"Foreign Tax Credit" is the amount of tax on profits and income paid in a foreign jurisdiction. It can reduce the amount of Corporate Tax payable in the UAE. In this context, the UAE Corporate Tax Law, Article 47 outlines the provisions and conditions surrounding the Foreign Tax Credit. This credit is designed to alleviate potential double taxation for Resident Persons whose foreign-sourced income is included in their Taxable Income.
Here's a comprehensive breakdown:
Source and Residence Basis of Corporate Tax
The UAE's Corporate Tax regime applies both source and residence basis of taxation.
- Resident Persons are taxed on their income, regardless of its source.
- To prevent double taxation, exemptions for foreign-sourced income are available through Participation Exemption and Foreign Permanent Establishment exemption regimes.
Purpose of Foreign Tax Credit
- To reduce or eliminate double taxation of foreign-sourced income.
- Available if the exemption for foreign-sourced income cannot be claimed and such income is included in the Taxable Income of a Resident Person.
Eligibility Criteria for Similar Character to Corporate Tax
- A Foreign Tax Credit is applicable for foreign tax that is of a similar character to Corporate Tax.
- This applies to taxes imposed and payable to a non-UAE government under the law.
- The tax must be compulsory and enforceable by law in the foreign jurisdiction.
- Imposed on profit or net income (income minus deductions).
- Not dependent on the name or collection method of the tax.
Types & Provisions For Exemptions
There are two types of exemptions under Foreign Tax credit under the UAE Corporate Tax Law for qualifying foreign-sourced income as stated below:-
- The Participation Exemption Regime manifests through Article 23 of Corporate Law.
- The Foreign Permanent Establishment Exemption Regime is referred to as Article 24 of Corporate Law.
Read more: UAE Corporate Tax Registration Exemptions
Types Not Considered Similar to Corporate Tax
The UAE's Corporate Tax Law meticulously outlines categories that do not align with the essence of "similar character to Corporate Tax."Notable exclusions encompass
- Consumption taxes such as Value Added Tax (VAT), Goods and Services Tax (GST), and Sales Tax.
- Customs duty, Excise Tax, and other levies tied to imports.
- Transaction taxes like stamp tax and capital duty.
- Property taxes and wealth taxes that disregard income and focus on ownership or asset value.
- Estate Tax and related inheritance duties.
Utilization of Foreign Tax Credit
As per Article 47(1)(2), the utilization of foreign tax credits is stated below
Corporate Tax under Article 3 can be reduced by the amount of Foreign Tax Credit.
- The claimed credit cannot exceed the Corporate Tax on foreign-sourced income.
- Example Illustration:- If the Corporate Tax due on foreign-sourced income is AED 100,000, the maximum Foreign Tax Credit claim is the lower of the actual foreign tax paid or AED 100,000.
Applicability of Double Taxation Agreements: Relevance of Agreements
- Recognizes that UAE-involved double taxation avoidance agreements could offer distinct methodologies for mitigating double taxation, potentially diverging from Article 47.
- If double taxation agreements specify different methods, those methods take precedence.
- Article 66 confirms the primacy of applicable double taxation agreement rules.
Preserving the FTC & Forfeiture of Unutilized Credit
It is specified under Clause 3 that any unutilized Foreign Tax credit (FTC) stemming from Clause 2's provisions will be forfeited and treated as stated below:-
- Unused amounts of credit cannot be carried forward to subsequent periods or retroactively applied to earlier periods, For instance, if foreign tax paid amounts to AED 150,000 while Corporate Tax due is AED 100,000, the unclaimed AED 50,000 becomes ineligible for future credit utilization.
Onus of Substantiation: Responsibility of Claimant under Corporate Tax Law
Clause 4 Imposes the responsibility on Taxable Persons seeking FTC to validate the eligibility of foreign tax payments for credit.
- Emphasizes meticulous record-keeping, including substantiation of tax payments under foreign jurisdiction regulations.
- Importantly, the term "paid" signifies remitted or accrued amounts to foreign tax authorities, reflecting an unwavering commitment.
Defining Term “Paid”
"Paid" refers to remitted or accrued tax to foreign tax authorities. It's imperative to note that an amount isn't regarded as "paid" if the tax liability remains uncertain or has not yet formally accrued. Similarly, tax amounts refunded or confirmed as refundable fall outside the scope of "paid."
Exceptions to the Term"Paid"
- Tax liability cannot be contingent or unaccrued in a foreign jurisdiction.
- Refunded or confirmed refundable tax is not considered "paid."
As we navigate the intricate realm of tax intricacies, Article 47 emerges as a cornerstone facilitating the seamless integration of foreign tax principles within the UAE's Corporate Tax framework. The provision of UAE corporate tax gives detailed insight into the foreign-sourced income taxation by proffering the Foreign Tax Credit for the UAE Resident Persons, steering them away from the realm of double taxation. As the UAE fortifies its tax framework, the latest explanatory guide is a testament to its commitment to transparency, equity, and adherence to global taxation standards. Contact us our Tax Consultant Dubai and we shall be glad to assist you.