Mastering Tax Laws: FTA Guide to Managing Foreign Source Income Taxation

What is Foreign Source Income? 

According to the Corporate Tax Law, any income that has originated in a foreign jurisdiction and is earned or received by a Person in the UAE is considered a foreign source of income. Foreign Source Income is income derived from sources outside the UAE. This includes income from different sources as follows:

• Profit on a loan or deposit made outside of the UAE
• Profits earned by businesses from operations outside of the United Arab Emirates
• Revenue from the sale of a legal non-resident person’s capital or shares

• Royalties, profits, and interests from entities that do not reside in the United Arab Emirates
• Revenue derived from outside the United Arab Emirates is from moveable or immovable property

Taxation for Different Taxable Entities:

Taxation of foreign-source income depends upon the taxpayer’s legal status (juridical person or natural person) and residency status (resident or non-resident).

Juridical Persons:  companies registered in the UAE are liable for corporate tax on their global income, which encompasses local and international earnings. However, specific exemptions and reliefs, such as the Participation Exemption and the Foreign Permanent Establishment exemption, can help reduce or eradicate the risk of double taxation.

Natural Person: Natural Persons are liable for Corporate Tax on foreign source income solely if it pertains to their Business or Business Activity carried out in the UAE. Wages, Personal Investment income, and Real Estate Investment income are exempt from Corporate Tax, irrespective of origin.

Exemptions and Relief Mechanisms:

Participation Exemption: This exemption applies to dividends, profit distributions, and capital gains from non-resident entities if the effective tax rate in the foreign jurisdiction is at least 9%.

Foreign Permanent Establishment Exemption: This allows the exclusion of a foreign PE’s income and expenses from UAE taxable income if the PE is subject to a minimum tax rate of 9% in the foreign jurisdiction.

Foreign Tax Credit: Taxpayers can offset taxes paid in a foreign jurisdiction against their UAE corporate tax liability to avoid double taxation.

Tax Exemptions for Small Businesses in the UAE:

The tax exemptions available for small businesses in the UAE include the following:

• Small businesses with revenues not exceeding AED 3,000,000 for the relevant tax period and all previous periods can opt for complete exemption from Corporate Tax under the Small Business Relief scheme.

• Dividends from companies resident in the UAE are also exempt from Corporate Tax for eligible small businesses.

Criteria for Eligibility:

• To qualify for Small Business Relief, businesses must be Resident Persons with revenues below the AED 3,000,000 threshold and meet specific conditions outlined in the Corporate Tax Law and Ministerial Decision No. 73 of 2023.

• Small Business Relief, including Constituent Companies of Multinational Enterprises Groups with consolidated revenues exceeding AED 3.15 billion and Qualifying Free Zone Persons.

Application Process:

• Small Business Relief must be claimed through an election as specified in Article 21 of the Corporate Tax Law (means that in the Tax Period where an eligible Taxable Person elects for Small Business Relief, the Taxable Person will not be able to accrue, utilize, or transfer Tax Losses).

• Taxable Persons, even if eligible for relief, must register for and file corporate tax returns. The election for Small Business Relief should be part of the annual tax filing process.

The Corporate Tax Guide on the Taxation of Foreign Source Income has been released by the UAE Federal Tax Authority (FTA). It provides taxpayers with general guidance on how foreign source income is taxed in accordance with the provisions of corporate tax law. 

Need Guidance To Manage Foreign Source Income Taxation:

Brisk Guide to Managing Foreign Source Income Taxation covers essential aspects:

• Defining foreign source income for taxpayers under Corporate Tax Law
• Identifying who is subject to tax on foreign source income
• Understanding when foreign source income becomes taxable
• Calculating taxable income and exempt income related to foreign source income
• Comprehending the concept of Foreign Tax Credit and its computation