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Taxation of Foreign Source Income is a key aspect of the UAE Corporate Tax Law introduced in 2023. This framework sets rules for taxing businesses in the UAE, including income from foreign sources. This article explores definitions, eligibility criteria, and tax implications for residents and non-residents.
Understanding Foreign Source Income
The UAE Corporate Tax Law defines foreign source income as income that a UAE resident or non-resident earns from activities, operations, or assets outside the UAE. Although the UAE’s tax framework focuses on domestic income, it may also apply corporate tax to foreign source income under certain conditions.
Determining Taxability of Foreign Source Income
The taxability of foreign source income depends on the Taxable Person’s legal and residence status.
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Juridical Persons: Companies incorporated in the UAE pay corporate tax on worldwide income, including foreign income. Exemptions like the Participation Exemption and the Foreign Permanent Establishment exemption prevent double taxation.
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Natural Persons: Individuals pay corporate tax on foreign source income only if it relates to their business activities in the UAE. Wages, personal investment income, and real estate income are exempt.
Taxation for Different Taxable Persons
The UAE Corporate Tax Law uses tailored approaches to foreign source income taxation for Resident and Non-Resident Persons.
Resident Persons
Resident Persons in the UAE are subject to corporate tax on worldwide income, including foreign income. Several exemptions and reliefs prevent double taxation:
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Participation Exemption: This applies to dividends, profit distributions, and capital gains from juridical non-resident persons taxed at a minimum 9%.
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Foreign Permanent Establishment Exemption: Resident Persons may exclude foreign PE income and expenses if the PE faces a minimum 9% tax rate.
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Foreign Tax Credit: Taxpayers can offset foreign taxes against UAE corporate tax liability.
Non-Resident Persons
Non-Residents, including individuals or companies, pay corporate tax only on income tied to their UAE permanent establishment (PE). Foreign source income connected to this PE may also face corporate tax. Non-Residents can access similar exemptions and reliefs as Residents to avoid double taxation.
