Permanent Establishment Risk in France for My UAE Company

The Operational Risk

A French director who sets up a company in the UAE and continues to manage it from France exposes that company to French corporate income tax on the profits generated from France. This risk, frequently underestimated, is one of the most closely scrutinized by the French tax administration when reviewing UAE structures.

The Legal Foundations

Article 209 I of the CGI

Article 209 I of the CGI provides that profits subject to corporate income tax are determined by taking into account only the profits realized in enterprises operated in France, as well as those whose taxation is allocated to France by an international convention on double taxation.

The expression "enterprises operated in France" is interpreted broadly by case law: it covers not only enterprises with their registered office in France, but also those that carry on an activity there through a permanent establishment, a dependent agent, or whose effective place of management is located in France.

France-UAE Treaty of 1989

Article 5 of the bilateral treaty defines the permanent establishment along the OECD model: a fixed place of business through which the enterprise carries on all or part of its activity (a place of management, a branch, an office, etc.). Article 7 allocates the right to tax profits to the State of the permanent establishment.

Article 4 § 3 of the treaty completes this framework: where a legal person is a resident of both States, it is deemed to be a resident of the State in which its effective place of management is situated.

The Three Risk Tests

1. Effective place of management

This is the most dangerous test. The effective management of a company is, according to the case law of the Conseil d'État, the place where the strategic decisions on management and operations are made. The directors' personal residence is only one indicator, but it carries significant weight.

If the sole director of a UAE company genuinely resides in France and makes decisions there (board meetings, dealings with clients and suppliers, signing of contracts), the French tax administration may argue that the effective place of management is in France and that the company is a French tax resident within the meaning of both domestic law and the treaty.

2. Office or fixed place of business in France

A UAE company that has in France an office (leased or owned), commercial premises, or even a mere operational address used for its activity may be regarded as having a permanent establishment in France. The duration and regularity of use matter (the occasional one-off rental of a meeting room is not sufficient).

3. Dependent agent in France

If a UAE company has in France an agent (employee or independent contractor) who has the authority to conclude contracts on behalf of the company and who habitually exercises that authority, the company is deemed to have a permanent establishment in France. The dependent agent is defined broadly and includes persons who negotiate and finalize contracts even without a formal signature.

Key Case Law

• Conseil d'État, March 7, 2016, No. 371435 (Compagnie internationale des wagons-lits): the place of management is where the persons exercising the most senior functions make the strategic decisions; the venue of board meetings is merely one indicator.
• Conseil d'État, plenary tax session, December 11, 2020, No. 420174 (Conversant/Valueclick): extension of the concept of dependent agent to digital activities — an agent who habitually negotiates contracts creates a permanent establishment even without formal signing authority.
• Conseil d'État, March 15, 2023, No. 449723: holding shareholder and board meetings in Luxembourg is not sufficient to locate the effective place of management there where strategic decisions are in fact made from France.

Prevention Strategies

1. Rigorously separate the management functions. The French director must not be the sole director of the UAE company. Appoint a UAE co-director who is physically present and genuinely involved.
2. Hold board meetings physically in Dubai with documented minutes. Strategic decisions must be formally recorded on UAE territory.
3. Maintain genuine substance in the UAE: a dedicated office, local employees, and effective operational activities. This substance simultaneously neutralizes the PE risk in France and secures the QFZP status.
4. Limit the director's travel to France for strategic management acts. Short business trips are acceptable; extended stays involving operational activity should be avoided.
5. Document the decision-making chain: calendars and electronic communications showing that decisions are made in Dubai.
6. Avoid offices or operational addresses in France. If a French presence is necessary, opt for a dedicated French subsidiary rather than operating under the UAE entity.
7. Do not grant an agent in France broad contractual authority. Negotiations must be conducted from Dubai.

The Special Case of Family Offices

Family offices with a mixed France-UAE structure are particularly exposed. The recommended practice: (i) separate the structures (a UAE holding for offshore assets, a French structure for local assets); (ii) maintain a dedicated team in Dubai for the UAE holding; (iii) avoid cross-flows and cross-decisions without documentation.