Summary of Corporate Tax Guide on Foreign Sourced Income
 

Summary of Corporate Tax Guide on Foreign Sourced Income

November 21, 2023by admin0

The UAE Federal Tax Authority (‘FTA’) has released the Corporate Tax Guide on the Taxation of Foreign Source Income. This provides general guidance to taxpayers on the taxation of Foreign Source Income in accordance with the Corporate Tax Law provisions, covering:

  • Definition and examples of Foreign Source Income.
  • Taxable Persons that are subject to tax on Foreign Source Income.
  • Timing of taxation of Foreign Source Income.
  • Determination of the Taxable Income and Exempt Income in respect of Foreign Source Income.
  • Definition of the concept of Foreign Tax Credit and comments on the applicability of such relief.

Some of the key highlights are as follows:

  • Foreign source income, for the purposes of the Corporate Tax Law, is any income which is originated in a foreign jurisdiction and is earned or received by a Person in the UAE.
  • The income which is subject to UAE Corporate Tax in the hands of a Taxable Person depends on that Person’s legal status (i.e. juridical person or natural person), and their residence status (i.e. Resident Person or Non-Resident Person).
  • The residence status together with the legal status determine (a) whether foreign source income is subject to Corporate Tax in the hands of a Taxable Person, and (b)the extent to which such income is subject to Corporate Tax.
  • Therefore, following person shall be subject to UAE Corporate Tax on their foreign source income:
    • A Resident Person which is a juridical person is subject to Corporate Tax on both its domestic and foreign source income. To the extent foreign source income is included in the Taxable Income of a Taxable Person, potential double taxation can be reduced or eliminated by way of a Foreign Tax Credit.
    • A natural Resident Person is subject to tax on any income derived from a Business or Business Activity they conduct in the UAE if the total Turnover from such a Business or Business Activities is above AED 1 million within a Gregorian calendar year.  Thus, any foreign source income which is linked to the Business or Business Activity they conduct in the UAE may be subject to Corporate Tax in the UAE. Accordingly, if a natural person, whether they are a Resident Person or a Non-Resident Person, carries on a wholly separate Business in a foreign jurisdiction, which does not relate to their Business or Business Activity conducted in the UAE, the income from the Business in the foreign jurisdiction will not be taxable in the UAE
    • A Non-Resident Person having a Permanent Establishment in the UAE is typically taxed on the income generated from activities conducted in the UAE. Thus, if it receives any foreign source income attributable to its Permanent Establishment in the UAE, that income may be subject to Corporate Tax.
    • A Non-Resident Person, which is a natural person, can only have foreign source income if they have a Permanent Establishment in the UAE (with a Turnover exceeding AED 1 million within a Gregorian calendar year) and the foreign source income is attributable to its Permanent Establishment in the UAE.
  • The timing of taxation of foreign source income follows the general income attribution rules of the Corporate Tax Law. Accordingly, the timing of taxation of foreign source income depends on whether the Taxable Person has adopted the Cash Basis or Accrual Basis of Accounting.
  • While determining Taxable income, a Taxable person can offset the Tax losses of a foreign sources against income from UAE sources of income.
  • If Tax Losses incurred in a Foreign Permanent Establishment have been previously offset against other profits (for example, from the head office), an election under Article 24 of the Corporate Tax Law is not permitted until that Tax Loss is fully offset by the Taxable Income from that Foreign Permanent Establishment in a subsequent Tax Period or Tax Periods.
  • A Foreign Tax Credit is available for any foreign tax that is of a similar character to Corporate Tax. The following conditions should be all satisfied for a foreign tax to be considered of similar character to Corporate Tax:
    • The foreign tax is imposed by and payable to the government (federal or state government) of a foreign jurisdiction.
    • Payment of the foreign tax is compulsory and enforceable by tax laws in that foreign jurisdiction.
    • The foreign tax is imposed on profit or net income (i.e. income less deductions).Foreign withholding tax is deemed to meet this requirement
  • Amounts paid to a foreign government as interest, fines, penalties, or any similar obligation are not taxes imposed on income, but instead are levied due to defaults such as late payment of tax. Hence, such amounts paid in a foreign jurisdiction are not similar in essence to Corporate Tax and do not qualify for Foreign Tax Credit.
  • While discharging Tax Liability, a Taxable person who has claimed Foreign Tax credit, but that is subsequently refunded to a taxable person in the foreign jurisdiction resulting into reduction of Foreign Tax Credit available to the Taxable person and accordingly Taxable person need to pay additional Tax liability.
    • Where the additional tax liability results in an increase in CT liability in excess of AED 10,000, the taxable person must submit a Voluntary Disclosure to the FTA.
    • If the increase in Corporate Tax Payable is AED 10,000 or less, the Taxable Person must correct the Foreign Tax Credit claim in the earlier of the following:
      • The Tax Return that has become due for submission for a previous Tax Period; or
      • The Tax Return for the Tax Period in which foreign tax is refunded
  • Conversely, if the foreign tax paid increases with the result that a higher Foreign Tax Credit could be claimed, a Taxable Person may submit a Voluntary Disclosure, along with an application for a Corporate Tax refund. The FTA will then assess the impact of the higher Foreign Tax Credit on the Taxable Person’s Corporate Tax position.
  • The amount of foreign tax credit to be claimed shall be lower of the following:
    • The actual amount of tax paid on foreign source income in the foreign jurisdiction and
    • The Corporate Tax due on foreign source income is to determined on weighted average basis using the following formula:
    • Corporate Tax due on relevant foreign source income = X x Y
    •                                                                                                       Z
      • X = Corporate Tax due on total Taxable Income of the Taxable Person before any Foreign Tax Credit
      • Y = Relevant foreign source income
      • Z = Total Taxable Income of the Taxable Person.
  • Any unutilised Foreign Tax Credit cannot be carried forward to future Tax Periods or carried back to earlier Tax Periods. Thus, unutilised Foreign Tax Credit will be forfeited. Further, a deduction from taxable profits for the unutilised Foreign Tax Credit is not possible.
  • Foreign Tax Credit is to be calculated on an income-by-income basis. Thus, where a Taxable Person has multiple sources of foreign income, the excess Foreign Tax Credit of one foreign source income cannot be set off against the Corporate Tax due on another foreign source income.
  • There may be a mismatch of relevant Tax Periods between the UAE and the foreign jurisdiction. To address any timing mismatch issues, a symmetrical approach is applied, where foreign tax paid follows the corresponding foreign source income on which such tax is paid. Accordingly, credit for foreign tax paid will be allowed in the Tax Period in which the foreign source income forms part of Taxable Income under the Corporate Tax Law.
  • A Foreign Tax Credit under Article 47 of the Corporate Tax Law is allowed even if foreign tax is paid in a jurisdiction with which the UAE does not have a Double Taxation Agreement

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Onboard the UAE’s one of most trusted advisory firm offering various tailored services to support all upcoming & existing businesses across the UAE.
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