How can we claim Foreign Tax Credit in UAE?

Suhail Kolakkadan

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    Businesses operating in the UAE will be liable to UAE CT on all their income, including overseas income that could have previously been subject to a tax comparable to CT by another nation. Therefore, there will be double taxation in cases when the taxpayer resides in one nation but receives revenue from any other enterprise located in a different country. The expense of conducting business internationally would become unaffordable and impede the progress of development if the company paid taxes on both levels.

    Double Taxation Avoidance Agreement (DTAA) lays down the allocation rules for taxation of the income by the source country and the residence country. Currently, ministry is working on expanding its Double Taxation Agreements and Bilateral Investments Treaties (BIT) networks, where it’s concluded 193 DTAs and BITs.

    Avoidance of Double Taxation Agreements benefits residents as well as public and private businesses operating in the UAE, including investment enterprises, air transport companies, and others. The UAE signed 137 DTAs with most of its trading partners in order to further its development objectives.

    The DTAA’s are intended to:

    • Boost the UAE’s development objectives and broaden its national revenue streams.
    • Addressing fiscal evasion, extra taxes, indirect taxes, and double taxing
    • Get rid of obstacles to international commerce and investment activities
    • Broaden the sources of national revenue, boost the amount of investment inflows, provide full immunity to taxpayers from double taxation, whether direct or indirect, prevent impeding free trade and investment, and advance performance targets.
    • Examine the taxation difficulties, the worldwide developments in the financial and economic sectors, the new financial instruments, and the transfer pricing processes.
    • Facilitate the mobility of wealth and the trade of products and services.

    Concept of Double Taxation

    Double taxation means taxing the same income twice in the hands of the taxpayer. A particular income may be taxed in UAE based on its residents and the same may be taxed in the same hands based on source country as per their domestic laws of that country.

    Juridical Double Taxation

    Tax is imposed on the by two or more countries as per their domestic laws for the same income which he had earned, it will lead to double taxation.

    Economic Double Taxation

    This happens when the same transactions or items of income are taxed in two or more states but in the hands of different person.

    Type of Relief from Double Taxation

    Bilateral Relief

    By jointly determining the foundation for which the relief is to be awarded, two countries might come to an agreement to offer relief from double taxation.

    Unilateral Relief

    This method provides for double taxation relief unilaterally by a country to its resident for tax paid in the other country, even where no DTAA has been entered into with that country.

    Foreign branch profit exemption

    As per the UAE CT Public Consultation Document, UAE resident persons will be taxable in the UAE on their worldwide income. But, certain foreign-earned income, such as that from qualified foreign shareholdings and foreign subsidiaries, will be free from CT.

    UAE companies can either:

    All overseas branches of the UAE firm would be subject to the election to claim a branch profit exemption, which would be final. When a foreign branch is not liable to a high enough level of tax in the foreign jurisdiction where it is situated, an exemption for foreign branch profits could not be applicable.

    Foreign Tax Credit

    UAE business entities have operations across the various jurisdictions through branches or subsidiaries. A foreign branch would typically constitute a PE in the foreign country and be subject to CT (or an equivalent tax) on its profits in that foreign country and have an obligation to pay corporate tax in the foreign jurisdiction.

    The UAE CT regime will permit a credit for the tax paid in a foreign jurisdiction against the UAE CT duty on the foreign generated income that has not been otherwise excluded in order to prevent double taxation. “Foreign Tax Credit” is the term referring to it.

    The lowest of the following will constitute the maximum Foreign Tax Credit:

    The FTA will not repay any unused foreign tax credits, nor will they be allowed to be carried forward or return to previous tax years.

    Methods of Relief from Double Taxation

    Exemption Method

    A particular income is taxed only one of the two countries

    Tax Credit Method

    Income taxable in both the countries in accordance with the respective laws read with DTA Agreement. The country of residence of the taxpayer, however, allows him to credit the tax charged in the country of source

    In the absence of clear guidelines on claiming the credit mechanism, there will be lots of uncertainty on determination of value of credit eligibility. So, we hope that a detailed guideline for claiming the tax credit is expected to be provided as a part of UAE Corporate Tax law. Especially, UAE as an international business hub and resident companies have business across the globe Foreign Tax Credit (FTC) is more critical element and important factor in arriving the group tax rate.

    Disclaimer

    This document is prepared based on public consultation document issued by Ministry of Finance (MoF). The information contained herein is of a general nature and is not intended to address the circumstances of any individual or entity. No one should act on such information without appropriate professional advice after a thorough examination of the situation.

     

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