Concept of Tax Credits under CT - Navigating the UAE's Withholding Tax

Running a business in the UAE requires staying on top of tax regulations.  Presently, understanding Corporate Tax, and related rules like - withholding tax, are key to ensuring compliance with current tax laws. Whether you're dealing with cross-border payments or have questions about how it applies to your specific situation, we'll break down the essentials in clear terms. This guide simplifies everything you need to know about this specific corporate tax, even with the current 0% rate. 

Get ready to confidently navigate the UAE's withholding tax landscape and maintain your business's smooth operation. 

With the broader objective of having a simplified yet robust UAE Corporate Tax regime to reduce the compliance burden for taxpayers, a Withholding Tax, currently set at 0%, applies to certain types of UAE-sourced income derived by non-residents insofar, as it is not attributable to a Permanent Establishment (PE) of the non-resident.  

Withholding tax is a form of Corporate Tax collected at source by the payer on behalf of the recipient of the income. Withholding taxes exist in many tax systems and typically apply to the cross-border payment of dividends, interest, royalties and other types of income. Withholding Taxes even though applies mostly on cross-border transactions, sometimes withholding taxes are also levied on domestic transactions. Typically, the payer of the income is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the FTA. 

Currently, the UAE applies a 0% withholding tax rate, meaning there's no tax deducted or filing requirements for businesses. However, this might change in the future. 

Withholding tax generally applies to payments made to non-resident businesses for certain types of income not earned through a permanent establishment (PE) in the UAE. 

 Withholding taxes usually apply to certain types of activities by foreign parties, or activities that do not typically require a Person to register for tax, for example, dividends and interest payments in certain countries.  

Withholding Tax applies to certain categories of income paid to a Non-Resident Person to the extent the income is not attributed to a Permanent Establishment in the UAE 

Important Points to Remember: 

• Withholding tax generally applies to - Specific activities by foreign parties - Activities not requiring separate tax registration like - dividends, interest payments  

• Withholding tax targets specific income categories paid to non-residents, excluding income earned through a UAE Permanent Establishment (PE). 

• Withholding tax doesn't apply to transactions between UAE resident businesses. 

• You can claim foreign tax credits on income subject to both UAE and foreign taxes, with limitations. 

• Stay updated on potential future changes to withholding tax regulations. 

 As 0% withholding tax apply to certain types of UAE sourced income paid to non-residents currently there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income. If the rate is changed in future, a Non-Resident Person who becomes subject to Corporate Tax will be able to reduce their Corporate Tax Payable by any Withholding Tax that has already been deducted in that Tax Period.   The Withholding tax does not apply to transactions between UAE resident persons.

 Foreign Tax Credits: If you pay foreign tax on income subject to UAE Corporate Tax, you can claim a foreign tax credit (FTC) to reduce your UAE tax burden. The maximum FTC is the lower of the foreign tax paid or the UAE Corporate Tax on that income. Any unused credit cannot be carried forward or backward. 

Offsetting Foreign Taxes: Withholding tax and other forms of foreign taxes on income or profits can be offset against the UAE Corporate Tax liability, subject to any conditions as may be set out in an applicable agreement or treaty made between the UAE and the foreign country or territory.   

Example on Foreign Tax Credit DXB LLC is a UAE resident company that does business through Permanent Establishments in several foreign countries.  During the Tax Period, DXB LLC paid AED 100,000 in foreign taxes on the AED 1,000,000 of income it earned in foreign countries. DXB LLC has not made an election to exempt the income from its Foreign Permanent Establishments.  At the end of the Tax Period, DXB LLC’s Corporate Tax liability was AED 800,000. DXB LLC can reduce its Corporate Tax liability using available Foreign Tax Credit.  

However, the amount of Foreign Tax Credit is limited to the amount of Corporate Tax that would have been paid in the UAE on the foreign income (AED 1,000,000 x 9% = AED 90,000).  

This is less than the amount of tax DXB LLC paid in the foreign countries. The surplus amount (AED 100,000 – AED 90,000 = AED 10,000) cannot be carried forward or back and will not be refunded.  

The amount of Corporate Tax due is therefore AED 800,000 – AED 90,000 = AED 710,000 for DXB LLC. 

The United Arab Emirates is dedicated to helping businesses thrive and grow. The UAE government provides numerous resources and initiatives that support entrepreneurs in achieving success. With its robust economy, the UAE offers an ideal environment for expanding your business ventures. 

For current and future business owners, it’s important to stay informed on changes to corporate tax laws, including the rules on withholding tax. This will ensure your business is always compliant with the latest regulations.