Taxation of Foreign Source Income

Taxation of Foreign Source Income

The Federal Tax Authority released a Guide on Corporate Taxation of Foreign Source Income on 16 November 2023. This guide contains comprehensive guidance on who is considered as taxable, which foreign income is considered as taxable, etc. Foreign Source Income refers to income produced by a UAE resident or non-resident from activities, processes, or assets sited outside the UAE.

What are the examples of foreign source income as per Corporate Tax Law?

It is important to explore some examples of foreign source income as per UAE Corporate Tax Law such as;

  • Income from the clearance of shares or capital of Non-Resident Persons
  • Income from the sale of products or provision of services outside the UAE
  • Income from portable or permanent property sited outside the UAE
  • Interest income from finances or deposits outside the UAE
  • Dividends and profit distributions from judicial Non-Resident Persons
  • Royalties for the use of intellectual property or intangible property outside the UAE
  • Returns or losses of a Foreign Permanent Establishment of a Resident Person

How to determine Taxation of Foreign Source Income?

Determine Taxation of Foreign Source Income, depends on the legal status and residence status such as Resident Person or Non-Resident Person of the Taxable Person. Tax consultant UAE can help you a lot to make an easier way for you.

  • Juridical Person

Juridical Persons are subject to Corporate Tax on their global income such as companies engaged in the UAE. It includes both domestic and foreign source income. However, some exemptions and reliefs can alleviate potential double taxation such as;

  • The Participation Exemption
  • The Foreign Permanent Establishment exemption
  • Natural Person

Natural Persons are also subject to Corporate Tax on foreign source income. The noteworthy factor is known is that it also subjects to corporate tax if it is associated with their Business or Business Activity engaged in the UAE. Certain ones are not subject to Corporate Tax, irrespective of their source such as;

  • Wages
  • Personal Investment income
  • Real Estate Investment Income

What is the Taxation of Foreign Source Income on Taxable Persons?

The Corporate Tax Law states the taxation of foreign source income depends on the category of Taxable Person. This also delivers exemptions and reliefs for Foreign Source Income such as;

  1. Resident Persons

Resident Persons such as individuals or companies engaged in the UAE are subject to corporate tax on their global income like foreign source income. Though, the corporate tax law also offers exemptions and reliefs to prevent double taxation of foreign source income such as;

  • Participation Exemption

This exemption applies to dividends, profit circulations, and capital gains. It must be derived from juridical non-resident persons where the active tax rate in the foreign jurisdiction is a minimum of 9% as a standard rate.

  • Foreign Permanent Establishment Exemption

The Foreign Permanent Establishment Exemption allows a Resident Person to choose to eliminate the income and related expenses of a foreign permanent establishment from their UAE taxable income. It is important to note if the permanent establishment is subject to a least tax rate of 9% in the foreign jurisdiction as a standard tax rate.

  • Foreign Tax Credit

The Foreign Tax Credit includes a taxpayer to counterpoise taxes waged in a foreign jurisdiction on foreign source income in contradiction of their corporate tax liability in the UAE.

  1. Non-Resident Persons

Non-Resident Persons such as individuals or companies not present in the UAE, are also typically subject to corporate tax. It will subject to individual income attributable to their permanent establishment in the UAE. 

However, it is important to note that if a Non-Resident Person obtains foreign source income associated with their permanent establishment in the UAE, that income will also be subject to corporate tax in the UAE. Non-Resident Persons can also benefit same as Resident Persons, from exemptions and reliefs to alleviate double taxation of foreign source income.

Conclusion

To know the significant pinpoints of foreign source income is important for businesses operating in the UAE. To handle complexities related to the taxation of foreign source income, it is recommended to get assistance from Tax consultant Dubai such as Farahat & Co. This one of the top Tax advisors in Dubai helps you to navigate corporate tax registration as well.

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