The latest release from the Federal Tax Authority (FTA) – the Corporate Tax (CT) Guide on Taxation of Foreign Source Income (FSI) – marks a significant development for businesses and individuals with cross-border financial activities. We will explore critical aspects of this new guide, offering insights into who is taxable, the nature of taxable foreign income, calculation methods, exemptions, reliefs, and the application of tax credits.
Who is Taxable?
The CT Guide outlines specific criteria for the taxation of FSI:
- Tax Resident Juridical Persons: These entities are subject to CT on their worldwide income, including FSI.
- Tax Non-resident Juridical Persons: These are taxable only if they have a Permanent Establishment (PE) in the UAE and the FSI is attributable to this PE.
- Tax Resident Natural Persons: Taxable only if the FSI is linked to taxable business activities in the UAE, with a turnover exceeding AED 1 million in the calendar year.
- Tax Non-resident Natural Persons: Similar to juridical persons, they are taxable if they have a PE in the UAE, and the FSI is attributable to this PE, with the same turnover threshold.
Important Considerations
The CT Law provides exemptions to mitigate double taxation, such as the Participation Exemption or Foreign PE Exemption. However, if FSI remains taxable, standard rules for determining taxable income apply. This includes the consideration of both domestic and foreign sources in calculating the taxable income, thus allowing foreign tax losses to offset income from UAE sources.
Foreign Tax Credit (FTC)
A key aspect of the CT Guide is the introduction of FTC, which prevents double taxation by allowing the deduction of taxes paid in a foreign jurisdiction from the UAE CT liability. However, FTC is subject to the following conditions:
- The foreign tax must be similar to the UAE CT.
- The tax must be compulsory and paid to the government.
- It should be levied on profit or net income.
The amount of FTC is limited to the lower of the actual tax paid abroad or the CT due on the net FSI. Notably, FTC is not available for UAE CT exempt income or in case of a tax loss, and there is no provision for carrying forward unutilised FTC.
Income-by-Income Approach
The Guide introduces a crucial approach where excess FTC from one FSI cannot be used to offset CT on another FSI for entities with multiple income streams. This approach necessitates careful calculation and segregation of income and tax credits.
Symmetrical Approach to Timing Mismatches
The Guide advocates a symmetrical approach to address timing differences between the FSI accrual and the foreign tax payment. FTC is allowed in the tax period when the FSI is included in the taxable income.
How TME Services can support your business
The FTA’s new guide on the taxation of FSI is a comprehensive framework that requires careful analysis and application by taxpayers deriving FSI. With the UAE CT legislation continually evolving, it’s essential for taxpayers to stay informed and adapt for optimal tax efficiency and compliance.
TME Services is a team of 45 professionals in legal-, tax-, accounting and compliance with over 18 years of experience. We advised a significant number of SMEs in the context of the implementation of the tax framework in the UAE and KSA over the last decade to make sure that our clients are well-oriented in the new and fast-evolving tax landscape and to reduce the legal liability of managers which may arise in connection with non-compliance.
