The United Arab Emirates (UAE) introduced a corporate tax regime effective from June 1, 2023. The Federal Tax Authority has released a new . This guide is particularly on Taxation of Foreign Source Income (FSI). This guide provides a good overview of the taxation of foreign source income by UAE resident companies.
This 52-page document includes detailed guidance on which foreign income is taxable. Also, who is taxable and how to calculate the taxable income. Most importantly, it covers the points about how to apply any reliefs and exemptions. Moreover, you will know how to apply for tax credits, etc.
Definition of Foreign Source Income
Foreign source income is income that is earned from sources outside of a country’s taxing jurisdiction. For UAE corporate tax purposes, Foreign Source Income is income derived from sources outside the UAE. This includes income from different sources as follows:
- The interests, dividends, and royalties received from non-UAE resident entities.
- Income from movable or immovable property located outside the UAE is also a foreign source of income.
- Interest income from a deposit or loan outside the UAE.
- Business profits gained from activities carried out outside the UAE.
- Income from the disposal of capital or shares of a juridical Non-Resident Persons.
Key highlights
Foreign source income is taxable for the following taxable persons:
- Tax resident jurisdiction person, which is part of worldwide taxable income.
- Tax non-resident juridical person is taxable. It is only taxable if there is a permanent establishment in UAE and also the foreign source income is attributable to the PE.
- Tax resident natural person is taxable only if FSI is related to taxable business activities in UAE. Also, provided the total turnover exceeds AED 1 million in the calendar year.
- Tax non-resident natural persons are taxable only if they have a permanent establishment in the UAE. Also, FSI is attributable to PE, provided the overall turnover exceeds AED 1 million in the calendar year.
Taxation of foreign source income
UAE resident companies are generally subject to corporate tax on their global income. Also, the foreign source income is included in it. Let’s discuss the few exemptions that can reduce or eliminate the tax liability on foreign source income.
Exemptions
The following categories of Foreign Source Income are exempt from corporate tax in the UAE:
Dividends
Dividends received from Qualifying free zone persons that are derived from qualifying income.
Interest
Interest on deposits or loans with non-UAE resident banks.
Royalties
Royalties from the use of intellectual property rights by non-resident entities. These royalties are trademarks, patents, copyrights etc.
Foreign Tax credits
UAE resident companies can claim a credit against their UAE corporate tax liability for foreign tax paid on FSI. This is also known as the foreign tax credit mechanism. The FTC helps to prevent double taxation of income. Moreover, this income has already been taxed in another jurisdiction.
The amount of FTC that can be claimed is limited to the lower of:
- The UAE corporate tax liability on FSI
- The foreign taxes paid on FSI
Deductions
UAE resident companies can deduct some expenses incurred to earn foreign source income. These deductions are as follows:
Expenses incurred directly to earn foreign source income. Examples are travel expenses, marketing expenses, and employees’ salaries working on foreign projects.
Foreign taxes paid on FSI can be deducted as an expense even if not claimed as a foreign source of income.
Taxation of foreign-sourced dividends
Dividends received from non-UAE resident entities are generally subject to corporate tax in the UAE. There are two exceptions for you to know:
Dividends from qualifying free zone persons
- Dividends received from a QFZP that are derived from QI are exempt from corporate tax in the UAE.
- Foreign participation exemption
- UAE resident companies can claim an exemption on dividends received from foreign subsidiaries that meet certain criteria. The foreign partnership exemption is designed to encourage UAE companies to invest internationally.
Taxation of foreign-sourced royalties
Royalties income from non-UAE residents is generally subject to corporate tax in UAE. However, there is no exemption for royalty income.
Taxation of foreign-sourced interest
Interest income from non-UAE resident entities is subject to corporate tax in the UAE. However, there is an exemption for interest on deposits or loans with non-UAE resident banks.
Taxation of foreign-sourced capital gains
Capital gains from the sale of assets located outside the UAE. These are generally subject to corporate tax in the UAE. However, there may be exemptions or deductions available depending on the particular circumstances.
Conclusion
The taxation of FSI in the UAE is a complex area of law. Companies operating in the UAE should consult the best accounting firms in UAE. Businesses can understand better about the tax obligations this way. All businesses in the UAE must ensure compliance with UAE corporate tax.
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FAQ’s
What is foreign source income under UAE corporate tax law?
Foreign source income refers to income derived from sources outside the UAE. This income comes from activities such as:
- Rental income from property located outside the UAE.
- Dividing, royalties, and interest received from non-UAE resident entities.
- Business profits from activities carried out outside the UAE.
- Capital gains from the sale of assets located outside the UAE.
- Rental income from property located outside the UAE.
Are UAE resident companies generally subject to corporate tax on their foreign source income?
Yes, UAE resident companies are generally subject to corporate tax on their global income and FSI also. However, there are certain exemptions and deductions available that can reduce or eliminate the tax liability on FSI.
What are some of the exemptions available for FSI under corporate tax law?
The following categories of Foreign Source Income are exempt from corporate tax in the UAE:
- Dividends
Dividends received from qualifying free zone persons that are derived from qualifying income.
- Interest
Interest on deposits or loans with non-UAE resident banks. - Royalties
Royalties from the use of intellectual property rights by non-resident entities. These royalties are trademarks, patents, copyrights, etc.