Businesses operating in the UAE with foreign income often face a common concern: will the introduction of the UAE corporate tax law lead to double taxation on income earned abroad? This would mean paying taxes in the country where the income is generated and again in the UAE. The situation appears even more complex when there is no tax treaty between the UAE and the foreign country.
The answer, however, is reassuring—no, businesses will not be taxed twice on the same income. The UAE’s corporate tax law allows for a Foreign Tax Credit (FTC), which helps reduce the corporate tax payable in the UAE by the amount of foreign taxes paid on the same income. Importantly, this applies even if there is no tax treaty in place between the UAE and the country in question.
However, the process of claiming an FTC is not as straightforward as simply subtracting the foreign taxes paid from the UAE tax liability. The UAE corporate tax law provides a specific formula to calculate the FTC, which must be followed to determine how much of the foreign tax can be credited. The credit granted cannot exceed the amount of UAE corporate tax due on the foreign-sourced income. This means businesses can claim the lower of either the actual foreign tax paid or the UAE corporate tax due on that income.
For example, if a UAE business has income that is taxed at 20% in Country A and another portion taxed at 2% in Country B, and both incomes are subject to the 9% corporate tax rate in the UAE, the excess tax paid in Country A cannot be offset against the shortfall in Country B. In this scenario, only the exact amount due under UAE law on the foreign income can be claimed.
Additionally, foreign tax credits are not available for certain types of exempt income, such as foreign dividends covered under participation exemption rules. Moreover, any unutilized FTCs cannot be carried forward or backward to other tax periods—they must be used within the same period or forfeited. The FTC can only be applied after withholding tax credits, ensuring a systematic application of available tax relief.
While the rules surrounding foreign tax credits under the UAE corporate tax law are complex, understanding them can help businesses minimize the risk of double taxation. Consulting with tax professionals is recommended to navigate these regulations and maximize tax relief.
