One employee in the other country can create a permanent establishment

The hire that is not a line on the payroll

A corridor business usually reaches its first cross-border hire having already done the harder things. The company is formed, the owner has moved or is about to, the banking is open, and the structure works. Then the business needs a person. Sometimes that person is back in the country the founder left, a salesperson or an operations lead who knows the home market. Sometimes it is someone in the new country, the first local employee of a company still run from abroad. Either way the instinct is to treat the hire as a cost, a salary line to be budgeted and paid.

It is not a line on the payroll. A person is employed in a country, and that country's employment law, payroll system and, in some circumstances, its corporate tax attach to the employment rather than to where the company happens to be registered.

The hire therefore opens a second system in a place where the company is not resident and may have assumed it had nothing to file. The company that was carefully built to sit in one tax system has quietly acquired a foothold in another.

Two questions arrive with the first such hire, and most founders have asked neither. Whose employment law and payroll govern this person. And does this person, by what they do, give the company a taxable presence in their country. The first question is administrative and expensive. The second is structural and far more expensive, because it reaches the company itself.

The obligation follows the worker, not the company

The organising principle is that employment obligations and payroll arise where the work is physically carried out, not where the employer is incorporated. A UAE company that engages a person living and working in the United Kingdom takes on the United Kingdom's employment and payroll system for that person. A United Kingdom company that engages someone in the United Arab Emirates takes on the Emirati system. Neither obligation is optional, and neither waits politely until the company decides to establish itself locally.

The treaty says the same thing in its own register. Under Article 14 of the UK-UAE double tax treaty, income from employment is taxable where the work is actually done, subject to a short-stay exception of 183 days for an employee of a genuinely foreign employer. The allocation of the employee's own tax follows the desk, not the headquarters, and the employer's compliance follows it there too. The two halves of the corridor behave very differently once a worker sits in each, and they are worth taking in turn.

The UK hire, PAYE and the direct-payment trap

A United Kingdom employer operating a United Kingdom payroll has a familiar and unforgiving set of duties. It deducts income tax under PAYE at 20%, 40% and 45% above the personal allowance of £12,570, and it deducts the employee's primary Class 1 National Insurance at 8% between £12,570 and £50,270 and 2% above. On top of the salary it pays employer secondary Class 1 National Insurance, which rose to 15% from 13.8% on 6 April 2025 and is charged on earnings above a secondary threshold cut at the same time to £5,000 a year.

It must also assess the employee for pension auto-enrolment, with a minimum employer contribution of 3% and 8% in total on qualifying earnings. Employer National Insurance alone turns a headline salary into a materially larger cost.

None of that is unusual for a United Kingdom business. It becomes a problem only when the employer did not think of itself as a United Kingdom business at all.

The trap sits where the employer is the foreign company. A UAE company that hires a United Kingdom resident often has no United Kingdom establishment and no PAYE scheme, and concludes from that it has no United Kingdom obligation. The position is more awkward than that. Where an overseas employer has no place of business in the United Kingdom, it cannot be made to operate PAYE, so the employee is required to set up a direct payment scheme, known in HMRC's manuals as a DPNI scheme, and to account for their own income tax and primary National Insurance to HMRC under a single reference. The employee carries a United Kingdom tax account the company never sees.

That is the administrative half. The structural half is sharper, and it runs the other way. The reason a foreign employer escapes employer National Insurance is that it has no United Kingdom presence. If the way the employee works gives the company a United Kingdom presence, that reasoning collapses, and the company is pulled into the United Kingdom system as an employer and, worse, as a taxpayer. That is the permanent establishment, and it is the subject of its own section below.

The UAE hire, no income tax and a full labour system

The United Arab Emirates imposes no personal income tax, which misleads employers into treating a UAE hire as payroll without consequence. The absence of income tax is real. The absence of a system is not. Employing a person in the Emirates engages a complete labour regime, and which regime depends on where in the country the person is hired.

On the mainland the employment is governed by Federal Decree-Law No. 33 of 2021, administered by the Ministry of Human Resources and Emiratisation. The employer must issue a registered fixed-term contract, obtain a work permit and residence visa, provide mandatory medical insurance, and pay the salary through the Wage Protection System, the electronic channel that lets the ministry confirm wages are actually paid, with new work permits blocked where an employer falls out of compliance.

At the end of the employment the employer owes an end-of-service gratuity under Article 51, calculated as 21 days of basic wage for each of the first five years of service and 30 days for each year after that, capped at two years' wage and paid on the basic wage rather than the full package.

Separately, the employee must subscribe to the mandatory unemployment insurance scheme, the ILOE scheme under Federal Decree-Law No. 13 of 2022, at a nominal premium of AED 5 or AED 10 a month depending on salary band. The premium is the employee's to pay rather than the employer's, but the obligation is real and carries fines for non-subscription.

The free zones are not the same country for this purpose. The Dubai International Financial Centre has its own employment law, DIFC Employment Law No. 2 of 2019, and in 2020 it replaced the end-of-service gratuity with the DIFC Employee Workplace Savings scheme, known as DEWS, a funded plan into which the employer pays a monthly contribution from the first day of employment rather than accruing a lump sum. Abu Dhabi Global Market runs its own Employment Regulations and retains a gratuity-style end-of-service benefit.

So there is no single thing called United Arab Emirates employment. There is a mainland regime, a DIFC regime and an ADGM regime, and the choice of where to hire changes both the monthly cost and the end-of-service mechanics. The cost of running a UAE company more broadly, including the staffing that drives it, is set out in the note on what a UAE company actually costs.

The permanent establishment is the part that reaches the company

Everything above is the cost of employing a person. The permanent establishment is different in kind, because it does not tax the employee, it taxes the company, in a country where the company is not resident. It is the single most expensive thing a routine hire can trigger, and it is the one almost no one prices in.

A permanent establishment is a taxable presence of a company in a country other than its own. It does not make the whole company resident there. It taxes a slice, the profit attributable to the presence, and leaves the rest of the company where it was. This is the distinction that matters, and it is why a permanent establishment is not the same as the company being tax resident.

Residence asks where the whole company is managed and controlled, a question examined in the note on central management and control. A permanent establishment asks a narrower question. Is there enough of the company, in people or premises, in the other country to tax what that foothold earns. Both can be true at once, and they are decided by different tests.

People create a permanent establishment in two ways. The first is a fixed place of business, an office or, in some readings, a home used as the company's place of business. The second, and the one a single employee springs without any premises at all, is the dependent agent. A person who habitually exercises authority to conclude contracts in the company's name is a dependent agent, and their presence is the company's presence. A country manager who closes deals, a salesperson who signs orders, a director who agrees terms from a flat, each can be the foothold.

On the United Kingdom side the mechanism is explicit. Under section 5 of the Corporation Tax Act 2009 a non-resident company is outside United Kingdom corporation tax unless it carries on a trade in the United Kingdom through a permanent establishment, and under section 19 it is then taxable on the profits attributable to that establishment.

Permanent establishment is defined in section 1141 of the Corporation Tax Act 2010, and it reaches both a fixed place of business and a dependent agent acting for the company in the United Kingdom. The agent limb was widened for chargeable periods beginning on or after 1 January 2026, which is taken up in its own section below.

The treaty aligns, taxing a UAE enterprise's business profits in the United Kingdom only to the extent they are attributable to a United Kingdom permanent establishment under Articles 5 and 7. A UAE company whose United Kingdom employee habitually concludes its contracts therefore has a United Kingdom permanent establishment, a United Kingdom corporation tax registration, and a return to file. The treaty mechanics of that trap are drawn out further in the note on the UK-UAE double tax treaty.

The Emirates mirror it. Under Article 14 of Federal Decree-Law No. 47 of 2022, the corporate tax law, a non-resident person has a permanent establishment in the United Arab Emirates where it has a fixed place of business there, or a dependent agent who habitually concludes contracts on its behalf, or another nexus prescribed by Cabinet Decision. A United Kingdom company whose UAE-based employee binds it in the Emirates has a UAE permanent establishment, and UAE corporate tax then applies at 9% on the attributable profit above the AED 375,000 threshold, the rate explained in the note on when a UAE company pays 9% rather than 0%.

Two qualifications keep this from catching every hire, and they are the heart of the planning. A genuinely independent agent acting in the ordinary course of its own business does not create a permanent establishment, and activity that is only preparatory or auxiliary, such as pure marketing, liaison or information-gathering that cannot bind the company, does not either.

The exposure turns on authority, not on headcount. Where a permanent establishment does exist, the profit attributed to it is worked out on the separate-entity, arm's length basis, so a permanent establishment is also a transfer-pricing exercise, the same discipline set out in the note on transfer pricing in the corridor. The charge is rarely the whole of the company's profit. It is the slice the foothold earned, and arguing that slice is its own piece of work.

The UK domestic test widened in 2026, and the treaty test did not

There is a further turn on the United Kingdom side that a note written in late 2026 cannot leave out, because it has moved the very test described above. For chargeable periods beginning on or after 1 January 2026, Finance Act 2026 rewrote the dependent-agent limb of section 1141 of the Corporation Tax Act 2010 to follow the 2017 OECD model. The domestic test no longer requires an authority to conclude contracts at all.

Under the widened test, a person creates a United Kingdom permanent establishment for a non-resident company where they habitually conclude contracts, or habitually play the principal role leading to the conclusion of contracts that are then routinely concluded without material modification by the company, and those contracts are in the company's name, or for the use of its property, or for the provision of its services.

A United Kingdom employee who negotiates and effectively settles the terms of deals that the company abroad then signs without changing them is now caught, even though the signature, and the older idea of authority to bind, sat elsewhere. Promotion and marketing that does not lead directly to a contract remain outside the test, so the carve-out for preparatory and auxiliary work survives, but the ground it protects is narrower than it was.

The sharper consequence is that the domestic test and the treaty test are no longer the same test, and the difference runs in the taxpayer's favour. The UK-UAE treaty was signed in 2016 on the pre-2017 model, so its Article 5 still carries the older and narrower wording, a person who habitually exercises authority to conclude contracts in the company's name.

A UAE-resident company entitled to treaty benefits can therefore rely on the narrower treaty test to resist a United Kingdom permanent establishment that the widened domestic rule would otherwise create, provided it holds a UAE tax residency certificate and actually claims the treaty.

A company that cannot evidence treaty residence is left with the wider domestic test and no such shelter. Which test governs has become a question in its own right, decided by treaty entitlement rather than by the facts of the hire alone.

Two hires, two systems

The table sets the United Kingdom hire of a UAE company against the UAE hire of a United Kingdom company, so the symmetry of the exposure is visible in one place.

Read across either row and the pattern holds. The payroll is the visible cost, the end-of-service benefit is the deferred cost, and the permanent establishment is the one that was never costed, because it taxes the company rather than the wage.

What to decide before the first hire

The hire that goes cleanly is the one where the questions are settled before the contract is signed, not after an enquiry asks them.

• Decide what the person is allowed to do. Authority to negotiate and conclude contracts is what creates the dependent-agent permanent establishment. A role genuinely scoped to marketing, support or liaison, which cannot bind the company, is a different exposure from a country manager who closes deals, and the difference belongs in the job and the contract from the start.
• Decide who the employer is. Employing through a local entity, where one exists, is cleaner than a foreign company employing across a border. Where there is no local entity, the real choice is to form one, to use an employer of record, or to accept the direct-payment and permanent-establishment consequences with eyes open, rather than to discover them later.
• Price the real cost. Employer National Insurance at 15%, auto-enrolment, or the UAE gratuity and the DEWS contribution, together with the cost of running a second payroll, are the true cost of the hire. The salary is the smaller number.
• Keep the contract and the conduct aligned. A contract that denies authority while the person in fact closes deals will not hold, because the permanent establishment turns on what happens, not on what the paperwork says. Article 24 of the treaty obliges HMRC and the Federal Tax Authority to exchange information, so the two pictures can be compared.

The sequence that works is the ordinary one for the corridor. Choose the employing entity first, scope the role second, and run the payroll third. The hire is the moment a one-country company quietly becomes a two-country one, and whether that is a planned step or an accident is decided entirely in advance. How the money then reaches the owner, rather than the staff, is the subject of the note on paying yourself from a UK company after you move, and the owner's own pay is itself a priced transaction, as set out in the note on the owner's salary as a transfer price.

Frequently asked questions

Does hiring one employee in another country create a permanent establishment?

It can, and it turns on what the employee does rather than their number. A single person who habitually exercises authority to conclude contracts in the company's name is a dependent agent, and that is enough to create a permanent establishment for the company in the country where the person works, under Article 5 of the UK-UAE treaty, section 1141 of the Corporation Tax Act 2010 in the United Kingdom, and Article 14 of Federal Decree-Law No. 47 of 2022 in the United Arab Emirates. For United Kingdom chargeable periods beginning on or after 1 January 2026 the domestic test is wider still, reaching a person who habitually plays the principal role in concluding contracts even without authority to sign, although the narrower 2016 treaty test can still protect a treaty-entitled UAE company. An employee who cannot bind the company, and whose work is only preparatory or auxiliary, generally does not create one.

Can a UAE company employ someone in the United Kingdom without a UK entity?

Yes, but the United Kingdom obligations do not disappear with the entity. Where the UAE employer has no United Kingdom place of business, it cannot operate PAYE, so the employee sets up a direct payment scheme, a DPNI scheme, and accounts for their own income tax and primary National Insurance to HMRC. The more serious point is that if the employee habitually concludes contracts for the company, that activity can give the company a United Kingdom permanent establishment, which brings the company itself within United Kingdom corporation tax on the attributable profit, whether or not a United Kingdom entity was ever formed.

What does a UK company owe when it employs someone in the UAE?

A full UAE labour obligation, even though there is no personal income tax to deduct. On the mainland, under Federal Decree-Law No. 33 of 2021, the employer must issue a registered contract, sponsor a work permit and visa, provide medical insurance, pay the salary through the Wage Protection System, and accrue the end-of-service gratuity. The employee must also hold the mandatory ILOE unemployment insurance. If the UAE-based employee concludes contracts for the United Kingdom company, the company can acquire a UAE permanent establishment and a UAE corporate tax liability at 9% above AED 375,000.

What is the UAE end-of-service gratuity, and who pays it?

The gratuity is a termination payment the employer owes to an expatriate employee who has completed at least one year of continuous service. Under Article 51 of Federal Decree-Law No. 33 of 2021 it is 21 days of basic wage for each of the first five years of service and 30 days of basic wage for each year after that, capped at two years' wage and calculated on the basic wage rather than the total package. In the Dubai International Financial Centre the gratuity has been replaced by the DEWS scheme, into which the employer pays a monthly contribution from the first day of employment instead.

Is the UAE unemployment insurance an employer cost?

No, the ILOE premium is the employee's to pay, not the employer's. Under Federal Decree-Law No. 13 of 2022 the scheme is a mandatory subscription for most private-sector employees, at AED 5 a month where the basic salary is AED 16,000 or less and AED 10 a month above that, and it pays a dismissed subscriber 60% of average basic salary for up to three months, subject to having paid in for at least twelve months. The employer does not fund it, but it should ensure new employees know the subscription is compulsory and carries fines if missed.

How is a permanent establishment different from the company being tax resident?

Residence and permanent establishment are two different charges decided by two different tests. Residence asks where the whole company is managed and controlled, and a company resident in a country is taxed there on its worldwide profit. A permanent establishment asks whether a non-resident company has enough presence, in people or premises, in another country to tax what that presence earns, and only the attributable slice is taxed. A UAE company can be United Kingdom resident through central management and control, or merely have a United Kingdom permanent establishment, or both, and the distinction changes how much is taxed and where.

Does a remote employee working from home create a permanent establishment?

It depends on what the employee does from that home, not on the home itself. A home office can be argued to be a fixed place of the company's business, and more commonly the employee who works from home while habitually concluding the company's contracts is a dependent agent, either of which can create a permanent establishment. An employee working from home on genuinely preparatory or auxiliary tasks, who cannot bind the company, is a weaker case. Because tax authorities now expect remote working to be considered, the safe course is to scope the role and document the authority rather than assume a home desk is invisible.

How much UK employer National Insurance is due on an employee?

Employer secondary Class 1 National Insurance is charged at 15% on an employee's earnings above the secondary threshold of £5,000 a year, following the increase from 13.8% and the reduction of the threshold from £9,100 on 6 April 2025. It is paid by the employer in addition to the salary, and it is separate from the employee's own primary National Insurance and income tax deducted under PAYE. A foreign employer with no United Kingdom presence is generally outside employer National Insurance, but a company that acquires a United Kingdom permanent establishment through its employee is brought within it.

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Critical advisory. A cross-border hire is two obligations wearing one job title. The first is the payroll, a United Kingdom PAYE and National Insurance account or a UAE regime of Wage Protection, gratuity and insurance, and it is merely expensive.

The second is the permanent establishment, the point at which the person's authority to bind the company drags the company itself into corporation tax in a country where it is not resident, and it is expensive in a different order of magnitude. The two are decided before the contract is signed, by what the person is permitted to do and by which entity employs them, which is why the planning belongs at the hiring decision and not at the first enquiry.

We handle corridor payroll, the employing-entity choice and the permanent-establishment analysis in-house across the United Arab Emirates, the United Kingdom and Ireland. This note is general information rather than advice on your own facts, so confirm your position before you make the hire or sign the contract.