The Corporate Tax Law recently implemented in the United Arab Emirates (UAE) establishes the legal framework for imposing federal taxes on corporations. It encompasses essential provisions regarding foreign tax credit and withholding tax, imperative for comprehending the tax consequences for businesses operating within the UAE. This article offers an overview of these provisions and their ramifications for businesses in the UAE.
Withholding Tax serves as a prevalent means of collecting income tax in cross-border transactions, where the payer deducts tax from specific payments to foreign entities at the time of disbursement. The UAE has instituted a Withholding Tax, applicable to certain income categories paid to Non-Resident Persons, to the extent that the income is not associated with a Permanent Establishment in the UAE.
In addition to the Withholding Tax Credit, the UAE Corporate Tax Law introduces a Foreign Tax Credit to mitigate double taxation.
Foreign Tax Credit pertains to the foreign taxes paid on income from foreign sources not exempted under the UAE Corporate Tax Law. To claim a Foreign Tax Credit, pre-tax foreign income must be incorporated into the Taxable Income of the UAE Resident Person filing their tax return. The Foreign Tax Credit amount cannot surpass the Corporate Tax due on the foreign source income and is non-transferable to other Tax Periods. Application of the Foreign Tax Credit follows the utilization of any available Withholding Tax Credit for the same Tax Period. Taxpayers must maintain proper documentation, such as foreign tax assessments and certificates, to substantiate their claims for Foreign Tax Credits.
Double Taxation Agreements (DTAs)assume a pivotal role in preventing double taxation within the UAE's international tax framework.
The UAE presently boasts over 80 comprehensive tax treaties in force.
When a DTA exists between the UAE and another country, its provisions supersede domestic Corporate Tax Law. Most DTAs signed by the UAE adopt either the exemption or tax credit method, providing relief based on cross-border income nature and treaty-specific terms. In cases where the DTA credit method applies, it supplants the unilateral Foreign Tax Credit permitted under domestic law. Taxpayers receiving income through a DTA partner country must scrutinize the relevant treaty to ascertain the appropriate double taxation relief mechanism.
Withholding Tax Credit
To claim Withholding Tax Credit, non-resident taxpayers must satisfy two main conditions:
Foreign Tax Credit
Several requirements must be fulfilled to utilize the Foreign Tax Credit provision:
In summary, the UAE Corporate Tax Law incorporates crucial provisions for Foreign Tax Credit and Withholding Tax, demanding careful consideration and adherence from businesses operating in the UAE. These provisions strive to establish a streamlined yet sturdy tax framework, alleviating the compliance burden for taxpayers. Despite offering certain exemptions and reliefs, businesses must diligently assess their tax standing to ensure compliance with obligations. Given the intricacies of the law and the potential repercussions for non-compliance, it is prudent for businesses to enlist the assistance of Tax consultant in dubai for guidance. Thus, contact us today and we shall be glad to assist you.