State Sourced Income received by Non-Resident Persons from sources in the UAE as per Article 13 and 12(3)(b) of corporate tax UAE. Non-Resident Persons are individuals or entities that are not classified as Resident Persons for taxation purposes.
How is State Sourced Income Classified?
State Sourced Income can be classified into three main categories, depending on the source and the recipient of the income:
- Non-Resident Persons Income from Resident Persons: The payer of the income must be a Resident Person who is liable for Corporate Tax under Article 11(3) of the Corporate Law. Such Resident Persons are usually eligible for deductions for expenses incurred in earning Taxable Income unless the income is related to a business operated outside the UAE through a Foreign Permanent Establishment.
- Income received by Non-Resident Persons from other Non-Resident Persons: This category covers any income that is paid by a Non-Resident Person to another Non-Resident Person, as long as the income is related to a business or activity conducted in the UAE through a Permanent Establishment. A Permanent Establishment is defined in Article 14 of the Corporate Law as a fixed place of business in the UAE or a dependent agent who acts on behalf of a Non-Resident Person in the UAE. Similar to the previous category, deductions for expenses may be applicable, subject to the provisions of Article 28 of the Corporate Law.
- Income derived from activities, assets, capital, rights, or services within the UAE: This category covers any income that is generated from the use or exploitation of activities, assets, capital, rights, or services that are located or performed in the UAE, regardless of the residence of the payer or the recipient. The source of income, for Corporate Tax purposes, depends on the location and utilization of the income-generating activity or asset, not on the contractual or legal relationship between the parties.
Income from Selling Goods
The source of income derived from the sale of goods hinges on the location where ownership of the goods transfers upon sale. This criterion serves as the primary determinant for establishing the source of income in such transactions. Therefore, if the ownership of the goods transfers within the UAE, the income is sourced to the UAE. Conversely, if the ownership of the goods transfers outside the UAE, the income is sourced outside the UAE.
Income from Providing Services
Income generated from service provision is attributed to the UAE if the services are rendered within the country’s borders or if the ultimate recipient of the services economically benefits from them within the UAE. For example, if a UAE-based company provides consulting services to a foreign client and the services are performed in the UAE, the income is sourced to the UAE. However, if the same company provides the same services to the same client, but the services are performed outside the UAE, the income is sourced outside the UAE.
Income from Executing Contracts
For income stemming from contract execution, the UAE serves as the source if the contractual obligations are fulfilled within its territory or if the ultimate recipient or beneficiary of the contract is situated within the UAE. For instance, if a UAE-based company executes a construction contract in the UAE, the income is sourced to the UAE. But if the same company executes the same contract outside the UAE, the income is sourced outside the UAE.
Income from Tangible Property
Income from the sale or utilization of tangible property is also a state source subject to UAE location. This includes revenue generated from property rentals or stakes in such properties, thus categorizing it as State Sourced Income. For example, if a UAE-based company owns and rents out a commercial building in the UAE, the rental income is sourced to the UAE. However, if the same company owns and rents out a similar building outside the UAE, the rental income is sourced outside the UAE.
Income from Capital Rights
In the case of income from selling shares or other capital rights in a juridical person, the UAE is deemed as the source if the said juridical person is incorporated or resident within the UAE for Corporate Tax purposes. This means that if a UAE-based company sells its shares in another UAE-based company, the income is sourced to the UAE. However, if the same company sells its shares in a foreign company, the income is sourced outside the UAE.
Income from Intangible Property
The income derived from intellectual or intangible property, including trademarks and patents is considered the UAE source without consideration of the residence status and location of the receiver or payer under Corporate Tax purposes of the payer and receiver. This implies that if a UAE-based company licenses its trademark to a foreign company, the income is sourced to the UAE. Likewise, if the same company licenses its trademark to another UAE-based company, the income is also sourced to the UAE.
Income from Interest and Insurance Premium: -
If a UAE-based company lends money to a foreign company, and the loan is secured by an asset in the UAE, the interest income is sourced to the UAE and us taxable. However, if the loan is secured by an asset outside the UAE, the interest income is sourced outside the UAE.
What are the Key Provisions that Govern the Taxation of State Sourced Income?
The taxation of State Sourced Income is governed by the following key provisions of the Corporate Law:
- Understanding the Definition and Scope of State Sourced (Article 12(3)(b): - This article establishes the definition and the scope of State Sourced Income, as explained above.
- Imposition of Withholding Tax on State Sourced Income (Article 45): - This article imposes a withholding tax on certain types of State Sourced Income that are paid by Resident Persons to Non-Resident Persons. The withholding tax rate is determined by the Minister of Finance, and it cannot exceed 10% of the gross amount of the income such as commissions, interest, royalties, fees, dividends, and other such payments. The payer of the income is responsible for deducting and remitting the withholding tax to the Federal Tax Authority (FTA) within the prescribed time and manner.
- Obligations of Non-Resident Persons Receiving State Sourced (Article 46): This article requires Non-Resident Persons who receive State Sourced Income to register with the FTA and file Corporate Tax returns unless they are exempted by the Minister of Finance. The Corporate Tax returns must include the details of the State Sourced Income and the withholding tax deducted, if any. The Corporate Tax rate is also determined by the Minister of Finance, and it cannot exceed 20% of the net amount of the State Sourced Income.
- Authority and Enforcement of Corporate Tax on State Sourced Income (Article 47): - This article grants the FTA the power to assess, collect, and enforce the Corporate Tax on State Sourced Income, in accordance with the provisions of the Corporate Law and the Executive Regulations. The FTA may also impose penalties for non-compliance with the Corporate Tax obligations, such as late registration, late filing, late payment, underpayment, or non-payment of the Corporate Tax or the withholding tax.
What are Some Illustrative Examples of State Sourced Income?
To help you understand the concept and the application of State Sourced Income, here are some illustrative examples, subject to any additional conditions and restrictions stipulated by the Minister of Finance:
- Example 1: A UAE company pays dividends to its foreign shareholders. The dividends are State Sourced Income, as they are paid by a Resident Person to Non-Resident Persons. The UAE company must withhold 10% of the gross amount of the dividends and remit it to the FTA. The foreign shareholders must register with the FTA and file Corporate Tax returns, declaring the dividends and the withholding tax. The Corporate Tax liability is calculated by applying 20% to the net amount of the dividends, after deducting the withholding tax.
- Example 2: A foreign company provides consultancy services to a UAE client. The UAE client must withhold 10% of the gross amount of the fees and remit it to the FTA. The foreign company must register with the FTA and file Corporate Tax returns, declaring the fees and the withholding tax. The Corporate Tax liability is calculated by applying 20% to the net amount of the fees, after deducting the withholding tax and the allowable expenses.
- Example 3: A foreign company sells goods to a UAE customer. The goods are delivered from a warehouse in the UAE, which constitutes a Permanent Establishment for the foreign company. The foreign company must register with the FTA and file Corporate Tax returns, declaring the sales proceeds and the allowable expenses. The Corporate Tax liability is calculated by applying 20% to the net amount of the sales proceeds, after deducting the allowable expenses.
- Example 4: A foreign company licenses its trademark to a UAE licensee. The royalties are State Sourced Income, as they are derived from a right that is utilized in the UAE. The UAE licensee must withhold 10% of the gross amount of the royalties and remit it to the FTA. The foreign company must register with the FTA and file Corporate Tax returns, declaring the royalties and the withholding tax. The Corporate Tax liability is calculated by applying 20% to the net amount of the royalties, after deducting the withholding tax.
Conclusion
State Sourced Income covers various types of payments, proceeds, or benefits that originate within or from the UAE, and it is classified into three main categories, depending on the source and the recipient of the income. State Sourced Income is a complex and evolving topic, and it is advisable to seek professional advice from tax consultants UAE before engaging in any transactions that may involve State Sourced Income.