FOREIGN TAX CREDIT (FTC) IN THE UAE: HOW BUSINESSES CAN AVOID DOUBLE TAXATION UNDER CORPORATE TAX LAW

This article has been researched and written by the Business Development team at Creation Business Consultants. AI has not been used in generating this article.

Businesses can avoid the difficulties of paying taxes twice on the same income in multiple jurisdictions by using the Foreign Tax Credit (FTC). It is more crucial than ever for UAE companies to comprehend and make use of the FTC as they grow their activities abroad. Companies that earn money from both local and international sources now have to evaluate their tax exposure in both countries since the UAE implemented corporate tax in 2023. The amount of income tax paid overseas on income originating from overseas can be deducted from a UAE company’s UAE corporate tax due by the FTC. For a deeper understanding of your UAE tax obligations and how to structure your operations efficiently, visit our UAE Corporate Tax Services page.

APPLICABILITY OF FTC UNDER UAE CORPORATE TAX LAW

Federal Decree-Law No. 47 of 2022, the UAE’s corporate tax law, has clauses that enable taxable persons to claim a Foreign Tax Credit (FTC) for foreign taxes paid on revenue that is also subject to UAE corporate tax. This shows the UAE’s dedication to aligning its tax system with international standards, especially the OECD’s anti-double taxation rules. Businesses based in the United Arab Emirates, including those with subsidiaries, branches, or other taxable presences abroad, are eligible to use the FTC.

MECHANISM OF THE FTC CALCULATION

A UAE business’s FTC claim is capped at the amount of UAE Corporate Tax that must be paid on the same revenue. According to current UAE law, any excess foreign tax paid over the UAE tax burden on such income cannot be repaid or carried forward. For example, only 9% of the foreign revenue may be claimed as a credit if a UAE firm pays 20% tax on international earnings in a foreign jurisdiction and the appropriate UAE Corporate Tax rate is 9%. Eleven percent cannot be recovered.

FTC CALCULATION WITH DIVERSE EXAMPLES

To illustrate how the Foreign Tax Credit (FTC) works under UAE Corporate Tax Law, here are three practical scenarios demonstrating its application across different situations. These examples cover dividends from countries with and without Double Taxation Agreements (DTAs), royalties from a foreign branch, and a comparison of high-tax versus low-tax jurisdictions. A summary table follows to clarify how foreign tax rates, UAE tax rates, and DTA provisions impact the final credit.

Scenario 1: Dividend Income from Germany (With DTA)

A UAE-based company receives AED 1,000,000 in dividends from a German subsidiary. Germany imposes a 15% withholding tax (AED 150,000). The UAE Corporate Tax rate is 9%, resulting in a tax liability of AED 90,000 on this income. Under the UAE-Germany DTA, the company can claim an FTC for the foreign tax paid, capped at the UAE tax liability. Thus, the FTC is AED 90,000, fully offsetting the UAE tax. The excess foreign tax (AED 60,000) cannot be refunded or carried forward under current UAE law.

Scenario 2: Royalties from a Foreign Branch (Non-DTA Country)

A UAE company operates a branch in a country without a DTA, earning AED 500,000 in royalties. The foreign country levies a 20% withholding tax (AED 100,000). The UAE Corporate Tax on this income is 9% (AED 45,000). The company can claim an FTC of AED 45,000, limited to the UAE tax liability. The remaining AED 55,000 of foreign tax paid is not recoverable, highlighting the importance of tax planning in non-DTA jurisdictions.

Scenario 3: High-Tax vs. Low-Tax Jurisdiction Comparison

A UAE company earns AED 800,000 from a branch in a high-tax jurisdiction (France, 25% tax, AED 200,000) and AED 800,000 from a branch in a low-tax jurisdiction (Singapore, 5% tax, AED 40,000). The UAE Corporate Tax on each income stream is 9% (AED 72,000). For France, the FTC is capped at AED 72,000, leaving AED 128,000 unrecoverable. For Singapore, the full AED 40,000 foreign tax is credited, and the company pays an additional AED 32,000 in UAE tax to meet the 9% liability. The UAE-France DTA does not reduce the French tax rate in this case, but strategic planning could optimize outcomes.

SUMMARY TABLE: FTC OUTCOMES ACROSS SCENARIOS

This table shows how foreign tax rates and DTA provisions affect FTC outcomes. Businesses must plan strategically, especially in high-tax or non-DTA jurisdictions, to minimize unrecoverable taxes.

INCOME ELIGIBILITY AND SOURCE RULES

The income in consideration must be taxable under UAE Corporate Tax regulations and must have been taxed overseas in order for a UAE corporation to be eligible for an FTC. In accordance with the UAE’s interpretation of the income source regulations, the revenue must be categorized as foreign-sourced. As long as they are also included in the UAE taxable base, this usually includes income from international dividends, interest, or royalties as well as revenue from foreign branches and permanent establishments.

TYPES OF FOREIGN TAXES THAT QUALIFY

Only specific tax kinds are eligible for the FTC. Either an income tax or a tax levied in place of an income tax must be the foreign tax. Payroll taxes, sales tax, value-added tax (VAT), and customs charges are among the taxes that are not eligible. Furthermore, the foreign tax has to be a legally mandated responsibility that is paid. Credit is not available for projected or possible tax liabilities that are not submitted to a foreign tax authority.

Supporting Records and Compliance to Regulations

Businesses in the UAE must keep thorough documents attesting to the amount of foreign taxes paid in order to be eligible for an FTC. This comprises overseas tax returns, assessments from foreign tax agencies, and official tax payment receipts. These documents are necessary to support the FTC’s claim in the event of an audit as well as to comply with UAE tax legislation. A credible, verifiable, and regulatory-compliant claim is guaranteed by appropriate documentation.

DOUBLE TAXATION AGREEMENTS (DTAS) AND THEIR INTERACTIONS

More than 130 nations have Double Taxation Agreements (DTAs) with the United Arab Emirates. These treaties may stipulate whether income is taxed only in the nation of resident, the country of origin, or both, and they frequently exceed domestic tax laws. To prevent double taxation, DTAs may offer a tax credit or a complete exemption. Businesses must determine which alternative produces the best result when both UAE law and a DTA offer relief for the same revenue, keeping in mind that the FTC cannot be claimed twice for the same income. For a breakdown of how DTAs work and when they apply, read our guide on How Double Taxation Agreements (DTAs) Can Help UAE Businesses Lower Tax Liabilities.

LIMITATIONS AND RESTRICTIONS

the credit is limited to the amount of foreign revenue that must be paid in UAE corporate tax. Second, the UAE tax code does not currently allow for the carryover of unused credits or the recovery of excess foreign taxes. Because of this, FTC planning is essential for companies doing business in high-tax areas. Moreover, credits cannot be claimed on income that is not included in the taxable base because of previous modifications or on revenue that is exempt from UAE corporate tax.

STRATEGIC TAX PLANNING AND OPTIMIZATION

Strategic preparation is necessary when claiming an FTC, particularly for companies that operate internationally. It’s critical to evaluate the whole tax impact of overseas income, accounting for withholding taxes, any DTAs, local tax rates, and the timing of income recognition. The goal of tax planning should be to minimize tax leakage and maximize available credit by coordinating the tax treatment of foreign income across countries. Businesses might assess options like changing transaction flows or restructuring ownership patterns to maximize international tax credit positions by working with knowledgeable tax consultants.

CONCLUSION

One important component of the UAE’s changing corporate tax system is the Foreign Tax Credit, which provides a workable answer to the issue of international double taxation. Understanding the FTC’s operations, when it applies, and how to file claims is crucial for UAE companies doing business internationally in order to stay in compliance and maximize tax efficiency. Businesses who successfully use the FTC will be in a better position to handle their international tax responsibilities and safeguard their financial interests as cross-border transactions increase in frequency.

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