UAE is becoming a global hub for all business and speculation. A major concern for foreign businesses was double taxation on their foreign income with the introduction of corporate tax in June 2023. To address double taxation, the UAE offers a foreign tax credit mechanism. FTA has issued a detailed guide on the Foreign Tax Credit relief. In this article, we will see all the details of claiming foreign tax credits in the UAE and other important points that will provide you with clarity.
The following are qualified to claim foreign tax credits;
UAE registered and working companies that pay corporate tax rate on their global income are qualified to claim foreign tax credits. It especially applies to companies with a prominent and Permanent formation in the UAE. For example, a headquarters, branch, or registered office.
A resident is also qualified to claim foreign tax credits for income produced from business conducted in the UAE. The noteworthy thing is the total annual turnover must exceed AED 1 million in their Gregorian calendar year.
Non-resident entity with a prominent and Permanent Establishment in the UAE Is Fit to Claim Foreign Tax Credits.
There are some cases where Foreign Tax Credits might not be available such as;
The foreign tax credit will not apply to taxes that are not measured as true income taxes. It includes;
Taxes imposed for getting an explicit benefit from a foreign government. These benefits usually are property taxes or registration fees.
Taxes based on assumptions of income rather than actual profits earned.
If your foreign income is exempted from corporate tax UAE, a Foreign Tax Credit will not be available.
The UAE needs specific documentation.it helps to demonstrate your eligibility for foreign tax credits. Failure to deliver detailed documentation could delay the time to claim the Foreign Tax credit.
UAE implements anti-avoidance rules. It helps to prevent the misappropriation of foreign tax credits. If your tax strategy looks excessively aggressive in shifting profits, you will be denied the credit.
Foreign authority imposes tax is also similar to the Corporate Tax UAE. It can be eligible as a Foreign Tax Credit in the UAE. But it provides some obligatory conditions such as;
The tax must be levied by a foreign government. And it should be payable either at the federal or state level.
The payment of this foreign tax must be obligatory. It is compulsory according to the tax rules of the particular foreign jurisdiction.
The tax must be based on profit or either net income. They are still measured for the persistence of Foreign Tax Credits even though foreign withholding taxes are not characteristically calculated on a net basis.
In jurisdictions where taxes are mostly based on a taxpayer's income. So, it is very hard to disperse income-based and non-income-based tax components. Such taxes can be considered parallel in scope to Corporate Tax UAE.
The steps to calculate Foreign Tax Credits are;
At first, precisely examine the taxes you have paid overseas. It ensures they meet the requirements as income taxes according to UAE standards.
Then, analyze the full amount of foreign income tax you have paid on your overseas earnings.
Insulate the share of your taxable income. This portion originates from your foreign procedures.
After that, the UAE imposes a limitation on the amount of foreign tax credit that you can claim. It may be a particular ratio of your UAE taxable income.
The lesser of the two amounts you calculated will signify your determined claimable Foreign Tax Credits.
To claim foreign tax credits after calculation, the following documents are mandatory for the procedure;
Proof of UAE Tax Residency
Exchange rates used
Financial year
Details of foreign tax
Type of tax
Documentation of Foreign Income Taxes Paid such as receipts and tax returns
Details of Overseas Income such as financial statements and invoices
Double Taxation Agreements are also mandatory but if applicable
Documentation of Audit Trail[1]
The UAE uses an amazing approach to Foreign Tax Credits that provides a favorable atmosphere for foreign investment. It requires several factors such as a strong understanding of the protocols, eligibility criteria, calculation procedures, and documents needed. Farahat & Co. offers an open and easy guidance about foreign tax credits. They help to ensure compliance and make the best use of tax benefits. Farahat & Co is one of the best trusted partners in the most difficult land of corporate tax UAE.
The tax landscape in the UAE is based on the following 3 steps;
Companies enjoy exemption from corporate tax with yearly taxable income under AED 375,000.
Companies are subject to a 9% corporate tax rate that surpasses the AED 375,000 threshold.
Large multinational entities may face another tax rate with an international revenue surpassing AED 3.5 billion.
The UAE does not enforce income tax on individual entities. It charges 5% VAT (value added Tax) on every procurement of goods and services. It is imposed at each stage of the supply chain and to the end consumer.
