Taxation of Foreign Source Income

What is the Tax Base under UAE CT Law?

Residents and Non-Residents with a Permanent Establishment in the UAE may generate income from foreign sources. The tax treatment of this "foreign source income" depends on the recipient's status, the nature of the income, and available exemptions.

• For taxable entities, such as resident companies in the UAE, global income is subject to Corporate Tax. This includes any income earned from foreign activities & operations.
• For natural resident individuals, they are taxed on income derived from business activities in the UAE, provided the total turnover exceeds AED 1 million within a calendar year. Therefore, foreign source income linked to their UAE business activities may be subject to Corporate Tax in the UAE.

The treatment of foreign source income in the UAE is subject to exemptions that aim to mitigate or eliminate the possibility of double taxation. These exemptions are designed to provide relief and ensure that income earned abroad is not taxed both in the foreign jurisdiction and in the UAE.

What is Income outside UAE?

Foreign source income, as defined by the Corporate Tax Law, pertains to any earnings that have their origin in a foreign jurisdiction (outside UAE) and received by an individual or entity within the UAE. Typically, this includes income accrued from activities conducted, assets situated, capital invested, rights utilized, or services performed or benefited from outside the boundaries of the UAE, which includes dividends and profit distributions from entities outside UAE, proceeds from the sale of shares or capital in non-resident entities, interest income from loans or deposits outside the UAE, revenue from the sale of goods or services outside the UAE, and income from movable or immovable property situated abroad. Additionally, royalties derived from the use of intellectual or intangible property outside the UAE are also part of this non-exhaustive list.

As regards, the Income generated from a Free Zone Person, since it is located within the UAE territory, it does not fall under the category of foreign source income and therefore shall be considered as domestic source of income. The income or profits earned by a Qualifying Free Zone Person from its Foreign Permanent Establishment, situated outside the UAE, shall be considered as a foreign source income.

Who bears the tax liability for income originating from abroad?

The residence status or legal status determines (a) whether foreign source income is subject to Corporate Tax in the hands of a Taxable Person in the UAE or not, and (b) the extent to which such income is subject to Corporate Tax.

A Resident Person, particularly a juridical entity, is liable for Corporate Tax on both its income generated within the country and from foreign sources. To address the potential issue of double taxation on foreign source income, the Corporate Tax Law incorporates exemptions such as the Participation Exemption and the Foreign Permanent Establishment exemption. In cases, where foreign source income is considered part of the Taxable Income for a Taxable Person, the risk of double taxation can be eliminated through the application of a Foreign Tax Credit.

Purview of the Corporate Tax Law as a Juridical Person

Understanding corporate taxation in the UAE boils down to residency. If a company is established or primarily managed from within the country, it's considered a resident. Resident companies, as per the Corporate Tax Law, must pay taxes on all income, whether earned locally or abroad. This includes entities registered elsewhere but significantly operated from the UAE. Simply put, UAE tax laws apply to global earnings of resident companies, ensuring compliance and contribution to the nation's tax system.

Taxable income of Non-Resident entity under the Corporate Tax Law

A non-resident juridical entity can only generate foreign source income if it establishes a Permanent Establishment in the UAE. In the case of a non-resident juridical person, it’s Taxable Income, regardless of origin (whether from the UAE or a foreign jurisdiction), becomes subject to Corporate Tax if it is allocated to its Permanent Establishment in the UAE.

For a natural person, Corporate Tax applies to foreign source income only when it is associated with their Business or Business Activities in the UAE subject to that the annual turnover of the business exceeds AED 1 million in a calendar year.

If a natural person, whether a Resident or Non-Resident, engages in a completely independent business in a foreign jurisdiction unrelated to their activities in the UAE, the income from that foreign business will not be subject to taxation in the UAE.

Further, wages, personal Investment income, and real estate investment income remain exempt from Corporate Tax, regardless of their origin.

Purview of the Corporate Tax Law as a Non-Resident Person

A natural person is categorized as a Non-Resident Natural Person if they:

• Possess a Permanent Establishment in the UAE with a Turnover surpassing AED 1 million in a Gregorian calendar year, or
• Acquire State Sourced Income.

When does foreign source income become taxable in the UAE?

It's crucial to ascertain the Tax Period during which foreign source income becomes liable to Corporate Tax. For juridical entities, this period aligns with the 12-month duration for Financial Statements preparation. In contrast, for natural persons, the Tax Period is consistently the Gregorian calendar year, or a portion thereof if the business operates only for part of the calendar year.

How is foreign source income taxed?

The principles governing the determination of Taxable Income apply uniformly to both domestic and foreign source income for a Taxable Person-

In the case of foreign source income, the same Accounting Standards required for domestic income in the UAE must be followed.

A Taxable Person has the option to utilize the Cash Basis of Accounting when the total Revenue, encompassing both UAE and foreign sources, for a Tax Period does not surpass AED 3 million.

For the calculation of Taxable Income, all income and deductible expenditure from both domestic and foreign sources are consolidated. This enables the offsetting of Tax Losses from foreign sources against income from UAE sources, excluding expenses related to Exempt Income (e.g., foreign Dividends qualifying for the Participation Exemption) and losses or expenses associated with a Foreign Permanent Establishment where an election has been made under Article 24 of the Corporate Tax Law.

Determining Corporate Tax Payable

Foreign source income is combined with all other income during the computation of Taxable Income. For a Taxable Person, excluding a Qualifying Free Zone Person, the current applicable rates are as follows:

• 0% for Taxable Income up to and including AED 375,000.
• 9% for Taxable Income exceeding AED 375,000.

Summarized - Taxation of foreign source income for a Taxable Person under the Corporate Tax Law

Source – Guide on Taxation of Foreign Source Income issued by Federal Tax Authority.