Have you ever thought that if a business pays taxes in one country, it also has to pay similar taxes in another country? This will result in double taxation and demotivate businesses from conducting commercial activities across borders. To mitigate this problem, there are double taxation agreements (DTAs) between various countries. Double taxation in the UAE is one of the most sought-after topics because of the UAE’s international attraction and investments. In this blog, we will understand double taxation and how DTAs benefit businesses in the UAE and across the globe. Let’s first understand what double taxation is in the real world.
What is Double Taxation?
In simpler terms, two or more jurisdictions may tax the same income twice or more, leading to double taxation. In the context of international taxation, double taxation occurs when the same source of income is subject to taxes in different countries. Suppose a UAE-origin company carries out sales in the USA and is subject to corporate or capital gain tax in the USA. When the same company transfers the proceeds after taxes to the UAE, will it be subject to corporate tax in the UAE? If yes, then it would be double taxation of the same income source.
Double Taxation Agreements (DTAs)
Double taxation is a common problem faced by international businesses. So an income may be subject to taxes in the country where it is earned and then subject to taxes again in the home country where it is repatriated. As a result, the overall effective tax for international businesses will be so high that it will be too expensive. Countries around the world have signed numerous treaties and agreements to avoid double taxation. These agreements are usually based on the models of the OECD. With the help of these agreements, countries limit their taxation on international businesses. This in turn results in augmented trade between the signatory countries and avoids double taxation.
In the UAE, the Ministry of Finance (MoF) is working continuously on growing its double taxation agreements (DTA). These global strategic partnerships result in the enhanced attractiveness of the UAE in the business world. Currently, there are 193 DTAs and bilateral investment treaties (BITs). The primary purpose of these agreements is to provide an exemption or reduction on taxes on investments and profits from direct and indirect taxes and to ensure that these profits can be transferred in free exchangeable currency.
Benefits of Double Taxation Agreements
There are several benefits of double-taxation agreements (DTAs). Let’s highlight a few of them.
- DTAs align the development goals of the UAE with those of the external world. In this way, the UAE can diversify its sources of national income.
- DTAs eliminate double taxation, thus lowering the burden of additional taxes and fiscal evasion.
- These agreements remove the difficulties associated with cross-border trade and investment flows.
- These agreements and treaties give protection to taxpayers from excessive taxation, including direct and indirect taxes. In this way, DTAs promote the free flow of trade and investment.
- DTAs take into account global taxation issues and changes in the economic and financial world. They also consider new financial instruments and transfer pricing issues.
- All in all, DTAs encourage the free flow of goods, services, and capital.
Foreign Tax Credit and Corporate Tax in the UAE
A UAE resident or non-resident person with a permanent establishment in the UAE is subject to foreign-sourced income. To mitigate the impact of double taxation, the UAE tax law exempts certain foreign-sourced incomes through participation exemptions and foreign permanent establishment exemptions. The foreign tax credit eliminates or reduces the potential double taxation. The foreign tax credit allows the taxable person to deduct taxes paid in the foreign jurisdiction on the same income. The credit is available under the following conditions:
- The tax in the foreign jurisdiction is imposed and payable to the government of that jurisdiction.
- The tax laws in the foreign jurisdiction should be enforceable and must make the payment of taxes mandatory.
- The foreign tax is based on the net income or profit, which is total income less deductions.
Conclusion
Double taxation in the UAE is of prominence due to the global attire of the UAE business culture. As we know, double taxation increases the overall cost of the business, thus lowering its commercial competitiveness. Therefore, there are double taxation agreements (DTAs) in place to eliminate or at least lower the tax burden on international businesses. Apart from just lowering the tax burden, there are several other benefits to DTAs. We have discussed a few of them in our blog. Furthermore, in the UAE, there is a corporate tax on foreign-sourced income. However, certain foreign-sourced incomes are exempt through various exemptions as per UAE laws. Moreover, there is a foreign tax credit on foreign taxes paid on the same income, but there are conditions.
Creative Zone Tax & Accounting
Whether you are an international business that deals in cross-border transactions or a local business, double taxation might impact your business. Therefore, you might need to reduce your taxation costs within the UAE. We have a strong team that deals with cross-border laws and regulations. Contact us today to discuss your future tax savings further.
Disclaimer
The information provided might be outdated with time as there is continuous updating of the tax laws and regulations. Therefore, this blog cannot be a reference for tax planning or tax advice. We strongly advise you to consult a tax consultant or lawyer for all your tax matters.
