A taxable person, including a qualifying free zone person, receiving or deriving income from sources outside the UAE must know about the applicability of corporate tax on foreign source income.
The Federal Tax Authority (FTA) has recently released guidance (CTGFSI1) on the taxation of foreign source income under the UAE corporate tax regime. The guide provides you with more clarity on relevant areas such as the definition of foreign-sourced income, types of taxable persons subject to the UAE corporate tax law, the circumstances under which foreign-sourced income is taxable, determining Taxable Income etc.
Consult with corporate tax consultants in Dubai to accurately interpret the FTA Guidance. Let us dive into the details stated in the new UAE corporate tax guide:
What is foreign source income?
The UAE corporate tax law doesn’t expressly state a definition for foreign source income. However, the FTA Guide says the foreign source income can be any income that originates from a foreign jurisdiction and is earned or received by a Person in the UAE. It also provides a non-exhaustive list of examples of foreign source income:
- Dividends and other profit distributions from juridical Non-Resident Persons
- Income from the disposal of shares or capital of a juridical Non-Resident Persons
- Interest income from a loan or deposit outside the UAE
- Income from the sale of goods or provision of services outside the UAE
- Income from movable or immovable property located outside the UAE
- Royalties for use of intellectual or intangible property outside the UAE
- Profits, or losses, of a Foreign Permanent Establishment of a Resident Person
Is income from a Free Zone Person a foreign source of income?
The UAE corporate tax regime does not treat the income derived from a Free Zone Person as foreign source income.
A Free Zone Person is a juridical person incorporated, established or otherwise registered in a Free Zone, including a branch of a Non-Resident Person registered in a Free Zone. Since a Free Zone is an area within the UAE territory, income derived from a Free Zone Person will either be:
- Income derived from a Resident Person, or
- Income derived from a Non-Resident Person that is attributable to a Permanent Establishment of that Non-Resident Person in the UAE.
Income Derived from Qualifying Free Zone Persons
A Qualifying Free Zone Person can derive income or profits from a Domestic or Foreign Permanent Establishment.
Income or profits from a Domestic Permanent Establishment, which is a Permanent Establishment located in the mainland of the UAE, is not considered foreign source income.
Income or profits derived by a Qualifying Free Zone Person from its Foreign Permanent Establishment, which is a Permanent Establishment located outside the UAE, is a foreign source of income.
Who is subject to tax on foreign source income?
The residence status and legal status of the person determine whether the foreign source income is subject to Corporate Tax in the hands of a Taxable Person, and the extent to which such income is subject to Corporate Tax in the UAE.
You have to note that a taxable Person can be either a Resident Person or a Non-Resident Person. A Resident Person or a Non-Resident Person can be either a juridical person or a natural person. Corporate tax advisers in Dubai can provide you with further insights in this regard.
How is foreign source income taxed in UAE?
Here, you have to refer to Article 20 of the UAE Corporate Tax Law which states the general rules for determining the Taxable Income of a Taxable Person. The general rules for determining taxable income apply equally to foreign source income earned by a taxable person as well.
Foreign Tax Credits
Resident Persons or Non-Resident Persons with a Permanent Establishment in the UAE are subject to tax on foreign source income. To mitigate or prevent potential double taxation of foreign source income, the Corporate Tax Law exempts certain types of foreign source income through the Participation Exemption and the Foreign Permanent Establishment exemption.
However, to the extent foreign source income is nevertheless 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 Foreign Tax Credit allows a Taxable Person to deduct taxes paid under the tax laws of a foreign jurisdiction from the UAE Corporate Tax due on the same income.
Consult with the Top Corporate Tax Consultants in Dubai, UAE
The FTA’s Guide offers valuable insights into the taxability of foreign source income under the UAE corporate tax regime. However, seeking professional assistance is key to properly complying with the UAE corporate tax law. Tax Gian, a brand of Jitendra Tax Consultants (JTC), can help you navigate all issues related to corporate tax.
We are one of the top corporate tax consultants in Dubai with a team of highly qualified tax experts at your service. Tax Gian can guide businesses on all aspects of the UAE corporate tax law including tax registration, formation of tax groups, transfer pricing etc. Call us today to avail yourself of comprehensive corporate tax consulting services in Dubai, UAE.