A common query we receive among businesses within UAE having presence outside the UAE is “With the implementation of UAE corporate tax law, do we have to pay taxes on our foreign income twice? i.e. once in the country where we earned the income and then again in UAE? Is the situation worsened if we do not have a tax treaty with the counterpart country – in such cases does the concept of tax credit does not hold good?
The answer to these questions is a ‘No’. Corporate tax payable may be reduced by any available foreign tax credit (FTC) for the same period. Further, it is very well a part of the local law and can be claimed in the absence of a tax treaty as well. However, it is not as simple and straightforward as it sounds. A business cannot just reduce the portion of entire foreign taxes paid while discharging tax liabilities in the UAE. There are formulas prescribed for calculating the foreign tax which can be claimed as well as mechanisms of how the same can be claimed.
The UAE corporate tax law provides for a formula to calculate the FTC. Only the amount which is calculated using the formula prescribed will be allowed as a FTC. The FTC granted cannot exceed the amount of corporate tax due in the UAE on the foreign source income. Essentially, you can claim a credit for the lower of the actual foreign tax paid on the income, or the UAE corporate tax due on that foreign income i.e. in any instance the amount of foreign taxes paid would not exceed nine per cent payable on the foreign sourced income corporate tax due on foreign source income is calculated on a weighted basis by dividing the relevant 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 FTC.
Moreover, the credit is calculated on an income-by-income basis, preventing the offsetting of excess credit against other foreign source income. For instance, any resident of UAE liable to pay taxes at the rate of nine per cent in UAE, has paid tax at the rate of 20 per cent in country A and tax at the rate of 2 per cent in country B (assuming both the income are also taxable in UAE), they cannot offset the excess 11 per cent (20-9) paid in country A against the shortfall of 7 per cent (9-2) in country B.
Notably, the foreign tax credit is not available in respect of exempt income, such as foreign dividends under the participation exemption, and when UAE Taxable Person has loss position under UAE Corporate Tax Law. Another critical point to consider is that any unutilised FTC cannot be carried forward to future tax periods or back to previous ones. It’s a use-it-or-lose-it scenario. Unused FTCs are forfeited, and there’s no provision for refunds or deductions for unutilised credits. Additionally, the FTC can only be applied after accounting for any withholding tax credits. This layered approach ensures that all credits are applied systematically to maximise the tax relief available to businesses.
The complexities of foreign tax credits under UAE corporate tax law may seem confusing, but understanding these key principles can help reduce the impact of double taxation. By adhering to the formula and recognising the income-by-income basis, businesses can effectively manage their tax obligations and leverage the FTC to its fullest potential. As always, staying informed and consulting with tax professionals can further smooth out the complexities of international tax management.
The writer is partner – MICS International