With the implementation of Federal Decree-Law No. 47 of 2022, the UAE introduced its corporate tax framework, marking a significant transition for businesses operating within the region. Effective from June 1, 2023, the law mandates corporate tax on business profits, including income sourced from outside the UAE. Unlock the secrets of the Foreign Tax Credit with us! This guide simplifies the process, offering clear insights and practical tips to help your business navigate and optimize tax obligations under the UAE corporate tax system. But first let’s understand what actually s foreign tax credit?
Understanding Foreign Tax Credit
What is Foreign Tax Credit?
A foreign tax credit allows businesses to offset taxes paid in a foreign jurisdiction against their UAE corporate tax liability. This mechanism ensures that income earned abroad is not taxed twice—once in the foreign country and again in the UAE.
Foreign Tax Credit Meaning
Simply put, the foreign tax credit meaning is the ability to deduct foreign taxes paid on the same income from the tax liability in the UAE. However, the credit is capped at the UAE corporate tax due on that income.
Key Features of UAE Corporate Tax Law
Who is Subject to Tax?
Under the UAE corporate tax regime:
Resident persons (including companies and natural persons conducting business in the UAE) are taxed on their worldwide income, encompassing foreign-sourced income.
Non-resident persons with a permanent establishment (PE) in the UAE are taxed on UAE-sourced income and foreign-source income attributable to the UAE PE.
What is Foreign Source Income?
Foreign source income refers to revenue generated outside the UAE. Examples include:
Dividends from non-resident entities.
Interest income from loans or deposits abroad.
Royalties earned on intellectual property used in foreign jurisdictions.
Income from the sale of goods or services rendered outside the UAE.
Income derived from Free Zone Persons within the UAE is not classified as foreign source income.
Claiming Foreign Tax Credit Relief
Eligibility for Foreign Tax Credit
Businesses and individuals can claim a foreign tax credit relief for taxes paid in foreign jurisdictions, provided:
The foreign income is taxable in the UAE.
Proper documentation supports the foreign tax payments.
Required Documentation
To claim the foreign tax credit, businesses must maintain:
Evidence of foreign tax payments (e.g., tax receipts or withholding certificates).
Foreign tax returns filed, with calculations of taxable income.
Records showing the nature and amount of foreign tax paid.
How to Calculate Foreign Tax Credit
The calculation compares:
The actual amount of foreign tax paid (converted to AED).
The UAE corporate tax due on the same foreign income.
The foreign tax credit is the lower of these two amounts.
Formula for Foreign Tax Credit Calculation
The formula for calculating the Foreign Tax Credit is as follows:
Foreign Tax Credit=min(Foreign Tax Paid,UAE Corporate Tax on Foreign Income)
Where:
Foreign Tax Paid refers
With the implementation of Federal Decree-Law No. 47 of 2022, the UAE introduced its corporate tax framework, marking a significant transition for businesses operating within the region. Effective from June 1, 2023, the law mandates corporate tax on business profits, including income sourced from outside the UAE. Unlock the secrets of the Foreign Tax Credit with us! This guide simplifies the process, offering clear insights and practical tips to help your business navigate and optimize tax obligations under the UAE corporate tax system. But first let’s understand what actually s foreign tax credit?
Understanding Foreign Tax Credit
What is Foreign Tax Credit?
A foreign tax credit allows businesses to offset taxes paid in a foreign jurisdiction against their UAE corporate tax liability. This mechanism ensures that income earned abroad is not taxed twice—once in the foreign country and again in the UAE.
Foreign Tax Credit Meaning
Simply put, the foreign tax credit meaning is the ability to deduct foreign taxes paid on the same income from the tax liability in the UAE. However, the credit is capped at the UAE corporate tax due on that income.
Key Features of UAE Corporate Tax Law
Who is Subject to Tax?
Under the UAE corporate tax regime:
Resident persons (including companies and natural persons conducting business in the UAE) are taxed on their worldwide income, encompassing foreign-sourced income.
Non-resident persons with a permanent establishment (PE) in the UAE are taxed on UAE-sourced income and foreign-source income attributable to the UAE PE.
What is Foreign Source Income?
Foreign source income refers to revenue generated outside the UAE. Examples include:
Dividends from non-resident entities.
Interest income from loans or deposits abroad.
Royalties earned on intellectual property used in foreign jurisdictions.
Income from the sale of goods or services rendered outside the UAE.
Income derived from Free Zone Persons within the UAE is not classified as foreign source income.
Claiming Foreign Tax Credit Relief
Eligibility for Foreign Tax Credit
Businesses and individuals can claim a foreign tax credit relief for taxes paid in foreign jurisdictions, provided:
The foreign income is taxable in the UAE.
Proper documentation supports the foreign tax payments.
Required Documentation
To claim the foreign tax credit, businesses must maintain:
Evidence of foreign tax payments (e.g., tax receipts or withholding certificates).
Foreign tax returns filed, with calculations of taxable income.
Records showing the nature and amount of foreign tax paid.
How to Calculate Foreign Tax Credit
The calculation compares:
The actual amount of foreign tax paid (converted to AED).
The UAE corporate tax due on the same foreign income.
The foreign tax credit is the lower of these two amounts.
Formula for Foreign Tax Credit Calculation
The formula for calculating the Foreign Tax Credit is as follows:
Foreign Tax Credit=min(Foreign Tax Paid,UAE Corporate Tax on Foreign Income)
Where:
Foreign Tax Paid refers to the amount of tax paid to a foreign jurisdiction.
UAE Corporate Tax on Foreign Income refers to the amount of tax that would have been payable on the same foreign income under UAE corporate tax rules.
The Foreign Tax Credit is the lesser of these two amounts.
Example Calculation
Consider Company A, a UAE resident entity with AED 10 million taxable income, of which AED 1 million is earned as interest income from Country X. Country X imposes a withholding tax of AED 50,000 on this income.
Item
Amount (AED)
Total Taxable Income
10,000,000
Corporate Tax Due
866,250
Foreign Tax Credit Eligible
50,000 (actual paid)
Corporate Tax Payable (Net)
816,250
In this case, Company A can claim AED 50,000 as a foreign tax credit, reducing its UAE corporate tax liability.
Limitations of Foreign Tax Credit
Exempt Income: The foreign tax credit does not apply to exempt income, such as dividends or capital gains qualifying under the participation exemption.
Loss Positions: If the taxable person incurs a loss under the UAE corporate tax law, no foreign tax credit can be claimed.
Special Exemptions and Reliefs
Participation Exemption
Dividends and capital gains from a foreign juridical person may be exempt under the participation exemption, provided specific conditions are met.
Foreign Permanent Establishment Exemption
Income and expenses from a foreign permanent establishment can be excluded from taxable income, provided the exemption is elected.
Foreign Income and Free Zones
Free Zone Persons
Income earned by a Free Zone Person is not classified as foreign source income unless derived from a foreign permanent establishment.
Qualifying Free Zone Persons
For Qualifying Free Zone Persons, income from a domestic permanent establishment is treated as UAE-sourced income, while income from a foreign permanent establishment qualifies as foreign source income.
How UAE Law Defines Corporate Tax and Foreign Income
Corporate Tax in UAE
The UAE corporate tax rate is:
0% for taxable income up to AED 375,000.
9% for taxable income above AED 375,000.
Key Benefits of Foreign Tax Credit
Prevents Double Taxation: Ensures income is taxed only once, encouraging international business expansion.
Promotes Compliance: Aligns with global tax principles, supporting businesses in maintaining tax transparency.
Maintain Accurate Records: Ensure all documentation is complete, including foreign tax receipts, calculations, and currency conversions.
Understand Applicable Exemptions: Familiarize yourself with the foreign permanent establishment exemption and participation exemption.
Seek Professional Guidance: Consulting tax experts can help optimize foreign tax credit claims while ensuring compliance.
Key Takeaways for Businesses
Document Everything: Accurate and detailed documentation is essential for claiming the foreign tax credit.
Leverage Exemptions: Utilize exemptions like the participation exemption to minimize taxable income.
Calculate Proactively: Use the provided formula to estimate your foreign tax credit and plan your tax payments effectively.
Why Consult Bestax Chartered Accountants?
Navigating the complexities of foreign tax credit, especially under the newly introduced UAE corporate tax law, can be daunting. Bestax Chartered Accountants offers:
Expert Tax Advisory: Tailored advice to maximize your tax efficiency and minimize liabilities.
Comprehensive Compliance Support: Assistance in maintaining proper records and meeting UAE tax law requirements.
Strategic Tax Planning: Solutions designed to align with your business goals and global operations.
Ensure your business stays compliant while taking full advantage of foreign tax credit relief. Contact Bestaxtoday for a consultation and unlock the full potential of your international operations.
Conclusion
The introduction of the UAE corporate tax law marks a new era for businesses operating in the UAE. Understanding the foreign tax credit is crucial for minimizing tax liabilities and fostering international growth. By leveraging the provisions of the law, such as exemptions and credit calculations, businesses can navigate the tax landscape effectively.
With meticulous planning, accurate documentation, and professional support from Bestax Chartered Accountants, businesses can ensure compliance and optimize their tax strategies under the UAE corporate tax framework. Don’t let double taxation hinder your success—act now to secure your financial future.
Disclaimer:The information provided in this blog is for general informational purposes only. For professional assistance and advice, please contact experts.
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