What is Foreign Source Income?

Foreign source income is any income which has originated in a foreign jurisdiction and is earned or received by a Person in the UAE. Examples may be but not limited to the following:

• income from movable or immovable property located outside the UAE,
• royalties outside the UAE
• interest income from a loan or deposit outside the UAE
• dividends and other profit distributions from juridical Non-Resident Persons,
• income from the disposal of shares or capital of a juridical Non-Resident Persons

Remember that in all cases, income would not be considered as foreign source income if it is:

• State Sourced Income
• Free Zone Person income

Income or profits derived by a Qualifying Free Zone Person from its Foreign Permanent Establishment, which is a Permanent Establishment located outside the UAE, is foreign source income.

Who is Taxable?

Who is taxable on their foreign source income depends on their legal status (juridical person or natural person) and tax residence status (Resident Person or Non-Resident Person).

We know that a Taxable Person may be either a Resident Person or a Non-Resident Person. A Resident Person or a Non-Resident Person can be either a juridical person or a natural person. Now we discuss these one by one.

Resident – Juridical Person

A juridical person is considered as a Resident Person if it is incorporated in the UAE, or incorporated outside of the UAE but effectively managed and controlled in the UAE and is subject to Corporate Tax on its worldwide income means it is subject to Corporate Tax on both its domestic and foreign source income., i.e.

• income derived from the UAE, and
• income derived from outside the UAE.

However, to prevent potential double taxation of foreign source income, the Corporate Tax Law exempts certain types of foreign source income via the Participation Exemption and the Foreign Permanent Establishment exemption. Further, if person has already paid tax in foreign country, then to avoid double taxation on same income, they may claim Foreign Tax Credit.

Resident – Natural Person

A natural person is a Resident Person if they conduct a Business or Business Activity in the UAE that are not considered an excluded income for Corporate Tax purposes and in this case such person is taxable on:

• income derived from the UAE, and
• income derived from outside the UAE, to that extent as it relates to the Business or Business Activity conducted in the UAE.

Excluded Income includes:

• • Wages,
  • Personal Investment income, and
  • Real Estate Investment income.

These three incomes are not subject to Corporate Tax, irrespective of their source. In addition to above natural persons are only subject to Corporate Tax if the total Turnover derived from their Business or Business Activity(ies) exceeds AED 1 million within a Gregorian calendar year.

In case Natural person carries on a wholly separate business in a foreign jurisdiction, which does not relate to their Business or Business Activity conducted in the UAE, the income from the Business in the foreign jurisdiction will not be taxable in the UAE.

Please also view my blog on Natural Person Taxation : https://accountingblogger.com/uae-corporate-tax-of-natural-persons/

UAE Corporate Tax of Natural Persons | Humayun Atif (CMA,CPA)

Non-Resident Person under the Corporate Tax Law

Non-Resident – Juridical Person

A Non-Resident Juridical person will be taxable if:

• Taxable Income attributable to its UAE Permanent Establishment.
• State Sourced Income that is not attributable to its UAE Permanent Establishment.
• Taxable Income that is attributable to its UAE nexus.
• Both State Sourced Income and UAE nexus income are not foreign source income as there is a link present for both in the UAE. Therefore, a Non-Resident Person can be subject to Corporate Tax on foreign source income provided the foreign source income is attributable to its Permanent Establishment in the UAE.

 Non-Resident – Natural Person

• A natural person, who is not a Resident Person, is a Non-Resident Person if they
• have a Permanent Establishment in the UAE and turnover attributable to their Permanent Establishment exceeds AED 1 million within a Gregorian calendar year; or
• derive State Sourced Income.
• As discussed earlier that State Sourced Income is not considered foreign source income as there is a link present with the UAE. Therefore, a Non-Resident Person, which is a natural person, can only have foreign source income if they have a Permanent Establishment in the UAE (with a Turnover exceeding AED 1 million within a Gregorian calendar year) and the foreign source income is attributable to its Permanent Establishment in the UAE.

Determining Taxable Income

• The rules for determining Taxable Income is same for foreign source income earned by a Taxable Person. Taxable Income and deductible expenditure from all sources, whether domestic or foreign, are aggregated for the purposes of calculating Taxable Income.
• The accounting net profit, or loss, as per the Financial Statements is the starting point for determining Taxable Income for a particular Tax Period, which is then adjusted accordingly.

Please also note that there are no separate Corporate Tax rates for foreign source income and foreign source income is aggregated with all other income when determining Taxable Income and apply standard rates as below:

• 0% for Taxable Income up to and including AED 375,000; and
• 9% for Taxable Income exceeding AED 375,000.
• Furthermore, all foreign currencies must be converted into AED based on the applicable exchange rate as per Central Bank of the UAE.

Exemptions

Corporate Tax Law has described certain foreign income which may exempt from Corporate Tax subject to certain conditions set out in Article 23 of the Corporate Tax Law and these are also explained in detail in Article 7.2 of Corporate Tax Guide issued in November 2023 on

Taxation of Foreign Source Income and recently issued guide in July 24 on Determination of Taxable Income Article 4.4.2. These includes

• Participation Exemption and
• Foreign Permanent Establishment exemption.

The aim of the Participation Exemption is to avoid double taxation of corporate profits, and these rules must be reviewed prudently before making any decision.

Ministry of Finance (MOF), UAE has issued Ministerial Decisions (“the Decision”) No. 116 of 2023, which deals with Participation Exemption under UAE CT Law. This is a very detailed decision and includes clarifications on the various conditions of a participating exemption.

Foreign Tax Credit

There is one more relief available under section 8 on Foreign Tax Credit in guideline issued in November 2023. A Foreign Tax Credit allows a Taxable Person to deduct taxes paid under the tax laws of a foreign jurisdiction from the UAE Corporate Tax due on the same income. These all reliefs and exemptions are very vital for tax workings and must be read carefully before making any decisions.

A Taxable Person is required to maintain all necessary records for the purposes of claiming a Foreign Tax Credit as stated in Article 8.6 of the guideline issued in November 2023.

ABOUT THE AUTHOR

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com