory and auxiliary exception is a genuine boundary, not a shortcut. The guide lists storage, display, delivery, purchasing and information collection as examples, but it also warns that combined activities can form one cohesive business when operations are fragmented. That treatment remains unsettled until the actual functions, related-party locations and conduct are reviewed together.
The completed pack should contain the structure chart, place-of-business analysis, contract-authority review, revenue bridge, cost allocation, transfer-pricing support and financial-statement tie-out. Exiloz can prepare those schedules for management review. It is not a registered Tax Agent and does not perform statutory audits before the filing decision.
Related guides
Frequently Asked Questions
For checking a domestic PE in the QFZP file.
What is a domestic PE in QFZP work?
The Federal Tax Authority's Free Zone Persons guide uses a domestic permanent establishment to analyse business carried on outside the Free Zone. The working papers must identify that activity and keep its revenue, costs and evidence distinct from the free-zone component.
Does domestic PE income stay in QFZP income?
The Federal Tax Authority's guidance treats the domestic permanent establishment as a separate component for the tax calculation. Do not leave its revenue inside the free-zone total by default. Map the activity, assign its costs and document the treatment used in the return.
What should the domestic PE schedule show?
The Federal Tax Authority expects a traceable tax position. Show the activity, customer or contract, revenue, direct costs, shared-cost allocation, ledger reference, financial-statement tie-out and the conclusion used for the Corporate Tax return for each period.
Can Exiloz prepare the domestic PE split?
Yes. Exiloz can map the outside activity, build the revenue and cost schedules and prepare the reconciliation against the Federal Tax Authority's Free Zone Persons guidance for management review and filing with clear next steps.
Does the split make sense?
Exiloz prepares the domestic PE revenue bridge, cost allocation and financial-statement reconciliation.