Understanding the Foreign Tax Credit under UAE Corporate Tax

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 under the UAE Corporate Tax Law

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.

• Presently, the Withholding Tax rate in the UAE stands at 0%, signifying no obligation to withhold tax from payments to non-residents.
• Non-Resident Persons subject to UAE Corporate Tax can assert a Withholding Tax Credit, reducing their Corporate Tax Payable by the amount of Withholding Tax deducted in the same Tax Period for income subject to both taxes.
• Should the rate increase, non-residents under UAE Corporate Tax can seek credit for any Withholding Tax amounts withheld from income within the same Tax Period. The credit equals the actual tax withheld, with any surplus credit refunded to the taxpayer after offsetting the Corporate Tax liability.
• Foreign Tax Credit under UAE Corporate Tax

In addition to the Withholding Tax Credit, the UAE Corporate Tax Law introduces a Foreign Tax Credit to mitigate double taxation.

claim a Foreign Tax Credit

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.

Impact of Double Taxation Agreements

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.

Requirements for Credits

Withholding Tax Credit

To claim Withholding Tax Credit, non-resident taxpayers must satisfy two main conditions:

• Be subject to UAE Corporate Tax on income from UAE sources not attributable to a permanent establishment.
• Possess documentation such as withholding tax certificates showing the amount of tax deducted from payments received during the same Tax Period.

Foreign Tax Credit

Several requirements must be fulfilled to utilize the Foreign Tax Credit provision:

• Taxpayer must be a UAE Corporate Tax resident.
• Pre-tax portion of foreign income must be included in the UAE Taxable Income calculation.
• Credit cannot exceed tax due on relevant foreign income in the UAE.
• Records such as foreign tax assessments substantiating taxes paid abroad must be maintained.
• Any DTA relief method takes precedence over the unilateral credit.

 

Consult Top Tax Consultants in UAE

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.