Understanding State Sourced Income: A Comprehensive Guide for Businesses in the UAE

State sourced income refers to the income that is earned from activities or assets located within, the UAEe. This type of income is primarily relevant to the taxation of non-resident persons. If you are a non-resident person earning income from sources within the UAE, that income is considered state-sourced and is subject to tax under the UAE's corporate tax laws. 

• Income from Resident Persons: Any income derived from a person who is a resident of the UAE for corporate tax purposes. 

• Activities or Assets in the UAE: Income earned from activities or assets located within the UAE. 

• Income from Non-Resident Persons: Income derived by a non-resident person from another non-resident person, if it is attributable to business activities conducted through a permanent establishment in the UAE. 

Income from Sales and Services 

Income generated from the sale of goods or the provision of services within the UAE is considered state-sourced. This includes transactions where the goods are sold to a resident person or the services are provided within the UAE. 

Contractual Income 

Any income arising from contracts executed within the UAE or with UAE-based entities falls under state-sourced income. This is particularly relevant for businesses involved in long-term projects or service agreements in the UAE. 

Property Income 

Income derived from movable or immovable property located in the UAE, such as rental income from real estate, is considered state-sourced. This also includes income from the sale of property within the UAE. 

Intellectual and Intangible Property 

Income earned from intellectual or intangible property, such as patents, trademarks, or copyrights, used or registered in the UAE, is classified as state-sourced. 

Financial Income 

Interest income, dividends, and other financial gains derived from UAE-based financial institutions or entities are considered state-sourced. Insurance income received from policies underwritten within the UAE also falls into this category. 

General Rule for Taxation 

Non-resident persons receiving state-sourced income are subject to tax on that income in the UAE. The resident person from whom the income is derived can generally deduct this expense as it is incurred for the purpose of deriving taxable income. 

Exceptions to the Rule 

An exception to this general rule applies when the income received is an expenditure of a business conducted by the resident person outside the UAE through a foreign permanent establishment. In such cases, the income may not be considered state-sourced. 

Income from Permanent Establishments 

Income derived by a non-resident person from another non-resident person is considered state-sourced if it is attributable to business activities conducted through a permanent establishment in the UAE. This ensures that all business activities generating income within the UAE are appropriately taxed. 

Importance of Accurate Bookkeeping 

Accurate bookkeeping is essential for ensuring compliance with UAE corporate tax laws. Businesses must maintain detailed records of all transactions to correctly identify and report state-sourced income. This helps in avoiding penalties and ensuring smooth tax filings. 

Engaging professional bookkeeping and tax preparation services can significantly ease the burden of tax compliance.  Kitaab offer comprehensive bookkeeping and tax prep services tailored for startups and small businesses, ensuring that all state-sourced income is accurately recorded and reported. 

Understanding state-sourced income is vital for any business operating in the UAE, especially for non-resident persons. By recognizing the different types of state-sourced income and ensuring compliance with corporate tax laws, businesses can avoid costly mistakes and focus on growth. Professional services like those offered by Kitaab can provide invaluable support in managing your bookkeeping and tax preparation needs, ensuring your business remains compliant and financially healthy.