Mastering Taxation of Foreign Source Income Fast
Any Taxable Person in the UAE - whether a Resident or a Non-Resident with a Permanent Establishment (PE) in the UAE - may earn income from outside the country. The taxation of such foreign source income depends on the residency status, nature of the income, and available exemptions under the UAE Corporate Tax Law
How foreign source income may be subject to Corporate Tax
For a Company registered in the UAE, such as juridical resident companies in the UAE, is taxable on its global income. Hence, there could be taxation on any income earned from foreign activities, operations, or assets.
For the natural person who is a taxable person in the UAE, 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.
A Non-resident Person having a Permanent Establishment in the UAE is typically taxed on the income generated from activities conducted in the UAE. Thus, if it receives any foreign source income attributable to its Permanent Establishment in the UAE, that income may be subject to Corporate Tax.
Which Incomes are typically foreign-source Income?
Foreign source income typically includes
- Dividends and profit distributions from non-resident entities,
- 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.
- Royalties derived from the use of intellectual or intangible property outside the UAE are also part of this non-exhaustive list.
Income generated from a free zone person, being within the UAE territory, does not fall under the category of foreign source income. As free zones are considered part of the UAE for tax purposes, any earnings or activities within these zones are treated as domestic rather than foreign.
Whereas any income or profits earned by a free zone person from its foreign permanent establishment, situated outside the UAE, are classified as foreign source income.
Who is payable tax liability on foreign-source income?
➤ For a resident company (which is registered or liable to register in the UAE),
The resident company is liable for corporate tax on both its income generated within the country and from foreign sources. Whereas some exemptions are available to address the issue of double taxation on foreign source income, 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 resident company, then the foreign tax credit can be claimed on the income which is double taxed in the UAE due to residential status.
➤ For a natural person resident in the UAE
Natural persons are taxable on their own foreign source income only if it is generated from business activities in the UAE.
If a natural person, whether a Resident or Non-Resident, engages in a completely independent business in a foreign jurisdiction unrelated to their business in the UAE, the income from that foreign business will not be subject to taxation in the UAE. Wages, Personal Investment income, and Real Estate Investment income remain exempt from Corporate Tax, regardless of their origin.
Further, it is important to note that natural persons are only liable for Corporate Tax if the total Turnover from Business or Business Activities exceeds AED 1 million within a Gregorian calendar year.
➤ For non-resident companies in the UAE
A non-resident company can only generate foreign-source income if it has a permanent establishment in the UAE. In the case of a non-resident company, it is always considered as taxable income, regardless of whether it is earned from the UAE or a foreign jurisdiction; it is subject to taxation in the UAE if it is allocated to its permanent establishment in the UAE.
➤ For a non-resident natural person in the UAE
A non-resident natural person only incurs foreign source income if they possess a permanent establishment in the UAE, and the said income is linked to the UAE permanent establishment, and exceeds the turnover in the UAE for more than AED 1 million in a Gregorian calendar year.
In which Tax Period does foreign source income become taxable in the UAE?
For juridical entities, this period aligns with the 12-month duration for Financial Statements preparation.
For natural persons, the Tax Period is the Gregorian calendar year, or part thereof, if the business operates only for part of the calendar year.
How is foreign source income taxed?
To confirm the uniformity of both domestic and foreign source income for a Taxable Person, below are the key considerations related to the determination of Taxable Income -
The general rules (under article 20 of the corporate tax law) for determining Taxable Income apply equally to foreign source income earned by a Taxable Person.
In the case of foreign source income, the same accounting standards should be followed which are applied for domestic income (i.e. UAE).
A taxable person has the option to apply the cash basis of accounting when the total Revenue, including both UAE and foreign sources, for a Tax Period does not exceed 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.
To learn more about Taxation of Foreign Source Income, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.