How is Foreign Tax Credit Calculated?

In the world of international business, companies often find themselves subject to taxes in multiple countries. To prevent double taxation and encourage international trade, the UAE allows businesses to offset the taxes paid in foreign jurisdictions against their Corporate Tax liabilities, as outlined in Article 47(2) of the Corporate Tax Law.

Foreign Permanent Establishment Exemption

To avoid potential international double taxation, Resident Persons (companies) in the UAE can make an election to exempt income derived from their Foreign Permanent Establishments from Corporate Tax. The election must apply to all Permanent Establishments that meet the Subject to Tax requirement. A Resident Person may not elect to apply the exemption for specific Permanent Establishments. exemption covers income, associated expenditure, and losses related to these establishments. However, it's essential to note that any Foreign Tax Credit that would have been available without this election will not be accessible.

When determining income and expenses, the Resident Person and its Foreign Permanent Establishments are treated as separate entities, and transactions between them must be valued at Market Value. The election to exclude income, expenses, and losses applies only to Foreign Permanent Establishments subject to Corporate Tax or a similar tax rate of at least 9% in the foreign country.

Foreign Tax Credit Calculation

The Foreign Tax Credit allows UAE Resident Persons to reduce their Corporate Tax liability by the amount of foreign taxes paid on foreign-sourced income that hasn't been exempted. This relief is unilateral and doesn't depend on Double Taxation Agreements. To utilize the Foreign Tax Credit, foreign income must be included in the UAE Resident Person's Taxable Income. The Corporate Tax due is then calculated based on the overall Taxable Income, with the Foreign Tax Credit subtracted from the Corporate Tax Payable.

Double Taxation Agreements

The UAE has entered into Double Taxation Agreements with numerous countries to mitigate the impact of double taxation. These agreements typically provide for methods to eliminate double taxation, such as the exemption method, the credit method, or a combination of both, depending on the nature of income and specific provisions in the agreement.

It's important to note that the provisions of Double Taxation Agreements take precedence over the Corporate Tax Law if they are inconsistent, following international norms.

Record-Keeping

UAE Taxable Persons are required to maintain thorough records for claiming the Foreign Tax Credit. These records may include Withholding Tax certificates, payment statements, or assessments from foreign tax authorities.