Saving you from double trouble – the concept of foreign tax credits

A common query we receive among businesses within UAE having presence outside the UAE is “With the implementation of UAE corporate tax law, do we have to pay taxes on our foreign income twice? i.e. once in the country where we earned the income and then again in UAE? Is the situation worsened if we do not have a tax treaty with the counterpart country – in such cases does the concept of tax credit does not hold good?

The answer to these questions is a ‘No’. Corporate tax payable may be reduced by any available foreign tax credit (FTC) for the same period. Further, it is very well a part of the local law and can be claimed in the absence of a tax treaty as well. However, it is not as simple and straightforward as it sounds. A business cannot just reduce the portion of entire foreign taxes paid while discharging tax liabilities in the UAE. There are formulas prescribed for calculating the foreign tax which can be claimed as well as mechanisms of how the same can be claimed.

The UAE corporate tax law provides for a formula to calculate the FTC. Only the amount which is calculated using the formula prescribed will be allowed as a FTC. The FTC granted cannot exceed the amount of corporate tax due in the UAE on the foreign source income. Essentially, you can claim a credit for the lower of the actual foreign tax paid on the income, or the UAE corporate tax due on that foreign income i.e. in any instance the amount of foreign taxes paid would not exceed nine per cent payable on the foreign sourced income corporate tax due on foreign source income is calculated on a weighted basis by dividing the relevant foreign source income with total taxable income of the taxable person and multiplying it with the corporate tax due on total taxable income before any FTC.

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