WITHHOLDING TAX RECLAIM FOR UAE BUSINESSES: HOW TO RECOVER EXCESS FOREIGN TAX EFFICIENTLY

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.

A typical component of international taxes is withholding tax (WHT), in which the payer withholds a percentage of revenue received to a non-resident at the source and sends it to the local tax authority. Usually, this channel is used for cross-border payments like royalties, dividends, interest, technical service fees, and management fees. WHT frequently causes an instant decrease in gross income for investors and companies domiciled in the United Arab Emirates that receive revenue from outside sources. However, depending on existing double tax treaties and internal laws in the source nation, many firms in the United Arab Emirates may be able to recover all or a portion of this tax.

UAE TAX RESIDENCY AND TREATY ACCESS

More than 130 nations have Double Taxation Agreements (DTAs) inked with the United Arab Emirates. By preventing income from being taxed twice, these accords give UAE citizens favorable tax treatment in other countries, such as lower WHT rates or exemptions. A UAE firm must be deemed a tax resident and get a Tax Residency Certificate (TRC) from the UAE Federal Tax Authority (FTA) in order to take advantage of these treaties. A requirement for submitting treaty-based withholding tax reclaims is this certificate, which attests to resident status.

WITHHOLDING TAX RATES UNDER KEY UAE TAX TREATIES

The table below summarizes withholding tax (WHT) rates for dividends, interest, and royalties under Double Taxation Agreements (DTAs) with major partner countries: India, the UK, the US, and China. By obtaining a UAE Tax Residency Certificate (TRC), businesses can access these reduced rates compared to standard domestic rates, optimizing their cross-border cash flow.

Key Notes:

• Accessing Benefits: A valid UAE Tax Residency Certificate (TRC) is mandatory to claim reduced rates or exemptions. The UAE entity must be the beneficial owner of the income.
• Standard Rates: These reflect the source country’s domestic tax laws and may vary based on entity type or income category.
• Additional Documents: Submit supporting documents like contracts, invoices, or payment confirmations as required by the source country.
• Practical Example: A UAE company earning royalties from India can reduce WHT from 30% to 0% under the DTA, significantly improving cash flow.

This streamlined table helps UAE businesses quickly compare tax savings across key markets. Always consult the specific DTA and work with tax professionals to ensure compliance and maximize refunds.

COMMON SOURCES OF WITHHOLDING TAX FOR UAE ENTITIES

Businesses in the UAE may encounter WHT in a number of conditions. Typical instances consist of:

1. Dividends given to parent firms in the UAE by overseas subsidiaries.
2. Interest received from bonds, loans, or international bank accounts.
3. Royalties for using intellectual property outside of the United Arab Emirates.
4. Consultancy or technical services offered to clients overseas.
5. Agreements for software usage, franchising, or licensing.

The source country’s domestic tax legislation and any reductions made possible by the appropriate DTA determine the applicable WHT rate. In many nations, WHT rates can range from 5% to 30% in the absence of a treaty. To better understand your exposure, plan treaty-based relief, or file a reclaim, explore our Withholding Tax advisory services for tailored support across jurisdictions.

RECLAIMING WITHHOLDING TAX THROUGH TAX TREATIES

For UAE companies earning income from treaty-partner nations, understanding how to reclaim withholding tax UAE becomes essential when WHT is applied at a rate higher than permitted under the treaty. Depending on the jurisdiction, the reclamation procedure differs, but often calls for:

1. A Valid FTA TRC.
2. Accurate determination of the income’s beneficial owner.
3. Filling out the tax return paperwork for the other nation.
4. Contracts, invoices, payment confirmations, and evidence of tax withheld are examples of supporting documentation.
5. submitting the claim within the legally mandated period, which differs from nation to nation but is often between two and five years after the date of withholding.

If the UAE entity submits the TRC before to the payment being made, several nations may provide a lower WHT rate at source through treaty advantages. In other situations, the company has to pay the entire WHT upfront before filing a post-event recovery.

COORDINATION WITH UAE CORPORATE TAX

Cross-border tax planning has become even more crucial since the UAE Corporate Tax regime went into effect in 2023. Businesses in the UAE may be able to claim a Foreign Tax Credit (FTC) against their UAE tax obligation if their foreign-sourced revenue is taxed both in the UAE and overseas through WHT. However, the WHT cannot be claimed as an FTC in the UAE at the same time if it is successfully reclaimed from the foreign jurisdiction. To prevent multiple claims and maintain compliance, businesses need to properly manage various tax relief schemes. For a detailed breakdown of when the UAE itself applies withholding taxes under the new corporate tax regime, read our guide on the applicability of withholding taxes under UAE Corporate Tax.

TAX RESIDENCY CERTIFICATE (TRC) IN UAE

Obtaining a Tax Residency Certificate is essential for accessing treaty benefits. The UAE Federal Tax Authority issues the TRC to both individuals and companies who meet the residency requirements. For companies, the applicant must:

• Be a UAE-incorporated entity (Not a branch).
• Have a valid trade license.
• Maintain adequate economic substance and business operations in the UAE.
• Provide supporting documents such as audited financial statements, lease agreements, bank statements, and organizational charts.

The TRC needs to be renewed every year and is valid for one calendar year. It is best to prepare ahead, particularly if TRCs are needed in the source nation at the start of the tax year.

Many UAE organizations now automate the reclamation process using technology platforms or recovery agents due to the amount and complexity of documents involved. These services can assist with document translation, country-specific form preparation, withholding tax tracking, and communication with foreign tax authorities. Using expert services guarantees precise, prompt, and economical reclaims, particularly for companies with sizable foreign revenue portfolios.

RECORDING WITHHOLDING TAX PAYMENTS AS WITHHOLDING TAX CREDIT

Businesses should record the foreign tax paid as a withholding tax credit in their accounting and tax records when withholding tax is not recovered but rather utilized to lower the UAE Corporate Tax liability. The UAE Corporate Tax that is owed on the same revenue is offset by this credit. To support the credit claim, appropriate records must be kept, such as evidence of payment, tax assessments, and pertinent treaty references. Any excess foreign tax paid cannot be repaid or carried forward, and the credit is only available for the UAE Corporate Tax due on the revenue earned abroad. In addition to preventing any disputes or fines during audits, timely and precise recording guarantees that the credit is shown appropriately in the business tax return.

CONCLUSION

For companies in the United Arab Emirates, withholding tax reclaim is a crucial component of cross-border tax administration. Businesses might recover substantial sums of tax and enhance their worldwide cash flow by comprehending the regulations, utilizing the UAE’s tax treaty network, and upholding strong compliance procedures. Tax directors, and cross-border finance teams will place a greater emphasis on recovering excess WHT and optimizing foreign tax situations as the UAE further integrates into the global tax system.

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