With globalization driving increased cross-border business activities, countries worldwide are revising their tax regulations to address base erosion and profit shifting (BEPS) issues. The anti-fragmentation rule is one such measure, aimed at preventing businesses from artificially avoiding a Permanent Establishment (PE) status by fragmenting their operations. In the Gulf Cooperation Council (GCC) region, this rule is becoming increasingly relevant as these countries work to protect their tax bases while also attracting foreign investment. This article examines the anti-fragmentation rule, its significance in the GCC, and its practical implications for businesses operating in the region.

What is the Anti-Fragmentation Rule?
The anti-fragmentation rule is a principle rooted in international tax law, primarily introduced in the OECD’s BEPS Action Plan, particularly through Action 7. Its goal is to prevent companies from evading PE status—and thus tax obligations—by dividing operations across various entities in a jurisdiction. Under this rule, if different parts of a business are conducted by related entities in the same country, and these activities together constitute a significant part of the company’s overall business, the anti-fragmentation rule may deem the business as having a PE.

The Relevance of the Anti-Fragmentation Rule for GCC Countries
The anti-fragmentation rule holds particular importance for GCC countries, where tax regimes are evolving in response to a growing need for revenue diversification and alignment with global standards. Traditionally, many GCC countries relied heavily on oil revenues and maintained tax-friendly regimes to attract foreign investment. However, with the shift toward diversified economies, tax frameworks are becoming more structured.

For GCC nations, the anti-fragmentation rule offers a means of strengthening their tax systems while continuing to appeal to international businesses. By implementing this rule, GCC countries can mitigate the risk of tax avoidance and assure compliance with international norms, which, in turn, helps bolster their reputations as secure, compliant jurisdictions.

Furthermore, foreign investment plays a crucial role in GCC economies, and investors value predictable, fair tax policies. The anti-fragmentation rule enables GCC tax authorities to safeguard their revenue base without discouraging legitimate business activities—offering a balanced approach between enforcing compliance and remaining competitive as investment hubs.

How GCC Countries Are Implementing the Anti-Fragmentation Rule

Different GCC countries approach the anti-fragmentation rule in unique ways, as their tax systems vary in maturity and scope.
Double tax treaties (DTAs) also play a role in the GCC’s approach to anti-fragmentation, as many of these agreements are based on the OECD Model Tax Convention, which includes anti-fragmentation provisions. By structuring tax treaties to recognize these rules, GCC countries enhance their ability to enforce PE standards while promoting cross-border investment within a clear framework.

1. Saudi Arabia
Saudi Arabia has been actively addressing tax avoidance issues, and its tax authority, Zakat, Tax, and Customs Authority (ZATCA), has taken steps to combat BEPS practices, including artificial fragmentation. Under Saudi Arabia’s tax framework, if related entities conduct complementary activities in the country, ZATCA may classify these activities as part of a broader, cohesive business, thereby triggering Permanent Establishment (PE) status.

Saudi Arabia has introduced PE guidelines that support the anti-fragmentation rule, particularly through requiring businesses to disclose all significant economic activities that are interdependent. This approach enables ZATCA to assess whether the separate functions of related entities could be viewed as a unified business operation and thereby prevent companies from avoiding tax obligations by fragmenting their presence.

2. United Arab Emirates (UAE)
With the UAE’s recent introduction of corporate tax, the Federal Tax Authority (FTA) has started defining principles around PE and is anticipated to incorporate anti-fragmentation measures. The UAE aims to balance its appeal to investors with fair tax enforcement, and aligning with international standards like the anti-fragmentation rule is part of this strategy. Although the UAE’s PE guidance is still developing, its framework is expected to prevent companies from splitting activities across entities to avoid tax liability.

The UAE’s approach to the anti-fragmentation rule is likely to emphasize substance over form, focusing on whether the split functions within the country contribute to a unified business purpose. The FTA may release further guidance or clarifications as the corporate tax law matures, especially for sectors where fragmentation is prevalent, such as logistics, finance, and technology.

3. Qatar
Qatar has introduced an anti-fragmentation rule explicitly within its tax regulations, showing a proactive stance toward curbing tax avoidance strategies. The Qatar Financial Centre (QFC), which regulates non-hydrocarbon foreign investment, includes specific anti-fragmentation provisions in its PE guidelines. These provisions state that related entities performing different functions within Qatar may be treated as a single PE if those activities are interdependent and collectively contribute to the same economic purpose.

Under the QFC tax regime, the anti-fragmentation rule is designed to catch arrangements where businesses try to split activities across separate entities or locations to stay below the PE threshold. By establishing this rule, Qatar aims to ensure a level playing field, requiring all substantial business activities to meet their tax obligations. This measure strengthens Qatar’s position as a transparent and compliant jurisdiction, aligned with OECD standards.

4. Oman
While Oman’s anti-fragmentation provisions are less explicit, the country relies on a general anti-avoidance rule (GAAR) within its tax code to address fragmented business structures. The Omani tax authority, while not issuing detailed PE guidance specific to fragmentation, applies a substance-over-form approach that may indirectly support anti-fragmentation. If entities operating within Oman exhibit interconnected activities that collectively serve a single business objective, the tax authority may deem them as a PE.

As Oman continues to evolve its tax policies, there is potential for more formal guidance on anti-fragmentation. Oman’s approach reflects a cautious stance, aiming to support tax integrity without compromising its attractiveness to foreign investors.

5. Kuwait
Kuwait currently has limited formal guidance on the anti-fragmentation rule. However, the Ministry of Finance monitors multinational structures to ensure that PE definitions are not circumvented through artificial fragmentation. Kuwait’s tax regime relies on general anti-avoidance principles, and it may consider introducing more detailed provisions in line with international practices in the future.

For now, Kuwait emphasizes assessing substance over form, evaluating whether the fragmented operations of related entities genuinely serve independent purposes or constitute a cohesive business. This approach allows Kuwait to discourage tax-motivated fragmentation while still offering a tax-friendly environment for foreign investment.

6. Bahrain
Currently, Bahrain does not have a specific anti-fragmentation rule in its tax framework. However, Bahrain’s tax laws are evolving, especially with the GCC countries’ growing alignment on tax policies in response to global tax standards, such as OECD BEPS initiatives and Pillar 2.

The recent tax changes in Bahrain introducing Pillar 2 could indeed lead to anti-fragmentation rules or similar measures as part of aligning with the OECD’s global minimum tax framework. Pillar 2 aims to prevent profit-shifting by ensuring a minimum tax level across jurisdictions, which often includes rules to counter tax base fragmentation.

Challenges and Considerations in Applying the Anti-Fragmentation Rule

The anti-fragmentation rule, while beneficial, introduces challenges for tax authorities and businesses alike. The rule is inherently complex, and interpretation can vary. This complexity can make it difficult to discern whether a business structure genuinely warrants a PE status or is structured solely to avoid it. Additionally, enforcing the rule effectively without burdening genuine business operations is a delicate balancing act for GCC tax authorities.

From a business perspective, compliance with the anti-fragmentation rule can lead to increased administrative costs. Multinationals must regularly assess their structures and activities in each jurisdiction, possibly restructuring operations to avoid inadvertently triggering PE status. Companies with decentralized functions—such as separate sales and support offices—are particularly susceptible to these requirements.

For GCC countries, strict enforcement could impact the investment climate. Overly rigorous applications of the rule might create apprehension among potential investors, which could, in turn, hinder economic growth. Thus, GCC countries face the challenge of implementing the rule in a way that supports compliance without deterring business operations.

Comparative Analysis: GCC and Global Standards

When examining the GCC’s application of the anti-fragmentation rule, it is useful to compare it with practices in other regions. In the European Union, for example, certain countries have highly specific anti-fragmentation guidelines, making their interpretation and enforcement more consistent but also more stringent.

Similarly, Asian countries that have incorporated anti-fragmentation measures tend to adopt an approach that resonates with OECD standards but is customized to suit regional economic priorities. By analyzing these international examples, GCC countries can refine their practices, leveraging insights to balance tax integrity with economic competitiveness.

Adopting OECD-inspired standards aligns GCC countries with global best practices. This alignment is crucial as GCC countries strive to attract international businesses seeking stable, compliant tax environments.

Conclusion
For businesses operating in the GCC, understanding and complying with the anti-fragmentation rule is essential. Companies with fragmented operations—where different functions are distributed across related entities—must evaluate their structures to assess the risk of being classified as having a PE.

Risk areas include business functions that are closely related or support each other, such as sales, customer support, and logistics. Fragmented operations that appear independent but in reality contribute to the same overarching business purpose may trigger PE under the anti-fragmentation rule.

Multinationals can reduce risks by conducting regular tax risk assessments, consulting with local tax professionals, and staying informed about GCC-specific guidance. As GCC tax authorities continue to refine their tax policies, businesses need to be agile, adjusting structures and operations to maintain compliance.