Details allocation of income and loss between the main entity and its PE using separate accounts, treaty principles and the PE category.
What should you do now?Document the PE category and income/expense attribution basis, prepare separate accounts or their equivalent, and reconcile with the Main Entity. For each transferred loss, retain evidence of both Paragraph G tests and a Paragraph H subsequent-income schedule.
What does the official Article provide?
The official source is Arabic. This English commentary is explanatory and is not presented as an official translation.
Details allocation of income and loss between the main entity and its PE using separate accounts, treaty principles and the PE category.
This is a verified summary rather than a verbatim reproduction. Consult the official Arabic text, the Law and later decisions before making a final determination.
What does the Article mean in plain language?
First identify the PE category under Law Article 1. For categories A, B and C, start with net income or loss in the PE's separate accounts. If no separate accounts exist, determine what would have appeared in standalone accounts under the Ultimate Parent Entity's consolidation standard. Missing separate accounts do not make the PE's income zero.
For categories A and B, adjust the accounts to include only income and expenses attributable to the PE under the applicable treaty or the law of its jurisdiction, regardless of the amounts taxable or deductible there. For category C, attribution follows Article 7 of the Model Tax Convention. Accordingly, do not automatically substitute taxable profit from a local return for the allocated accounting result.
Category D of the Law's definition has a different rule: determine the result from income exempt in the Main Entity's jurisdiction because it is attributable to operations in the other jurisdiction, taking account of attributable expenses not deducted for tax in the Main Entity's jurisdiction. Do not apply the first three categories' approach without assessing this rule.
Paragraph F generally excludes the PE's accounting net income or loss from the Main Entity's Constituent Entity Income or Loss. Paragraph G instead treats a PE's Constituent Entity Loss as a Main Entity expense to the extent it is an expense in computing the Main Entity's domestic taxable income and is not set off against income taxable in both jurisdictions. Where both conditions apply, do not count the loss as an expense of both entities.
Paragraph H then attributes the PE's subsequent Constituent Entity Income to the Main Entity rather than the PE, up to the loss previously treated as the Main Entity's expense. Maintain a running schedule of transferred losses, subsequent income and the outstanding balance, rather than simply separating the two accounts permanently. This Article allocates income and loss; assess Covered Tax allocation under its separate provisions.
Financial reporting, tax, transfer-pricing and consolidation teams.
Document the PE category and income/expense attribution basis, prepare separate accounts or their equivalent, and reconcile with the Main Entity. For each transferred loss, retain evidence of both Paragraph G tests and a Paragraph H subsequent-income schedule.
How can the rule appear in practice?
A PE loss of 100 units fully meets both Paragraph G tests and is treated as an expense of the Main Entity rather than the PE. The PE later earns 60 units and then 70 units: Paragraph H attributes 60 and then 40 to the Main Entity, exhausting the loss balance. The remaining 30 is not transferred under that Paragraph. The example assumes the conditions are established and does not compute final tax.
This illustration is not an NBR case or a binding outcome for a particular fact pattern.Counting PE income in both entities, equating accounting and taxable income, transferring every loss to the Main Entity without both tests, or overlooking subsequent income after transferring a loss.
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Before relying on the result
Is this Article enough on its own?
Usually not. Read it with the connected Law Article, definitions, any effective election and current NBR guidance, especially for an amount or deadline.
Does NBR guidance replace the Regulations?
No. Guidance explains application and supports procedures and examples, but current legislation and decisions prevail in case of inconsistency.