Tax credits

In some cases, Taxable Persons may be entitled to credits which they can use to offset against their Corporate Tax liability. These credits arise if they have paid tax on the same income already, either in the UAE or in a foreign country.

Requirements for the Withholding Tax Credit

Withholding taxes are a common form of collecting income tax on cross-border transactions. Under these regimes, tax is deducted at the source when certain payments are made to, for example, overseas Persons. Sometimes withholding taxes are also levied on domestic transactions. Typically, the payor of the income is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the tax administration.

Withholding taxes usually apply to certain types of activities by foreign parties, or activities that do not typically require a Person to register for tax, for example, dividends and interest payments in certain countries.

As part of the introduction of Corporate Tax, the UAE has introduced a Withholding Tax that applies to certain categories of income paid to a Non-Resident Person to the extent the income is not attributed to a Permanent Establishment in the UAE. 352 However, the rate of this tax is 0% meaning that, currently, no tax will need to be withheld.

If the rate is changed in future, a Non-Resident Person who becomes subject to Corporate Tax would be able to reduce their Corporate Tax Payable by any Withholding Tax that has already been deducted in the same Tax Period.353 This is known as Withholding Tax Credit. Any excess Withholding Tax Credit will be refunded.354

Foreign Tax Credit

Corporate Tax Payable may be reduced by any available Foreign Tax Credit for the same Tax Period.355 Foreign Tax Credit is the amount of foreign taxes paid on foreign sourced income which has not been exempted. This relief is unilateral and does not rely on a Double Taxation Agreement or any other reciprocal action from the foreign taxing jurisdiction.

In order to apply Foreign Tax Credit, the pre-tax foreign income must be included in the Taxable Income of the UAE Resident Person. The amount of Corporate Tax due should be calculated based on the overall Taxable Income, and Foreign Tax Credit can then be deducted from the amount of Corporate Tax Payable.

The amount of Foreign Tax Credit cannot exceed the amount of Corporate Tax due on the foreign source income,356 and a Foreign Tax Credit cannot be carried forward or back.357 No refund will be given for unutilised Foreign Tax Credit. In addition, Foreign Tax Credit can only be applied after any Withholding Tax Credit has been applied.358

Taxable Persons must maintain all necessary records for the purposes of claiming Foreign Tax Credit.359 This could include, for example, Withholding Tax certificates, statements of payments or assessments by the relevant foreign tax authority.

Application of Foreign Tax Credit

C LLC is a UAE resident company that does business through Permanent Establishments in a number of foreign countries.

During the Tax Period, C LLC paid AED 300,000 in foreign taxes on the AED 1,500,000 of income it earned in foreign countries. C LLC has not made an election to exempt the income from its Foreign Permanent Establishments.

At the end of the Tax Period, C LLC’s Corporate Tax liability was AED 1,000,000. C LLC can reduce its Corporate Tax liability using available Foreign Tax Credit. However, the amount of Foreign Tax Credit is limited to the amount of Corporate Tax that would have been paid in the UAE on the foreign income (AED 1,500,000 x 9% = AED

135,000). This is less than the amount of tax C LLC paid in the foreign countries. The surplus amount (AED 300,000 – AED 135,000 = AED 165,000) cannot be carried forward or back and will not be refunded.

The amount of Corporate Tax due is therefore AED 1,000,000 – AED 135,000 = AED 865,000.

Impact of Double Taxation Agreements on Foreign Tax credits

Double Taxation Agreements between the UAE and other countries will generally provide for methods for the elimination of double taxation. In the event that a Resident Person derives foreign source income from a country with which the UAE has an in- force Double Taxation Agreement, the agreement with that country will generally provide either for the exemption method, the credit method or the application of both methods depending on the nature of the income and the specific provisions of the Double Taxation Agreement.

The provisions of Double Taxation Agreements take precedence over the Corporate Tax Law if the terms of the Double Taxation Agreement are inconsistent with the Corporate Tax Law.360 This treatment is internationally common and accepted.


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