Foreign Tax Credits in UAE
One of the most frequent questions we get from UAE-based companies operating abroad is, "Will we have to pay taxes on our foreign income twice now that the UAE corporate tax law is in effect?
A resident person in the UAE or non-resident person with a permanent establishment in the UAE is subject to foreign-sourced income. Any available foreign tax credit (FTC) for the same period may be applied towards reducing the corporate tax payable. Additionally, it is a valid claim under Dubai tax law in United Arab Emirates. However, when paying its tax obligations in the United Arab Emirates, a taxable person cannot simply deduct the portion of all overseas taxes paid. The foreign tax that can be claimed is calculated using defined formulae (through participation exemptions and foreign permanent establishment exemptions), and there are also procedures for filing the claim.
There is a formula provided in the UAE corporation tax law to determine the Foreign Tax Credit. Only the amount determined by applying the specified formula is allowed as Foreign Tax Credit. The allowed amount of the FTC cannot exceed the amount of UAE Corporate Tax due on the relevant foreign income. You can claim a credit for the lower of the actual foreign tax paid on the foreign source income, or the amount of the UAE corporate tax due on that foreign source income. Corporate tax due on foreign source income is calculated by dividing the foreign source income with total taxable income of the taxable person and multiplying it with the corporate tax due on total taxable income before any Foreign Tax Credit.
Under the UAE Dubai Corporate Tax Law, a UAE Taxable Person who has a loss is not eligible for the foreign tax credit. Examples of such exempt income include foreign dividends paid under the participation exemption. The fact that any unused FTC cannot be carried over to subsequent tax months or retroactively applied to prior tax periods is another important consideration.
Foreign Tax Credit is not available in respect of Exempt Income, Small Business Relief, Natural person’s Turnover being below AED 1 million and where foreign source income is Qualifying Income of a Qualifying Free Zone Person, i.e. subject to 0% Corporate Tax. Also, where a Taxable Person is making a loss and no Corporate Tax Payable. In such a case, if taxable income includes foreign source income and tax has been paid in the foreign jurisdiction, no Foreign Tax Credit is available due to no Corporate Tax Payable.
Although the intricacies of foreign tax credits under UAE corporate tax law may appear perplexing, being aware of these fundamental can lessen the effects of double taxation. Businesses can maximize their use of the FTC and efficiently manage their tax responsibilities by following the formula and acknowledging the income-by-income basis.
As usual, the difficulties of managing international taxes can be further eased by remaining knowledgeable and seeking advice from our FTC advisory, Chrysalis offers FTC advice to assist in maximizing the use of foreign tax credits by the UAE government. Our tax specialists assist in maximizing tax credits to reduce your total tax responsibility.
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