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Global income of UAE company is subject to taxation in the UAE

Resident juridical persons are subject to corporate tax in the UAE for their worldwide income; A natural person having business revenue more than Dh1 million in a Gregorian calendar year are subject to the tax for their world-wide income related to the business in the UAE

Published: Mon 25 Nov 2024, 11:52 AM

  • By
  • Mahar Afzal / Expert View

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To prevent double taxation, UAE law permits UAE companies to claim a Foreign Tax Credit (FTC), even in the absence of a Double Tax Treaty (DTT) with another country. Photo credit: Designed by Freepik”

To prevent double taxation, UAE law permits UAE companies to claim a Foreign Tax Credit (FTC), even in the absence of a Double Tax Treaty (DTT) with another country. Photo credit: Designed by Freepik”

Khaleej Times' has launched a new initiative to offer readers expert insights about the impact of VAT and Corporate Tax on UAE’s business environment. Here is another expert view:

A Limited Liability company incorporated in the UAE is providing contracting services and generating revenue from Egypt. Regarding this, we wanted to know the followings:

• Will the Income generated from Egypt be subject to the tax in the UAE?

• Can we claim the expenses in our UAE Return?

• Can we take credit for the tax paid in the Egypt in our UAE return?

The income liable for corporate tax for a taxable person in the UAE is determined by their legal status (such as whether they are a juridical person or natural person) and their residency status (whether they are a resident or non-resident). Resident juridical persons are subject to tax in the UAE for their worldwide income; while the natural person having business revenue more than Dh1 million in a Gregorian calendar year are subject to the tax for their world-wide income related to the business in the UAE.

It is crucial to understand the legal and residency status of the UAE company generating income from Egypt. A limited liability company is classified as a juridical person, and since it is incorporated in the UAE, it is recognised as a resident juridical person for tax purposes. Consequently, according to the law, the global income of the UAE company is subject to taxation in the UAE. Thus, any income earned by the UAE company from Egypt will also be taxed in the UAE.

When preparing the UAE tax return, it is essential to evaluate the taxability of income from Egypt according to general tax rules. If the income is exempt, it should not be included in the calculation of taxable income. For instance, if the UAE company receives dividends under the participation exemption from Egypt, those dividends will not be subject to tax in the books of the UAE company.

Mahar Afzal, is a managing partner at Kress Cooper Management Consultants.

Mahar Afzal, is a managing partner at Kress Cooper Management Consultants.

When income from Egypt is taxed in the UAE, the law permits the deduction of related expenses according to general deductibility rules. If the income from Egypt is exempt, related expenses will not be deductible; however, if the income is taxable, expenses can be deducted to determine the taxable income. Certain expenses, such as 50 per cent of entertainment costs, non-business expenses, bribes, and fines, are not permitted under UAE tax law. Therefore, the UAE company must apply these general tax rules to the income and expenses from Egypt to accurately calculate the taxable income.

To prevent double taxation, UAE law permits UAE companies to claim a Foreign Tax Credit (FTC), even in the absence of a Double Tax Treaty (DTT) with another country, including Egypt. However, since a treaty does exist between the UAE and Egypt, it is important to consider the provisions of the relevant DTT when claiming taxes paid in Egypt.

To determine the amount of the FTC, it is essential to know the tax paid in Egypt, which depends on the UAE company's relationship with its operations in Egypt. If the UAE company has a subsidiary in Egypt, any repatriation from Egypt to the UAE may qualify for the participation exemption. The income and expenses of the subsidiary will be included in the UAE taxable income according to general rules, and the FTC will be granted based on the relevant provisions.

If the UAE company has a PE in Egypt, such as a branch or office, I believe the PE will need to register for tax purposes in Egypt and submit tax return. Any amounts transferred from the PE in Egypt to the UAE company will not be subject to tax, as these transactions occur between two offices of the same entity. However, the income and expenses related to the operations in Egypt will be included in the taxable profits according to the general rules of UAE tax law. The corresponding tax will be allowed based on the provisions related to the FTC.

The third scenario involves a UAE company that does not have a subsidiary or PE in Egypt but generates income from there, which may be subject to withholding tax. The tax withheld by the Egyptian customer will be submitted to the Egyptian tax authority. The UAE company can claim a 100 per cent refund from the Egyptian tax authority by demonstrating that it is a tax resident of the UAE and does not have a PE there. This tax residency can be established by obtaining a tax residency certificate from the Federal Tax Authority (FTA), where the refund is not received from the Egyptian tax authority, the UAE company has the right to claim a FTC in the UAE based on the general rules governing FTC.

The FTC is applicable only for taxes similar to corporate tax imposed on taxable income in foreign jurisdictions. It does not apply to taxes such as VAT, excise tax, property tax, customs duties, estate tax, inheritance tax, stamp duty, and capital duty. The FTC is limited to the lower of the amount of tax paid or committed to be paid and the tax due under UAE tax law. The tax due is calculated using the weighted average method like tax due as per UAE law* foreign source income/total income. If a taxable person has multiple sources of foreign income, any excess FTC from one source cannot offset the corporate tax due from another. Additionally, if a taxable person's taxable income is negative (indicating a loss), there is no corporate tax payable, and therefore, the FTC is not available. For timing differences, the credit for foreign tax paid will be allowed in the tax period when the foreign source income is included in taxable income under corporate tax law. By considering these general provisions of the FTC, the company should assess the amount of FTC available and the period during which the UAE company can claim the FTC.

Example: Have a look into the following example, which is self-explanatory; and in this example, we have assumed that the provisions to book the income; and expenses are same in Egypt and UAE. Moreover, we assumed that the UAE company has not claimed the foreign PE exemption under article 24 of the law. The below numbers are in millions.

If a UAE company has claimed an FTC and subsequently the amount of tax paid in Egypt changes, the company must adjust its FTC accordingly. If the changes result in a tax benefit exceeding Dh10,000, the UAE company is required to adjust its return through a voluntary disclosure. If the tax benefit in Egypt is less than Dh10,000, the adjustment can be made in the current or next tax return. Conversely, if the UAE company becomes liable for additional tax in Egypt, it must submit a voluntary disclosure to adjust its return.

In nutshell, we can say that income from Egypt, unless exempt, will be taxed in the UAE; and expenses will be allowed accordingly. The FTC will be allowed but lower of the tax paid in Egypt and tax due in UAE; and unadjusted FTC will not be carried forward or back.

About the expert

Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above is not an official of Khaleej Times but an opinion of the writer. For any queries/clarifications, please feel free to contact him at mahar@kresscooper.com.

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